Trading Strategies That Work (With Cesar Alvarez)

Yeah, it was. I mean, there was a lot of…

I believe we don’t give luck or fate enough proper credit for our lives.

So the way, I mean, the story, the way it happened is the day Microsoft came to my university during those years, companies would come to university, set up booths and you’d walk around and you’d talk to them.

That day was a football game I wanted to go to.

I was like waffling with my roommate.

“Guys like, I don’t want to go to this because I have to get dressed up, go to campus, come back, get back into normal clothes, and go back to campus to go football game”

It’s like, I don’t want to do this.

And he goes like…

“I’ll drive you, drop you off, call me, I’ll pick you up and we’ll do this”

Like, okay, fine.

I just happened to connect with the recruiter there who was a developer in Excel.

I ended up connecting well with him.

Then what happens from there is it’s very typical.

They flew me back out to Microsoft, a round of six, eight interviews with a whole bunch of Microsoft people.

Well, yeah, I would say I did not do very well in my first person.

I was very worried after my first interview because I did not do very well on that question.

But after that first one, I’m either, I think I got the gist of what they were asking.

I loosened up, and then after that, I started doing well in the interviews.

I went through six or eight people and then you know, I don’t know shortly thereafter got a job offer from them.

That’s how that all worked out.

The good part is the interesting part is the guy who interviewed me at my university is still a good friend and only lives like two miles from my house and I see him at least once a month or so.

Rayner (14:49)

You said there were like six to eight rounds of interviews.

That’s a lot, right?

Cesar (14:53)

Yes, it’s a lot.

But it’s typical. It’s still pretty typical nowadays, even my son just has gone through the interview process, you know, with the tech companies and it’s you know, six interviews is not that uncommon.

You know, sometimes it’s six interviews in multiple days, which I think is ridiculous.

I think I think three is enough, in my opinion, if I were running a company, I probably would do three.

But I don’t run my own big companies, just me myself, and I

Rayner (15:22)

Maybe I can, these days they have a lot of options.

So, you know, let’s have filter after filter after filter, you know, but then like in trading terms, I have too many filters, you kind of like, you know, over-optimized and it may not work in the real world.

So, I’m just, you know.

Cesar (15:33)

To me, all good interviews are good for it, I believe is figuring out whether you like the person and figuring out if they’re an idiot.

Beyond that, it’s a toss-up on how good somebody is.

I’ve done lots of interviews, I’ve done lots of hiring and I’ve realized.

Once you get them inside your company, it’s a toss-up of how well they work out.

Rayner (15:58)

You said that you were doing Excel back in the day.

So maybe could you explain what part of Excel that you were doing back then?

Cesar (16:07)

Yeah. So, I mean, for me, it was kind of exciting to get to Excel because I was using Excel on my wife’s Mac at that time.

So I was familiar with Excel when I started there.

But I worked on the charting engine.

I worked on all the pretty charts that you have in Excel.

So that’s the part of Excel I worked on.

The really funny and interesting part, I guess, then, I don’t know what the right phrase would be, is I got there, we started doing stuff, and then the Japanese market contacted us, the Japanese people for Microsoft contacted us, and said…

“Hey, there’s a chart type that the Japanese really like, we would like you to add it to Excel”

Guess what it is?

Candlestick charts.

Guess who added candlestick charts to Excel?

I added candlestick charts originally to Excel.

I hope my code isn’t dirty right now, after 30 years, but I originally added candlestick charts for the Japanese market.

The cool part is, that something that happened at Microsoft then, was after, when you used to ship a product.

It was a physical product we used to ship.

So we’d get boxes.

There were boxes that we had to go to the stores.

People had to buy Excel. You bought this big box.

I have the Japanese version box of Excel sitting right up there on my shelf.

Because I added that to them, they sent me that box from Japan saying…

“Here, you need to have this box”

Rayner (17:39)

So that box is not, I mean the Japanese candlestick is not on every Excel.

It’s only for the Japanese version.

Cesar (17:43)

No, it was for every Excel.

We added it for every Excel, it’s just the Japanese asked us for it at that time.

So, in Excel 3, let’s see if it says there, I can’t tell from here.

But yeah, it was probably Excel 3 that it got added into, maybe Excel 4.

So, you know, this is back in probably 91/92 when Excel finally got candlestick charts.

Rayner (18:07)

Can I trouble you to show me the box?

I’m curious.

I think the listeners are curious to see how the box looks.

You can wait 30 seconds because it’s up high.

I need to get a chair.

Rayner (18:14)

No problem. Take your time.

Cesar (18:23)

This is on the way…

Rayner (18:30)

Wow.

That is a huge box!

98,000 Yen I suppose?

Cesar (18:35)

Yeah, probably 98,000 yen.

Rayner (18:35)

Wow.

Cesar (18:36)

This box is heavy.

This box is probably five pounds.

Rayner (18:42)

What do they put the entire manual of Excel inside?

It’s just a CD-ROM.

Cesar (18:47)

Yeah, so there are manuals, and there are probably 3.5 floppy disks in here.

Rayner (18:55)

A keeper, yeah? Maybe you can sell it on eBay for a higher price.

Cesar (19:02)

I’ve got a whole bunch of old boxes, but this one’s my favorite of all of them.

It’s just like…

“Okay, Japanese Excel”

Rayner (19:08)

It’s blue. I thought Excel had the trademark of green color. Maybe back then it was blue?

Cesar (19:11)

Uh, no. I don’t know.

Back then, I’m looking at the boxes.

We had lots of weird icons back then.

Rayner (19:20)

Okay, Thank you for sharing. It was so insightful.

And to know that you were the one who did candlestick charts for Excel.

Cesar (19:26)

Yeah, it’s funny. Once I got into trading, I realized, wait a second, I did candlestick charts.

Rayner (19:35)

I’m guessing back then when they used CD-ROMs, whenever you guys do a major update, then you guys have to produce a whole new batch of CD-ROMs and then ship it off to all around the world again.

That’s how it works.

Cesar (19:43)

Yes, that’s how it works.

No, these boxes are 3.5 disks.

So, they’re floppy disks.

They’re not CD-ROMs.

Rayner (19:54)

Don’t floppy disks just have, like, 1.4 megabytes?

That’s the capacity you have?

Cesar (19:59)

Yeah, there are probably five… there are probably several in here.

 

Rayner (20:02)

 

So you need to put it one by one to complete the installation.

Wow. Yeah, the CD-ROM came after that, where I think you can increase the size.

Cesar (20:10)

Yes, CD-ROMs were probably, when was probably CD-ROMs?

Probably 95 or so is probably when we started using CD-ROMs is my guess, somewhere around there 94/95.

Rayner (20:20)

So how did you then go from working at Microsoft and that, if I’m not wrong, you were also working for Larry Connors or helping him develop his strategy?

So how did the transition come about?

Cesar (20:31)

I started Microsoft in 1990 and I left it in 1996.

The reason I left Microsoft, I didn’t want to leave Microsoft.

I developed tendonitis on both my elbows from working too hard.

Rayner (20:47)

What is tendonitis?

Cesar (20:52)

So, tendonitis is a pain kind of like right here.

You actually can get it both inside and outside.

I had it on both the inside and outside of both arms.

It’s sometimes called golfer elbow and tennis elbow, depending on what side of it, whether it’s on the inside or outside.

So I was spending three hours a day or three times a day, an hour, an hour at a time, I see my elbows so I could just work because I was just in so much pain.

At that point, my wife and I were starting to think about having kids.

I could not even think about trying to hold a baby because my arms just hurt so much.

I asked to get a sabbatical.

Because I was not high enough up in the hierarchy yet, it got denied.

I ended up just quitting Microsoft.

The part that annoyed me was about six months later, they changed the policy such that I wouldn’t have had to quit.

That’s why I left Microsoft.

I wanted to heal my arms.

One of the best ways of doing that is to stop what you’re doing and just rest.

So I spent six to nine months just not using a computer, using a computer as little as possible, resting my arms, and getting my arms to heal.

Now they’re in what I call remission because I can if I overdo my martial arts or exercising, weightlifting, stuff like that, I can cause it to get, I won’t say bad, but to start to feel a little bit of pain.

That’s why I left Microsoft.

So I took six and a half months off.

We had our first child.

Then I went back to Microsoft as a part-time contractor.

Back on Excel, just working on something else.

Just working part time.

I spent about a year there.

That was probably 97-98.

Then from 98 to 2003, I worked at various small startups part-time.

Mostly part-time, mostly because I started enjoying part-time work and just also wanted to not work too hard because of my arms.

I was doing various software startups during that time.

Also, after I left Microsoft, I was always interested in the stock market and that’s when I started getting into the stock market myself.

I started trading individual stocks probably in late 97.

I got to believe I was a brilliant trader from 97 to 99.

I had stocks like JDSU, which some of you old folks would know.

Those were some great trades I had.

Fortunately, when the bear market hit 2000, I did not lose too much.

I did lose some, but it impacted me, like a lot of traders who thought they were just great traders, following all these great things straight up.

That time, around that time, is also when I discovered Amibroker and realized…

“Oh, I can start testing things and testing ideas and as a computer programmer and engineer”

To me, that’s like…

“Oh, this is really what I like. I want to test the”

I started testing things and started to realize a lot of things I was reading in magazines and what few websites there existed then, really didn’t test out.

I was quite disappointed that a lot of things I tested in the early 2000s were just not working.

Then probably, what is it, 99 or so?

Larry had started tradehard.com, which then he renamed to tradingmarkets.com.

I don’t remember when he made the name change.

But I was kind of like a member of that website.

It was a kind of a whole bunch of traders there giving their trading tips, their trading advice.

I bought a couple.

I bought one thing from Larry and tested it.

It’s like…

“Oh wow, this works”

I was like…

“Wow, the first thing that worked”

In 2002, I took a course from Larry.

He was way ahead of it.

This was an online course that I took.

It was a mean reversion strategy.

I took the course and enjoyed it. Of course, I had to make a spreadsheet of the material he gave me, because I love spreadsheets.

I gave it to Larry.

Larry was like…

“Oh, wow, this is great”

Then I said…

“Hey, if you’re looking for help, you know, testing ideas or making spreadsheets, you know, I’m here”

I’m available.

He said…

“Yes, yes”

He was very polite, but you know he wasn’t interested.

About six months later,

I contacted him and said…

“Hey, you know, just me again, you know, are you interested?”

He said…

“Yeah, thank you, thank you, yes, I’ll keep you in mind”

Six months after that, I contacted him.

He goes…

“Oh, we just hired somebody, I’m so sorry”

And I was like…

“Ah, man”

Then sometime in 2003, he contacted me and said…

“Hey, we’ve got this strategy we’ve developed”

We need some external verification because we’re getting really good numbers.

We just want to make sure these numbers are correct.

He hired me, he said…

“We’ll hire to do this”

I was like…

“Oh yes, my great, my break into all this”

He gives me the project

I started the project, I sent him the first spreadsheet, and I made a stupid mistake that I did not catch on how I computed compounded annual return.

It was just the worst mistake.

He responds going…

“This is wrong, there’s a mistake here”

I looked at it, it’s like…

“Oh crap, I just ruined my chance to break in”

I sent it back in the email saying…

“I’m so sorry, you’re right, this is a mistake”

Here’s the corrected version.

If you want to fire me, if you don’t want me to work for you, that’s fine.

You don’t need to pay me for the work I’ve done for you.

That email struck him.

I wound up my mistake and the fact that I told him, don’t pay me for the work I’ve done.

He said…

“No, no problem”

From then on, I slowly started working more and more for him.

Within six months or so, year tops, I ended up being the director of research for him.

Then spent 10 years with them.

Rayner (27:16)

Wow!

What a story of grit, being a president.

You talk about you’re trading the markets or maybe speculating the markets before the dot-com bubble.

I’m curious.

How were the markets back then when you were speculating?

What do you think is the changes like now?

Cesar (27:35)

Yeah, it’s really funny. I’m seeing a lot, especially in 2020 when we saw the meme stocks.

They started to be very, very familiar with just like the stocks that just go up.

But I think the only, difference in 99 versus 2020 that I was seeing was in 99, it seemed to be a much broader set of stocks that were going up.

You know, in 2020, it seemed to be a smaller set of stocks.

For 1999, you could throw a dart.

It wasn’t just the meme stocks were just the big cap stocks.

It was as though everything was going up, you know.

It didn’t matter what it did.

As long as that word.com was in its name, it was going up.

But you know, that speculation, that just going straight up, that thinking that…

“Oh, I’m a genius because I happen to be on this meme stock and whatnot”

To me, it was like…

“Okay, I know exactly how this story is going to end”

Yes, some people may get lucky and get out at the right time, but most of them end up losing a lot of the money that they make.

You know, if they’re If they’re lucky, they break even.

Some of them ended up losing a lot, all their money, and then some.

The other thing was, you got to remember, the internet was much smaller, much quieter, so information traveled slower.

It was an interesting time.

Like I said…

“You thought you were a trading wizard during those times because it was so easy just to throw a dart”

The stock would go up during that time.

Rayner (29:14)

Would you say that back then, as information travels slower, so a lot of these stocks have a lot more momentum behind it compared to these days now when information is much faster, the momentum is not as apparent or strong?

Cesar (29:29)

I think yeah, I think momentum is nowadays much quicker, so it’s quicker to go up and quicker to go down nowadays, just because the information just comes out.

There are more reasons to sell because there are so many more boards that you know you got forums, TV, websites, YouTube, podcasts. You got all these people telling you either to buy or to sell.

It’s just so much more information coming at you that I think the reactions are just as much faster nowadays.

 

Rayner (30:03)

 

Got it.

Back to Larry…

Back there when you were working for him, so I’m assuming that he asked you to verify certain projects.

He has a team of people helping him to run the test already.

It’s just you as a third party, just to make sure that the numbers are aligned.

Cesar (30:17)

Larry always had a small team.

He’s never had a huge team of researchers.

I think when I came on, I think it was only two people who were working for him at the time, and I was the third.

This is even common nowadays that I will do is I will go to an external person to verify my strategies.

The reason for this is, that it doesn’t have to necessarily be an external person, but it needs to be somebody else who didn’t write the original strategy and knows nothing about it that you can only give them kind of English rules.

Then they go off and do it because this way the likelihood of them making the same mistake that you may have made is very small.

Not to say it hasn’t happened or it’s not possible, but it is just much less likely to happen.

Because I will often have clients come to me with incredible looks, I’ve got one right now.

He’s got a strategy that’s making 110% a year with a 15% drawdown.

I can almost guarantee you, he’s either looking into the future or he’s got some major coding mistake or he’s way over-fitting the data.

One of those three things.

Because this is like a 10-year backtest.

This is not like a one-year backtest. This is a 10-year back test.

I saw this, and I know when I talk to this client, it’s me, is it possible that he’s found some holy grail thing?

Yes.

Would I bet against him?

Yes.

Because I know whenever I get any strategy when I’m testing that looks half as good as that, if it was 50% return with a 30% drawdown, I’ll be thinking…

“Maybe I made a mistake, but 110% with a 15% drawdown?”

This is the kind of thing that, I’m going to tell him…

“Look, I know you don’t want to share your strategy, but it’d be really good if you found somebody that you trust to do verification”

Yes, I could do it, and if he doesn’t, but it’s one of those things.

Verification can save you a lot of money and grief.

Rayner (32:30)

Yeah, and this brings me to my next question is that, you know, people usually when they think, right, they found something really good.

They have problems sharing the rules with someone else to verify.

What’s the top process of maybe Larry or even that client of theirs who is willing to give you the plain rules and then let you verify?

Cesar (32:50)

First of all, I completely understand not wanting to share the rules.

I mean, nobody wants their trading secret if you found the Holy Grail of getting out there.

I completely understand my tranquility trading service where I give out black box signals for what I trade myself.

But I’ve had people approach me saying…

“Hey, can we, I want to buy the rules to the strategy”

I tell them…

“No, because I don’t want my strategy to get out there because if it does get out there, the edge will disappear”

I completely understand this.

Now I did get those, my strategies verified because I asked somebody I trust and know and worked with for a long time to verify my strategy.

How does a third person, this person I’ve told you about…

He has to balance. Does he trust let’s say me?

I’ve been, or somebody else, to verify not to steal his idea.

I’ve been doing this for not more than 20 years now.

At least whenever somebody says…

“Hey, how do I know you’re not going to steal my strategy?”

 I tell them, look…

“I’ve been doing this for 20 years. I’m not some fly-by-night person”

I have a reputation out there.

If I took your strategy and sold it as mine or did something and gave it out there, it would ruin my reputation.

Nobody would give me any more work.

I’d get roasted out there.

For me, that’s how I try to explain it to others this is why you can trust me.

Because the downside for me doing that is just way too high.

I’ve been out on my own for 10 years now, doing testing for people like yourself, Rayner, and hundreds of other people.

In that time, I think I’ve only asked once somebody, say, can I take your trading idea?

I don’t want to take the system that you had me test.

I just want to extend it. I want to go slightly different area and make it my own.

I asked his permission before I did it.

So even though I have tested hundreds and hundreds of strategies for people, 99.9% of the time, I don’t want to trade them for whatever reason.

Only one time I even come close, have I even asked, can I take your idea, not necessarily your idea itself, but your idea and extend it to something.

I want to put some twists on it to make it different from your idea a little bit and trade that.

Even then, I don’t trade other people’s strategies.

You’ve had lots of great strategies I have tested for you right?

Lots and lots of great things.

I haven’t come to you and asked you…

“Hey, can I trade this?”

I’m not trading any of your strategies, just because I try to keep that wall there up.

That’s your IP. That’s your idea.

Now, do we share?

Do we have commonalities?

Of course, because there are always so many things that are out there.

There’s mean reversion, there’s a trend following, and there’s a breakout. So, yeah.

All our strategies are somewhat common, you know, even I hate it, but you know, I don’t, yeah, I don’t trade other people’s strategies.

So for this person, if I were in his shoes, I would find somebody I could trust and say…

“Can you verify this?”

Because if he does have something great, then you know, somebody else says…

“Yes, this looks good”

You know, I’m going to have a call with them and kind of point out, here’s my concerns with your strategy.

There are lots of concerns I have.

You may have something here, but here are my concerns.

You need to address these if you want to feel comfortable trading this.

Another thing people sometimes…

Somebody can come to me and say…

“Hey, why don’t you sign an NDA?”

Honestly, NDAs are worthless.

You don’t know when somebody’s broken an NDA, quite honestly.

So, I find NDAs worthless.

I know Larry Connors probably had people do NDAs and I know some of our stuff hit it up on the internet.

We don’t know who did it, but once it’s out there, it’s too late.

Now your edge is disappearing.

I think you have to find somebody you trust to do some verification.

Rayner (36:57)

Earlier you mentioned that you don’t want to give out the rules of, I think, the signals that you have.

I think about tranquility, and I can understand it because the edge might be eroded.

Like maybe certain markets where the market is so huge, I don’t know, Russell 500 stocks, I mean, S&P 500, Russell 1000, those huge markets,

Will the edge still kind of be affected if like…

Cesar (37:20)

Oh yeah…

I mean, definitely depending on the strategy and depending on the liquidity on the stock

I mean, some of the stocks can have very low liquidity or not even that low.

But I mean, if you do the math sometimes, you figure out…

Let’s say…

“You only have 100 subscribers, okay?”

Let’s say each subscriber is only trading $10,000.

Let’s do this. Some math here.

These are very small accounts that under subscribe, very small, you know, service a hundred subscribers, $10,000, very small amount.

They say you’re doing five positions.

So, you’re doing $2,000 per position.

If you time that by a hundred, that’s $200,000.

Now dropping $200,000.

Now, if you’ve got one, it’s a stock one that has a liquidity of a million dollars a day.

That’s a fifth of the volume.

That’s a problem.

You can’t put that much, and that’s a small amount.

God forbid if you’ve got either large accounts or a large service.

This is something you have to be careful with just in itself on services themselves, with how big are they?

Something I do is I do not want to grow my service big.

What I love from the money point, from bringing in the money for my services.

Yes.

But again, I want to keep my edge.

That’s something I don’t want my service to get too big.

I don’t want my rules to get out because I trade those strategies and I want to keep my edge there.

Rayner (38:51)

Got it. Okay.

So, since we’re on the topic of strategy, let’s talk about…

What’s your trading approach there, for the listeners to know?

Cesar (38:59)

I’ve been doing this for a long time. We’ve been doing trading for 20 years systematically.

It has evolved through the years.

I mean, because I started working for Larry, I was a mean reversion guy.

For the first probably eight years, that’s all I traded.

It was just mean reversion.

One of the main reasons why it worked well back in 2003-2005, even through 2008.

Oh my God…

Getting 10-30% winners was not uncommon.

Seeing my account going up or down 5% in a day was very normal.

Those were great trading days because we were early.

This was the early timeframe for mean reversion trading and the edges were still huge.

People are there even though we were publishing a lot about this, there just weren’t a lot of people trading this at the time.

Especially like I said, 2003, four and five. Oh my God, those edges were huge then. Um, so that’s all I did for probably the first eight years of my trading career.

I was all mean version on the long side. I don’t remember exactly when, but eventually I started doing shorting.

Something I’ve come to realize in shorting is the edges are stickier there because it’s hard to short emotionally.

There are lots of issues with shorting, just trying to find shares to short, getting partial fills, just shorting just a lot scarier also. I mean, I’ve had short positions where I’ve woken up and looked at it and it’s up 100%.

Trust me, when you’re in a short position and it’s up 100%, life is not good.

It’s not easy to trade a system that can have those kinds of losers.

Next in the Mexican evolution was going from long-only mean reversion to short-mean reversion.

Then you know in 2013, I left Larry and took out on my own.

At that point, I started to branch out more. I started researching more.

I added a breakout method.

I’ve added trend-following methods to my strategy.

Now I’m still trading stocks only.

I haven’t gotten into futures, I haven’t gotten into options.

Even though I’ve done lots of options testing, I still haven’t, I get tempted by options, but I still haven’t pulled the trigger on options.

Forex, none of that stuff.

For me what’s happened is I’ve expanded the range of types of strategies.

As I said, I’ve got mean reversion strategies on the long and short side, I got breakouts, I got trend following, I got volatility ETF strategy, which…

“Oh man, I have just been loving that strategy the last several years”

That strategy has been doing great.

The way I’ve evolved is by adding more strategies into my trading stable, not more strategies, more types of strategies are a better way of putting it.

This used to be me, I’d be trading four different mean-reversing strategies.

Quite honestly, that’s just one.

They all trade exactly.

They all trigger at the same time.

They all go up at the same.

So it’s like, you know what?

That’s not diversification.

You’re just fooling yourself when you think that’s diversification.

That’s not diversifying away.

So, you know, that understanding how powerful the diversification of strategies helps when you put them all together, how much smoother that makes your equity curve, how much better things get overall versus when you just trade one strategy or two strategies.

For me has been the big overarching arch of my trading career over the last 10 years.

It’s just trying to find different strategies that are not highly correlated.

Rayner (42: 59)

So am I right to say that the Tranquility Trading,

The strategies that you offer are the ones that you are currently actively trading?

Those, I think you said four or five?

Cesar (43:12)

Yeah, so I trade those strategies.

Plus, I trade other strategies which I don’t put up on the site.

The reason I don’t put them up for the site is they tend to be very low liquidity.

So I traded some very low liquidity stuff that could not even handle 10 new subscribers kind of thing.

So that’s why I don’t put it up there.

So I have strategies that I have on tranquility trading that I trade and I have my strategies that aren’t published anywhere that I trade.

These I have about, I have about 10 strategies in my trading stable.

The way I do this is, so every quarter what I do is I take those 10 strategies, I run them through kind of like a momentum filter and I pick the five best strategies through my momentum filter and I trade those for the next quarter.

That’s kind of what I do. It’s kind of rotating amongst my stronger strategies.

Rayner (44:08)

I see.

The weightage to each strategy, do you allocate the same amount of money?

Cesar (44:14)

20% each.

I mean, that’s now that you’ve brought it up.

Position sizing, I’ve read lots of different types of position sizing.

There’s inverse volatility, risk parity, calculated formula.

What I’ve discovered at the end of the day is some of them may be slightly better.

But doing equal position sizing does just as good 90% of the time, it is way easier and I always tend to be simple, I always go for the simpler.

If I add complexity, it better gives me a lot of bang for the buck. If it doesn’t, it’s like it’s not worth it in my book.

That’s why I keep my position sizing, and my trading strategies, even if I have 10 positions, it’s 10% each.

I’ve tested all the different types of other position sizing and I always come back to the very simple. It’s just 10% each.

Nothing seems to buy me that much more for the complexity.

Rayner (45:18)

Right, so maybe let’s dive a little bit deeper into mean reversion trading,

Let’s talk a little bit about that because you mentioned you’ve been trading that for like a good eight years. Is there a reason why Larry is, I’m guessing…

Does he still trade mean reversion today?

Cesar (45:34)

I talk to Larry maybe once a year now, so I don’t know what he’s trading nowadays.

From the last time I talked to him, I think he’s really into zero-day options.

So, I think he’s trading. That’s what his big thing is now.

Rayner (45:54)

I have no idea what zero-day options are.

Cesar (45:55)

Zero-day options are options that you can buy and expire on the same day.

That’s zero-day options on the SPY and the SPX.

It’s really popular right now.

My trading buddy Steven Gabriel loves to trade them.

I’ve got a couple of clients of mine who just love trading them.

I’ve looked into it.

It’s just way too much work.

You have to follow the markets during the day.

I don’t like following the markets during the day.

I know that’s what Larry is doing now.

But you know, back when I started working for Larry, mean reversion was just, that happened to be his thing.

We were just finding lots of different ways to slice mean reversion at that time.

Originally when we started, when I started working for them, the mean reversion was always entry at the close or the open.

Then we figured out doing limits.

That added a whole new world to us and you know using limits to do things.

Also during that time, we were discovering different ways of ranking signals.

We were discovering different ways of adding new filters beyond you know simple RSI but other filters that added things to the thing.

It was not necessary we were on a continuous improvement of mean reversion strategies.

It wasn’t kind of like we were reinventing the same strategy over and over again.

We kept getting each strategy better and better.

We were finding different ways of getting things better and better through about those eight years or so of doing that.

Rayner (47:29)

Would I be right to say that instead of maybe trying to refine or to make that strategy even better, it was going to be a lot more worth it in terms of ROI to adopt another strategy with nothing to do with mean reversion, based on different principles?

So, you get the diversification.

Cesar (47:50)

Yeah, now I would say what we were doing back then, we should have tried harder to find breakouts, trend following, and whatnot.

But again, you remember back then, this was all new. There wasn’t a bunch of information out there on mean reversion.

We were at the forefront of the kind of promoting that mean reversion strategy.

Like I said, we were…

It wasn’t like we were taking…

“Oh, let’s take this strategy that works on the S&P 500 and make it work on the NASDAQ 100”

Same rules.

No, we were like…

“Oh, we take this strategy on the S&P 500 and we add this new rule or we do something else”

Now…

“Oh, look, our results get better”

We were like continuing to figure things out how to make things better for the longest time.

Rayner (48:35)

I know that you and Larry wrote a few books.

So, I’m curious to hear, what’s the incentive behind promoting mean reversion trading?

Because if too many people learn of it, then that’s where your edge gets eroded.

What’s the mindset behind that?

Cesar (48:48)

Yeah.

You’re asking me now to get into the mindset of Larry here.

This is pure speculation.

Okay. But I mean…

Larry was an educator.

He liked putting out strategies out there to educate people.

At that time, things didn’t…

I guess information didn’t travel as fast.

You could put the rules out there, and this is true even now.

I could probably put the rules out there for a lot of strategies.

Most people won’t follow the rules.

Just because it’s hard to follow, following a strategy is hard.

You know, first drawdown, or first minor drawdown, most people will bail.

I can tell you that right now.

But the problem is…

Back then versus now is…

Back then, systematic trading was not that well known.

There weren’t as many systematic traders.

We could publish the rules and it was a smaller universe and even smaller for the people who follow the rules.

Now if we’d published a rule set, there would be so many systematic traders, the universe would be so much bigger and information would be so much wider that we would destroy the trade, the edges in my opinion, right away nowadays.

Years before the edges would potentially disappear kind of thing.

Now, I bet you put out a good strategy, you probably have months and the edge would disappear.

Rayner (50:18)

Now let’s kind of like go to an overview of you know some of the trading strategies that you have on your website.

I think what I saw was the exploding star sounds exciting or exploding.

So maybe without giving your rules, maybe just get a high-level overview of you know what exploding stars is about.

Cesar (50:36)

Exploding Stars is a short strategy and this is a very narrow short strategy.

This strategy only goes short when the market is under the 200-day moving average.

The reason for that is you tend to have less frequent blowups when the market is under the 200.

You’re less likely to wake up and see a stock up 100%.

Rayner (50:59)

Because it’s not in an uptrend.

Cesar (51:01)

Yeah.

What I would say is a very strong mean version strategy.

I mean, you look at the chart of a typical setup and it’s going straight up and then you are getting in at a very high limit intro day.

If you look at the charts, you would kind of…

Even if I do this, I would go, why am I shorting the stock?

It is going straight to the moon.

Why am I putting my face straight into the fire?

But there’s a point where things just have to pull back.

That’s just looking for quick pullbacks.

It works quite well during bear markets.

The problem is I can make the strategy work during bull markets and I don’t have it that way there, but I do have it in my trading because in bull markets, the drawdowns are much worse and you find those 100% losers happen then.

I just don’t want anybody, not that I can guarantee it, but I can at least make it less likely that it happens, when it’s under 200, it’s a lot less likely to happen.

Like I said, waking up when a stock’s up 100% or even 50% just really, really sucks, this is something that took me a while to figure out for shorting my position sizing was too big.

I realized after one of my 100% losers that my brain just shut down.

My brain was just like…

“I don’t know what to do. It’s like, what do I do?”

Do I still follow my rules?

Do I just get out?

What do I do?

I realized at that point my positional sizing was too big and I had to reduce position sizing to small enough.

I mentally went through that kind of exercise and said…

“Okay, if my position size is, let’s say $10,000 per stock, and I wake up and it’s up, it’s doubled and now it’s $20,000”

That means I got a $10,000 loss, eventually getting bigger.

Can I still function?

If the answer is No…

Then it’s like, okay…

Go smaller.

I did this kind of mental exercise.

I said…

“Okay, I think I have $8,000. I’ll be okay”

Then I know that’s the edge.

Let me just make it $7,000, now I’ve got a little buffer.

This is kind of what I realized.

When I started doing shorting, you got to mentally prepare for these huge losses and understand if it happens, can I still function?

Can I still follow my rules?

Because that’s one of the hard parts of any strategy is usually when you stop following the rules It’s the worst time to stop following the rules.

Rayner, you’re probably quite familiar with this.

You’ve probably done it.

I mean, we’ve all done it.

I mean, I still have now done it.

We find a great excuse to stop following the rules.

Sure enough, it was the wrong time to stop following the rules.

So yes, so that exploding stars, like I said…

“It’s a very strong mean reversal strategy”

Right now, because we’ve been such a strong bull market, it’s been sitting in cash, which is fine.

It’s just sitting there for when the next bull market happens.

Granted they don’t seem to happen very often and they’re very short nowadays it seems like.

But it’s they’re waiting on the sidelines.

Rayner (54:05)

Got it.

So that strategy I guess is a sort of swing trade hold trades for a few days rather than existing

Cesar (54:10)

Yeah, very short hold very few days.

Yeah, just looking for you know, the stock going up and just coming down a little bit.

The way I put it has given me any excuse to get out of the position.

That’s the way I look at yours.

You’ve made me a little bit of money. Okay, I’m getting out.

I’m getting out because usually when they come back, they come back really strongly.

It works quite well.

Rayner (54:32)

I can imagine how scary it is when you let those hundred percent move multiple days in a row.

Cesar (54:37)

If I showed you some of the charts on the setup, you would go…

“There’s no way I’m shorting this”

I mean, 99%.

This is why I love short, shorting strategies.

Because if you show the chart to anybody and say…

“Okay, would you short this?”

Most people would go…

“No way, you crazy.”

This is why, you know, the edges are still much stronger there than all the long side.

But they’re hard to trade.

I do not recommend it for most people.

Rayner (55:00)

Would you say then that there’s a correlation between how strong an edge is, is a function of how uncomfortable it is to take the trade?

Cesar (55:09)

Yes, I believe so.

I believe that is a great statement.

How hard is it to either get into the trade or stay in the trade?

It’s easy, for me, trend following in a sense is easy, especially if they’re going up.

Anybody can stay in a trade that’s going up and up and making you money.

Yeah, that’s easy.

A trade that’s going against you and you have to get into it or stay in it tends to be hard.

Like you said…

This is more of a conceptual thing.

I think mean reversion tends to be harder to trade the trend following breakout, I think can be kind of hard to trade depending on the person.

Because you know breakouts are kind of like wait it’s just making it hard.

I don’t want to pay that much, you know because it was lower.

So, I can see breakouts being hard to get into.

But once you’re in a breakout, I think they’re a little easier.

Usually, a mean reversion trade is going down. You’re getting into it.

It usually goes down another day or two before it finds size amounts up.

I mean, as you’re aware, because I know you have some mean reversion strategies so they can be a little harder to trade.

But unfortunately, not hard enough because the edges have gotten smaller over the years.

Rayner (56:28)

Maybe just to help the audience visualize.

What exactly does mean reversion trading?

So everyone is on the same page over here.

Cesar (56:37)

So mean reversion trade…

Imagine a stock has been going up for lots of days in a row, and then it goes down, let’s say…

Two or three days.

So, it’s kind of like what we’d call pullback.

That’s a mean reversion.

It’s kind of like bounce back.

By mean reversion, we mean it’s going to go back to where it was going back at that uptrend.

We’re kind of saying…

“It’s gone down”

It’s pulled away from, let’s say…It’s moving average and we think it’s going to go back up.

On a mean reversion trade, usually what we say is like…

“Okay, it’s gone down three days in a row. Okay, I’m going to get in now.”

Then I’m going to wait till it bounces back up.

Then I’m going to get out when it bounces back up.

One very common thing I’ve had through the years, and it’s been a while since anybody’s asked me this question.

It’s like…

“Okay, you’ve got a mean reversion trade. Why don’t I just wait for confirmation that’s going up?”

Let’s say it breaks the high of the previous day.

The problem with doing that is it destroys like 80-90% of your edge and a strategy that looks also really good now is like hardly makes any money.

Waiting for that confirmation destroys the edge.

You can’t wait for the confirmation.

You have to kind of like take it on faith that it’s going to bounce up.

Unfortunately, sometimes they don’t bounce up.

Sometimes they keep going down, down, down.

that’s what makes mean reversion difficult because the second part stops.

We always read…

“Oh, put stops in. You need to have stops”

I remember this story greatly when I started working with Larry.

We were doing some mean reversion testing. He goes…

“Okay, we need to put stops”

I have to tell him… we always have to have stops.

We need to have a stopping.

He said…

“Okay, watch his test”

I don’t remember. 5% stop.

I said…

“Okay, I’ll test 5% stop”

I went and started testing.

I told it a 5% stop and I saw the results.

I said…

“Well, let me try a 6%.”

The results got better,

7%? …

It’s like…

“Well, this is kind of weird”

The results keep getting…

Let me try 10%…

“Wow, the results are still better”

Let me try 20%…

“The results are better”

Let me try a 50% stop…

“Results are still better”

I realized… Let me try no stop.

The no stop here, and I remember coming back to Larry.

Larry…You’re not going to believe this.

No stop gives the best results of all.

He was like… What?

That is one of the hard parts of Mean Reversion, Is not in theory.

In practice having no stop works the best.

Now, I will come back and say for my trading strategy, I have two types of stops.

I have a 50% stop loss and I have a time stop in my trading strategies.

The time stop I think is like eight days.

So, after eight days, it’s not gotten to my exit.

Usually, that means it’s bounced up or it’s not hit my 50% loss, I’m just getting out.

The reason for those two is they have minimal impact on the results.

I mean, they make the results worse, but not greatly worse.

Most importantly, it makes it easier for me to continue to trade the strategy.

So, if I’m a 50% loser, I just don’t want to see it in my account anymore.

Just selling it, and getting out of my account makes me feel better, makes me trade, and continues to trade the strategy.

If I’m in the position eight days later and it hasn’t bounced up and it’s just going sideways, I just get out of the account, maybe put something else that might work better that will make me.

Again, these two rules make my MDD a little bit worse, not a lot, but just a little, but make it much greater that I will continue to trade the strategy.

That’s the most important part.

That’s one of the biggest lessons I’ve learned through the years You have to keep trading the strategy.

When things are going bad, things are going poorly, it’s usually the hardest time.

It’s easy to keep following a strategy when you’re making money.

It’s hard to follow a strategy when you either have bad trades or you’re losing money.

Anything you can do to make that easier is important in my book.

Those two rules make it easier to trade my mean or original strategy.

They’re added there just for that, even though they make the results a little bit worse.

Rayner (1:00:20) 

What you shared earlier is just beautiful.

I’m so happy to learn from you.

Because I believe you were the one who kind of exposed my eyes to having no-stop loss in the stock markets.

It’s better overall.

But we still have risk management in place.

Then you talk about a time-based stop loss.

Cesar (1:00:35)

Yeah, the risk management is done by position sizing itself.

It’s like…OK, how big are my positions in this strategy?

Thankfully, on the long side, the worst you can do is a 100% loss.

But you know, I think my worst long-side strategy is maybe like a 75% loss.

No, it sucks.

They’re pretty infrequent.

But you know, again, let me just say this…

This doesn’t mean my other strategies don’t have stops.

Yes, my breakout strategies have stopped.

My trend-following strategy has a stop.

So yeah, it all depends on the strategy whether having a stop makes sense or not.

It’s understanding.

I’ve had people come to me; I need to have a stop.

It’s like…Fine, okay.

Understand, if you’ve got a meme or a strategy and you need to have a stop, understand what you’re giving up.

As long as you understand your results are worse and how much worse they are, that’s fine.

Because if you need that to continue to work to trade the strategy or for whatever position sizing method you’re using, then that makes sense.

Rayner (1:01:35)

So earlier I heard you say breakout and trend-following strategies.

Are they like two different strategies?

Because they sound so similar, like trend following and breakout all…

Cesar (1:01:42)

Yeah, they’re similar.

But I guess I would call them my breakout momentum.

They’re similar, but in my books, they’re not quite the same.

Rayer (1:01:55)

Could you expand on that?

Cesar (1:01:56)

Breakout to me is… It is making a new high, a new yearly high, and a new all-time high.

You know, I’ve got one strategy that was doing an all-time high.

I have another strategy that’s doing, I think, yearly high.

So those to me… That’s a breakout.

When it’s doing that, a momentum strategy or a trend-following strategy, to me, it’s just above the moving average.

It doesn’t have to be making some all-time high or a yearly high or anything like that.

The charts look different to me.

When I look at the charts, they look different.

Also, the way you place the exits between a breakout strategy and a trend following tends to be a little bit different.

To me, they’re very similar, but to me, they’re two different types of strategies.

Rayner (1:02:41)

Maybe on exits, do they both use trailing stop loss or one may have a trailing stop loss and maybe one is a fixed target or something?

Cesar (1:02:49)

Right, yes, exactly.

Here’s the bad part. Because I’m a systematic trader and because after I’m fully systematic,

I often forget the exact rules of my strategies.

You can put a gun to my head and say…

“Hey, give me the rules of that strategy”

And I’d say…

“Well, you’re going to have to pull that trigger because I don’t remember the rules”

I can tell you the general concept, but the exact rules, I have no idea.

It’s not because they’re complex strategies.

It’s just because I’ve got them up and I’ve got them running.

It’s been years since I’ve had to look at the rules.

I was like, so hopefully I’m getting this right.

But my breakout strategy has both a profit target and a stop loss.

They’re fixed.

It’s got a profit target, a stop loss, and a time stop.

Because usually, I find for those, the momentum usually continues and tends to be strong.

Now, the profit target is pretty high at, I think, 50% or 75%, somewhere up there.

So, it’s a pretty high-profit target.

And the stop loss is around 10% or 15%.

It’s a pretty wide range.

But there is a kind of a time stop to say…

“Look it’s got to get to one of these within six months or so if not then you know rotate something else”

That’s a moving kind of thing because I can’t expect a breakout to happen and the momentum to continue and get up to my profit target.

That is the breakout the trend follows.

I also have a profit target on that. I tend to like to have profit targets

But again, also somewhere around 50-75%, somewhere around there.

That one’s got a kind of trailing stock behind it.

That’s kind of the difference on those there.

Rayner (1:04:45)

I’d like to hear your opinion because when having stops and targets that are of a certain fixed percentage and you decided to use this for the foreseeable future, that percentage…

I mean, there are so many ranges of numbers that you can choose.

How do you kind of go about deciding,

I decided to go with a 50% target and maybe a 20% stop loss.

You don’t want to over-optimize the best numbers.

How do you go about choosing?

Cesar (1:05:08)

Right, so we’ll start with the stop loss.

The stop loss usually tends to be in the 10 to 20% range, just because on a breakout or a trend following stock, you usually don’t want them to pull back right away.

That tends to be pretty fixed in the 10 to 20% range.

I always have a profit target on these longer-term ones.

Let me explain first why I have these profit targets.

The reason I have this profit target is cases like Tesla, Apple, and Nvidia.

The problem is, if you do a backtest if you don’t have a profit target and you just kind of say…

“I’m going to have a trailing stop where I’ve got some other rule, these positions, if you get into Apple or Tesla or Nvidia at the right time they can grow to be a very large part of your portfolio”

Such that the reason why your strategy did so well is because you got into just that one stock and picked it at the right time.

I don’t like that.

I don’t like a backtest that depends on one stock or depends on when I started.

Because if I started this, let’s say…

“The strategy a year earlier, I didn’t get into Nvidia for whatever reason, because I didn’t have open positions”

Now my strategy didn’t do well.

What happens is if I have like a 75% or 100% profit target.

Let’s say…

I get into Apple; it gets to my 100% stop-loss profit target.

What would happen often is I exit it, and then often it ends up being a new reentry quickly thereafter.

In a sense, I’ve resized it back down to a smaller size, so that it’s not taking up such a huge amount, and now it can keep growing.

So that’s just kind of why I always have a profit target, is I’m trying to avoid a position becoming so big.

How big do you want it?

Between 15 and 100% is kind of like my normal amount.

I say normally, it’s normally around 75-100% where I say… Okay, that’s gotten big enough.

Yeah, because you got to remember, at 100%, let’s say you’re doing a portfolio, you’ve got $100,000, you’re doing $10,000 per position for 10 positions, and you get started and you get $10,000 in Apple and $10,000 and something else.

Apple doubles, okay?

So, it’s now $20,000.

It’s now become twice as big as any other new position that you’re putting on.

That to me, I don’t like that much concentration in one stock.

This is kind of why I’m doing that.

Does that all make sense, Rayner?

Rayner (01:07:42)

Yep, it all makes sense.

Also, maybe just take a step back and go back to mean reversion trading, I’ve been wanting to ask, what markets, based on your, I think your research…

Which markets are good for mean reversion trading, and then which markets are not good for mean reversion trading?

 

Cesar (01:07:59)

By markets, I’m not sure what you mean by markets.

Do you mean like Forex and Futures, or do you mean, what do you mean by markets?

Rayner ((1:08:09)

From what I’ve gathered so far, mean reversion trading works best in the US stock markets, right?

Because it’s more efficient back there.

If you apply it on markets, like I don’t know, more trending markets, I mean the China A50 and stuff like that, it probably won’t work.

Cesar (1:08:23)

Actually, from the work I did with Larry and the little work I’ve done with what I did.

I can get it I believe mean reversion iron is stronger and better outside the US.

So Australian markets, Canadian markets.

Now part of the problem, I’ve been doing some testing on the Canadian markets, and mean reversion is working well there.

The problem with the Canadian market is there are just not enough stocks to get you enough trades to make it worthwhile.

Does that make sense?

The market itself is not big enough or the universe is not big enough to give me enough trades to make a portfolio worthwhile.

Now the individual trades that you can get are really good.

You’re just not getting enough of them.

Rayner (1:09:12)

What about Australia?

Cesar (01:09:13)

I have not tested Australia, but my bet is from what I’ve heard from other people, there’s an Australian market is pretty good from the mean reversion.

I believe the foreign markets are probably really good still for the mean reversion.

Part of it also, there’s two reasons, there are fewer people trading them and their liquidity tends to be less and this is true in the US market.

The lower liquidity stocks tend to have better, larger edges in them because the big players can’t trade those stocks because they move them.

You know even if they did, they have to take such a small position size that it’s not going to make much difference.

It’s not going to help them that much.

So yeah, I think especially for your international viewers that look at their markets.

Part of the problem for me is getting data that I would trust and be comfortable testing with.

Right now, the only data that I trust that we can use is for the Canadian, US, and the Australian market.

I guess I need to see how hard it would be to trade the Australian market.

Probably the problem with the Australian market is also hours.

The Canadian market is nice because it’s on the US hours kind of thing.

The Australian market just would make it, I’m lazy at the end of the day.

 It’s like…

“Oh, don’t make me wake up at some weird time or don’t make me have to look at the markets at some time I don’t want to”

Rayner (1:10:42)

What about mean reversion trading,

Let’s say…

On the Forex or futures market?

Cesar (1:10:47)

I’ve tried it on the Forex markets that have yet to see it work.

I’ve seen it work on the futures markets in the past.

I honestly have not done much testing on my own on the futures markets because I just don’t trade futures.

I’ve done some testing for clients in the future. It seems like it does.

It can’t work on there. It’s a little bit different

In the futures market, you have a lot more complexity because of position sizing and the leverage and stuff like that, which can also help you out a lot.

Rayner (1:10:47)

Now let’s move on and talk about another strategy, I think, on tranquility.

You have another one called the volatility trend traders if I got it correctly.

Yeah, this one you spoke about earlier, right?

Maybe a high-level overview of what that is about.

Cesar (01:11:33)

Yes.

So, this is one of my favorite strategies because it’s so different.

So first of all, it’s trading VIXI and SVIXI.

So VIXI is the long VIX ETF.

And SVIXI is the short VIX half size, so half size or half volatility.

Trading just those two. It’s looking at when it thinks volatility will be staying low.

When it thinks, volatility is going to stay low, it goes into S-VXC or collapses down.

So, S-VXC makes money when volatility is flat or volatility is going down.

Then, so think of it, the easy way to think about it is when we’re a nice quiet bull market like we are now, is it great, is it low volatility?

Or when we’ve come off a very huge spike, the markets have gone down a whole bunch of days in a row.

It’s bad news, the market’s been down for a month, whatever.

Usually, the VIX goes up, and then eventually the VIX will start, volatility starts to come back down to normal, and that’s also another good time to get into S-VIXI.

So, most of the time the strategy isn’t something like that.

The good part about this is you can be in S-VIXI and the markets can be flat, and you’ll be making money because S-VIXI also kind of erodes over time.

This is nice on that feature.

VIXI now is every that when we think the markets are starting to get volatile or the markets are starting to get volatile we get into VIXI.

Markets are getting volatile and you know markets are usually collapsing so the VIXI is going up and if we time it right markets collapse we’re in VIXI so that means that makes money during you know market collapses hopefully.

So yeah, basically I’m trying to judge which volatility regime we’re in.

Most of the time, what I view as quiet volatility or down volatility.

Now and then, I’ll get mixed signals because it takes a couple of things into account and I’ll be sitting in cash when it’s kind of like…

“I can’t make up my mind which one to be in”

So, I’ll just decide to be in nothing.

It’s done.

Last year, it did 51-50%.

Rayner (1:13:10)

Wow.

Cesar (1:13:11)

It didn’t do it all at the end. It was pretty consistent.

The year before, I don’t even know what it did the year before, but I think it was, I mean, it’s had some great years since I’ve been trading it the last couple of years.

Yeah, but it’s a much higher risk, definitely not something I recommend for beginners or even immediate people.

You have to understand that Volatility ETFs have had their issues in the past.

For those of you who’ve been around long enough, you may remember XIV.

It imploded, in 2018.

When it went down 80 or 90% in a day.

It almost went to zero, almost instantaneously.

Part of the reason now why XIV was a 1X short.

Part of the reason why XVIXI existed at the time, but didn’t go out of business or didn’t get closed down, they converted it to a half X to avoid that kind of situation.

But you can still have huge moves in that.

If the markets suddenly shoot up, if they say a really bad event happened in the stock market and the stock market suddenly collapsed and you were in S-VIXI, you could easily lose 50% of your position overnight.

So that can happen.

Now VIXI, which is the long volatility, I don’t know what the biggest one-day movement is on VIXI, but I can’t imagine it’s more than 10 or 20%.

Still a very large amount, but it’s not the kind of thing, markets, for VIXI to collapse down, volatility has to drop all of a sudden.

Volatility very rarely drops from really high to low overnight.

That’s just very rarely happens.

It’s the reverse. Volatility goes from very low to very high overnight.

That’s what kills you.

So yeah, I like the strategy because it’s very different.

It’s not mean reversion, it’s not trend following, it’s volatile, it’s very different.

But it’s also for advanced people, this is one of those you can get burned on because of the way the market goes and because of the way these things are structured.

Rayner (1:16:01)

I’m just thinking out loud over here where you talk about VIXI and S-VIXI.

I’ve not traded those before but one is long volatility.

I’m thinking the best time to be long volatility is when the market is really quiet, because markets, through long periods of consolidation, means that it’s kind of like storing potential energy for a big move to happen.

I’m thinking probably quiet times are probably one of the better times to buy that one.

I think the other one, which is profit when volatility kind of tapers off, probably is going to be when there’s huge volatility in the market and there’s fear.

That’s where you know that things are going to get quiet in the coming days because it can’t be too fearful for a sustained period before, the selling pressure just kind of eases off.

I’m just thinking out loud here as you were talking about these two products.

Cesar (1:16:37)

Yeah, yeah, so yeah, what happens is…

I’m looking for things that have gotten very fearful and things are looking like they’re turning around, that’s why I’ll get into S-VIXI.

Or times where I just say…

“Hey look, it’s pretty quiet right now, this is a good time to be in S-VIXI”

S-VIXI will do well even during quiet times, doesn’t have to have the market going from high volatility to low volatility, but just an even kind of steady volatility works well.

Like you said…

“Volatility picking up time to get into VIXI”

 Is it perfect? No.

But no strategy is.

But it’s done well in the last two years.

I’m worried it’s going to have a bad year because it’s been on a good little run.

So usually, it’s like…

“Okay, it’s due for a bad year”

Rayner (1:17:24)

Mentally prepared.

Maybe we can talk about another one.

We have one called the market surfer.

Seems very simple to understand because there are only two markets, Bonds and DSMP.

Cesar (1:17:41)

This is an interesting one.

This is bought, well, this one originally started when I first put it out.

I first put it out on the site as a SPY and TLT that is the stock market or TLT.

The idea was, to try to catch all the moves then things kind of get bad in the markets, and go to TLT.

What happened was…

It was very interesting here.

The concern I had even when I put it out there when I kind of published it to Trek Reliity Trading, something I mentioned, it’s like…

Look, we’ve been dealing with, at the time when I put it out there, we’ve been dealing in a bull market in bonds since 1982.

We’ve not had a bear market in bonds.

I said…

“Look, I don’t know what’s going to happen in a bear market of bonds”

One of the members of the site emailed me and said…

“Hey, look, I think we…”

He gave me an idea of saying…

Maybe there’s a way you can do this to kind of look at bonds that are doing badly and instead of going to bonds, going to cash.

Because originally, the original system was in either SPY or TLT, one or the other.

It was perfectly well-timed for when the bond market.

I love this variation that he gave.

The results were a little bit worse, but conception, I liked it because it took care of the idea of, I don’t know when a bond bear market is coming.

But I know when it’s coming eventually.

I didn’t know how soon it was going to be, but so this was nice and conception.

I liked this idea.

When the bond bear market happened, we moved into cash.

Because you know TOT was getting crushed, and SPY was getting crushed because in 2022 both of them were losing money.

In 2022 the strategy didn’t make much loss.

I don’t remember my loss maybe 5% or so, but it was good, one of the lessons learned from that was you know understanding the limitations of your backtest and you know this limits the original backtest limitation was.

We didn’t account for the eventual bear market in the box and having this member of my site kind of say…

Hey, look, really pushing it and saying, coming up with some ideas on how to deal with that was good and made a much better strategy.

I still have the other versions on there for people who are much more aggressive and think…

Because especially now that we’ve now the bond prices have come, interest rates are much higher, we’re not likely going to have a bear bond market shortly.

So maybe some people are going to the other ones a little bit more aggressive.

Does that make a little sense to you?

Rayner (1:20:17)

Yep, it does.

I’m also curious because you’re either in cash, bonds, or S&P and thinking the average annual return is in double digits.

So how does that come about, since the buy and hold on the S&P?

Cesar (1:20:31)

Well, you have to remember, that comes about in two ways.

One way is you make money when the market goes down if you’re in TLT.

The other way is, if you’re making money on TLT, you’re not losing on the spikes.

It’s kind of like you get a little bit of both.

So that’s how you kind of manage to do better than the market itself.

Part of the trick sometimes is, they say market timing is hard and it is really hard, but you can get it halfway right, and you can improve your results on either drawdowns or returns.

For me, it’s usually drawdowns I’m trying to avoid.

Rayner (1:21:10)

Okay, awesome.

Yeah, this is a fun one.

I mean, you’ve been training for like over 20-plus years.

What are some strategies that you have used in the past that no longer work?

Cesar (1:21:22)

Oh…

So that’s a lot and lots of strategies.

There have been multiple mean reverting strategies that have come and gone.

A lot of that was what I would call Larry Conner strategies that were published and eventually those that just disappeared.

Just because I was trading them as we published, I believe too many people got around to seeing the rules and trading those.

That’s a strategy, it’s disappeared.

I’ve had a strategy, God… when was this?

The early 2010s, which was dependent on some FED Data. And that one, went away mostly because the FED stopped publishing the data I needed.

That’s another strategy that has kind of gone away.

Now is a data issue kind of thing.

A recent strategy I’ve finally formally killed, even though I haven’t traded it for two years, is I had a strategy that was trading S&P 500 stocks, kind of a breakout strategy, and it just stopped working for the last two years.

I finally decided It was not because I hadn’t been working for the last two years.

I kind of killed it out of my trading stable and this is why you haven’t asked the question that everybody always eventually asked us.

How do you know when to stop trading a strategy?

This kind of segues to this in a sense of so as I mentioned earlier I have about 10 strategies that every quarter I kind of evaluate and trade the five best ones.

 What that naturally does if a strategy is doing poorly, it’s not going to make the five best.

This is my way of figuring out when a strategy dies.

This strategy that I just recently killed had not made it into my five best for two years.

The results sucked over the last, they were kind of flattish over the last two years.

Because it hadn’t been aided in the top five, told me it just was not doing well.

Just looking over the past results, looking at the marketing conditions that they should have done well, I decided I was going to kill it.

But I was able to kill it without getting hurt by having it in my trading stable.

Does that make sense?

Rayner (1:23:37)

Yeah…

Cesar (1:23:40)

So a lot, because often people say…

When do you know when to stop trading strategy?

The problem is you don’t know until a year or two or three years after it stopped working that it’s gone bad.

Nobody wants to trade a strategy for three years that’s going bad.

By having in my trading stable and rotating through the best strategies, I didn’t naturally, didn’t trade this strategy for two years.

I was able to see two years.

I can see through two years of backtest returns going, it didn’t do well.

I understand why it didn’t do well. It did market, the markets were doing well.

It should have done well, but it didn’t.

So, the edges disappeared, but I didn’t get hurt by having to trade it for those two years because it didn’t make the top five.

Rayner (1:24:24)

That’s a very new concept that I’ve just learned from you.

You know, basically having a stable of strategies and then just picking the top few ones and not even getting affected by the ones that have stopped working because you know ones that are working always at the top ranking.

Cesar (1:24:37)

The way I came up with this or the way I kind of came up with this and perfected it is I had this concept of…

Oh, okay, maybe rotating strategies.

I said…

Well, can it help me get out of bad strategy?

So, I created a strategy that purposely lost money.

I mean, this strategy goes broke.

So, it was really easy to make, it’s easy to make strategies that lose money.

I made a strategy that purposely lost money almost every year, lost money, lost money, lost money.

Then I put it into my stable.

I back-tested it with my stable.

I was like…

Okay, does putting this strategy that I know loses money year after year after year?

Yeah, there were months now and then when it would pop up and make money.

So, I was like…

Okay, here’s a strategy that just conceptually just sucks.

I put it, I tested it, and pretty consistently, it just never would show up.

A couple of times it did show up because it had three months where it got lucky and made some money and showed up in the top five.

But then, yeah, I traded for three months, it would lose money, then I’d rotate out.

So that kind of showed me that I can purposely put it in a strategy that sucks.

But when I put it into my whole stable, it only minimally impacted the total return.

Yes, did it bring them down a little bit? Yes, it did because I put something I know is bad. But it did not destroy everything. It did exactly what I wanted it to do.

So that’s how I verified that this concept that I had worked.

Rayner (1:26:03)

Yeah, it’s the first time I heard this concept.

Wow, I think we have some work to do with you after the call.

So are we able to then, let’s say…

I have, for example, 10 strategies, am I able to,

let’s say…

If I take the top three every year or every quarter and I backtest between the top three to the top five, can I see the difference in the performance?

Cesar (1:26:20)

Yeah. It’s doable?

Yeah, I mean, you will see the difference in performance.

You have to come up with your ranking method.

I mean, my ranking method is pretty simple.

I mean, it’s not a complex ranking method.

I think I’m just looking at two timeframes and saying…

Okay, look at these two timeframes and compare them all, and just rank by that.

That’s kind of a very simple ranking method of my strategies.

And then, yeah, I mean, anybody doing this.

I would say… You know, if you can get up.

I have one of my strategies which is a brain death strategy.

It’s just a two-in-a-day moving average on the SPY.

Because I figured if my strategies can’t beat that, then that should be in there.

I think also one is just cash. Those aren’t official.

Well, the cash isn’t an official strategy, but it’s unofficial like 11th added in there, just as a kind of extra buffer.

It’s like…

OK, things are really bad. I just want to know if that puts it in there.

But anybody else, if you’re doing this, if you’ve gotten to the point where you’ve got lots of strategies this is a good way of trying to focus on a smaller set.

For me, it’s a really good way of dealing with understanding when a strategy is dying.

This also lets you get away slightly with strategies that are similar-ish.

But yeah, I’ve found this has been good for me. Is it better?

Would you be better off on the backtested results trading my entire 10?

Yes, I will say yes.

If I just trade it all together and back-test the results to give me better results.

But I’m willing to give up a little bit of return to now kind of like say, I now don’t need to worry about when does the strategy die?

Because that to me, that’s always one of the hardest questions to answer.

You can’t answer that until a couple, you know unless it’s something obvious.

I mean, very rarely is it that. I mean, like when my data disappeared…

Okay, yeah, that strategy is dead. Yeah, that’s pretty obvious.

Or something critical in your strategy happens, you know, it’s not obvious for a couple of years that your strategy is dead.

Very rarely is it very kind of like…

“Oh yeah, my strategy because normally it’s not that they lose a lot of money”

It’s they just stop making money, I’ve discovered.

Rayner (1:28:46)

So this kind of like brings me to this question.

Let’s say you rebalance every quarter, if I hear you correctly, pick the ones with the strongest momentum.

There will be times where let’s say…

A strategy goes into a drawdown.

And I think there’s a saying that the best time to trade a system where it’s in a drawdown is because if it works, it’s going to catch up with the next up move.

I’m going to assume that you will not be able to enter those strategies which is in a deep drawdown.

You only enter it when it’s kind of recovering from the drawdown to prove itself before you get back to those strategies again.

Cesar (1:29:16)

Yes.

Because I’m looking at like, I don’t remember the exact things, but I think I’m looking at three- and nine-month momentum.

How has it done over the last three and nine kind of thing?

The thing is, if a strategy is a drawdown, the problem is we don’t, and this is always the question, is the drawdown normal?

Is it going to come back or is this a drawdown?

This is because the strategy is dying and broken.

You can’t know that, yes, sometimes the best time to get into a strategy is when it’s in a drawdown.

That’s where you kind of end up giving a little bit of a return.

When I said, it’s sometimes better to trade the entire 10 than trading the five.

But again, this is always trade-offs.

At my age now, I’m no longer looking for huge returns.

I’m looking for smaller returns and fewer drawdowns.

I don’t need the big years anymore. I just need consistent years and small drawdowns.

Rayner (1:30:16)

Preservation mode, I’m guessing.

Cesar (1:30:17)

Yeah, I’m in the preservation. I’m not looking to super grow my portfolio now.

I’m looking to preserve it and slowly grow it.

Rayner (1:30:29)

Also, I’m thinking when you do this rebalancing, it won’t make sense to be using a loopback period of like one year or two years, because that’s where things can be.

I don’t know, like the strategy that has done well for the past year.

I don’t know, I have this kind of theory in my head that it’s about to mean revert soon in the future.

I don’t know.

Maybe is that a reason why that’s why your rebalancing is on a shorter duration, like three months, or nine months?

Cesar (1:30:49)

I mean, the problem is,

I mean, I don’t want it too long, because if I have too long, then it’s going to, take a hard time to kick out a strategy that’s dying.

That’s the thing.

The one thing you have to be careful with is something like this, and there is a little bit of discretion strategies that are market-dependent.

For example, I told you, we were talking earlier about the exploding stars.

I have a version that trades both above and below the 200-day moving average for the market.

But that one that I’ve got published on my site is only for when the markets are in a bear market, okay?

So of course, right now, it’s just sitting in cash.

So that one, if I had that in my trading stable, I would have to do something slightly different.

Are we in a bear market?

That one I might just throw straight in.

If we got into a bear market, I would just throw it straight in.

If we got a quarter rotation, it’s like we’re in a bear market.

It’s like…

Okay, that one automatically gets it.

Then I’m thinking of the next top four.

Because it’s just the way it is.

You have to be careful with that.

Like…

Oh, this is only a bull market strategy.

Oh, there’s only a bear market strategy.

Then you have to be careful with this kind of strategy rotation.

Because it may keep you out of strategy when it should, not when it shouldn’t, but when you should, then you should be getting into something.

Rayner (1:32:13)

Because that strategy is meant to shine during bear markets and maybe the ranking has not made it show up yet.

Cesar (1:32:19)

Right. Yeah, just imagine it’s March 31st, and we’ve just entered a bear market, and this strategy has been sitting in cash.

Of course, it’s not done very well.

But we’re in a bear market and this is why I know it’s going to go.

I’d automatically throw it to the top.

Say, no, it’s a bear market. I’m throwing you in.

So that would be kind of like a semi-discretionary override over that.

But if you have, it’s something to think about if you’ve got strategies like that.

Rayner (1:32:51)

Okay. And what’s your take on trading individual markets versus a portfolio?

I think what you do, you trade a portfolio of stocks, right?

But there are also some traders like Kevin Davy, and Andre Unger, who trade individual futures markets with specific systems on these different markets.

What’s your take on it?

Because both of you are like, yeah.

Cesar (1:33:09)

Yeah. I think I don’t like it.

I mean, yeah. First of all, you can make money in a whole bunch of different ways.

I’m not saying anybody other ways the individual market is wrong.

I’m just saying from my point of view, I don’t like it.

The problem I have is from a testing point of view, you have to be careful about curve fitting.

Curve fitting becomes a lot easier.

You know, if you’re just testing on the SPY, you only have one symbol.

It’s really easy to accidentally overfit to that.

Now, that’s my biggest kind of concern about that.

It’s much easier.

You know, I’ll tell you this…

I am always trying to find a strategy to trade the ETFs.

The problem I have is I haven’t found anything that.

Gets me excited.

I found strategies that are okay, but not enough to excite me to trade.

The good part about ETFs, like trading the SPY or trading the spiders, the sector ETFs, is they can handle a lot of money.

You can place open orders, and you can place market orders, but for most of us, we’re not going to move the market.

There are tiny spreads.

Yes, I could see if I was trading a larger account, I would be trying to focus more on those markets because like I said…

They can handle that amount of money.

But like I said…

I’ve not been able I have not been able to find anything there that makes me excited but doesn’t make me think I’ve maybe overfit the strategy.

I’m always looking though that’s one of my areas or I always go back to it like I got to find something just trading for me, it’s usually the sector ETFs.

I want to find something on the sector ETFs that makes me excited, but I can never get anything.

And anytime I do, I feel like I’ve overfit the data.

So, I end up throwing it away and like…

Okay, I’ll come back in another month or two and try again.

Rayner (1:35:12)

How do you know you have overfitted the data?

Cesar (1:35:16)

Part of it is the gut feeling.

Part of it is what I would call parameter sensitivity.

So, making small changes in parameters

How much do the results change?

So that to me is that, and then also out of sample.

I mean, if I can’t, I usually try to leave data for out-of-sample testing to see how that works.

So those three things, my gut, out-of-sample testing, and parameter sensitivity testing will help me give me an idea of whether it overfit or not.

Rayner (1:35:47)

All right.

The next one I have is if a trading strategy, let’s say works on the Russell 1000, the large caps.

But it doesn’t work on, let’s say, the Russell 2000.

What’s your, would you trade such strategies too?

Cesar (1:36:01)

Yeah, so it depends on your definition if it doesn’t work.

The answer is, if it just, the edge is not as big, you know, it doesn’t work as well as strong, then yes, that to me, it doesn’t bother me.

I don’t expect strategies that work well on one index to work well on some other index.

Though I generally do expect them to still work.

Sometimes I’ll look to understand why.

Sometimes it may be…

“Oh, it works, the edge is the same amount, but there’s just”

Like if you went from, let’s say…

S&P 500 to Dow Jones, the Dow Jones 30, there’s just only 30 stocks.

The edge may be the same.

You may be making the same amount per trade, but you’re just getting so many fewer trades that you can’t, that the overall portfolio isn’t making that much money.

Sometimes it could be you go from NASDAQ 100 stocks to S&P 100 stocks.

Well, the NASDAQ 100 stocks are just so much more volatile that, yes, the S&P 100 stocks aren’t going to make as much money just because the volatility isn’t there.

It’s a matter of understanding why.

But now, if I did something on the NASDAQ 100 and it made money and I tested on the S&P 100 and it lost money, I’m concerned.

Now, that’s a bad time.

It’s a matter of understanding what universe you tested onto the new universe, understanding the differences in them, and saying…

Okay, why is this difference there and is it to be expected?

Often it can come down to liquidity or volatility of the stocks or the number of the size of the universe.

Those tend to be the common things of why you will see the differences.

But like I said…

“If you see, makes money in one, loses money in the other, bad sign, run away”

Rayner (1:37:42)

What if like earlier you’re comparing stocks of similar market cap, but what if like, let’s say the S&P 100 and then with Russell 2000?

I mean, and then Russell 2000 loses money.

The reason could be because the edge works in large-cap stock, but not in small-cap stock.

Cesar (1:37:58)

Yeah. That becomes interesting guys.

The hard part about that is it’s really easy for us to justify makeup stories afterward on why something is.

If I were to see something like that, I would probably then say…

Okay, try putting a very, you know, if it’s like…

Okay, it’s losing money on the Russell 2000.

Let me try the most liquid stocks in the Russell 2000. Yes, so still, do I see better results?

Maybe I’m losing less money.

So maybe it is a liquidity thing kind of thing.

Maybe it’s just whatever you discovered is better on the bigger-cap stocks.

You know, I would look, okay, is it a liquidity issue?

That’s how I would kind of segment it and see that made the difference.

Rayner (1:38:40)

I see.

The next question was to ask you what are some of the things to look forward to seeing if a strategy is broken, but you shared with me that concept earlier.

I think we can see.

Cesar (1:38:50)

Ah, I knew that strategy was going to be coming up. That’s the most popular question I ever get. I heard

Rayner (1:38:57)

I think, once on Better Systems Trader Podcasts, you said that there’s like a 3–4-hour conversation just to talk about that topic.

Cesar (1:39:02)

I have a much better answer nowadays. I used to just say I have no good answer.

At least I have an answer that makes me happy.

Let me just put it to you that way.

I’m happy with the way I’m now dealing with it.

Probably not the answer most people want to hear because most people don’t have 10 strategies to be trading.

They’re only trading one or two and then that’s.

Yeah, I mean if you’re only trading one or two strategies and you ask me, okay, how do I know when my strategy’s broken?

The thing is, some people say…

Well, maybe it’s broken if it’s gone into a bigger drawdown.

The problem is, that the biggest drawdown is always the next one coming.

The biggest drawdown is always in the future.

Statistically, that’s just how it works, is there always will be a bigger drawdown in the future than your back-tested results.

If you’re going to say…

I got a bigger drawdown there if my system’s broken, well, no, not necessarily so.

You can’t use that.

I mean, what I would tell people generally if you were like…

You’ve got one system; you want to know if is it broken.

This is kind of what I did before.

I would love, okay, to understand what market conditions it should make money.

Is it good when markets are going up and volatile or maybe up and quietly or something?

What kind of market does your strategy do well?

Have we had that kind of market recently?

Did it not do well then?

If it didn’t do well, then that’s a bad sign.

You just say your strategy does well in markets that are highly volatile and going up.

We just went through three months of high volatility moving up and your strategy lost money?

Bad sign.

Now, the problem is often the market that our strategy does well may not be what’s happening right now.

Then it becomes, okay, is the market conditions causing the problem or is it the strategy itself causing the problem?

That’s where it gets a little bit hard.

But I try to look at it and look, you need I hate to say this, you need six months and years’ worth of strategy performance before I can even consider thinking it’s broken.

You know, unless it just falls off the cliff and, you know, just like, suddenly just starts losing money left and right.

Okay. Yeah.

That’s the rare obvious side.

You need to give it six months to a year of timeframe because that gives you long enough to see hopefully enough trades, go through hopefully a market condition that you expected to make money in, and kind of evaluate it in, I don’t know.

I don’t have what I would consider a good answer.

I’ve never had a good answer that I’ve been happy with if you just came to me with one strategy and said…

Hey, I think my strategy is broken. Can you tell me if it’s broken?

Yeah, unless I looked at your backtesting and said, oh yeah, you overfit your data, that’s why it’s broken.

That’s the easy answer.

But assuming you haven’t done anything bad, you need six months to a year, and then you kind of look at it and say, how’s it performing compared to what I expect it to perform?

Rayner (1:41:53)

All right.

So maybe now let’s talk about ranking factors.

I think earlier in the conversation, we talked about ranking factors.

May be for the audience to let them know what ranking factors for.

Because sometimes there are too many stocks to buy.

We need certain ranking factors to choose which stocks to buy.

I think the popular one, I think, is the rate of change.

I can’t buy the strongest performance stocks, blah, blah, blah.

What type of strategies work well for certain ranking factors?

Because there are many ways to do it.

Cesar (1:42:16)

I’ve discovered anything volatility-based.

So historical volatility, ATR, you want the higher volatile stocks for mean reversion.

That I’ve discovered.

For trend following, it’s the reverse.

You want the low-volatility stocks. Or you want, if you’re going to also, you can also rank by the rate of change.

How has the stock performed over the last three months, six months, nine months?

Sometimes you can just do one of those.

Sometimes people combine all three.

I’ve seen lots of different ways of combining multiple timeframes.

So that tends to be very popular and very useful for trend following.

Also, for breakout.

Breakouts tend to do well for me for high volatility stocks, ranking high volatility stocks, and also rate of change.

Those tend to be my go-to ranking methods.

So, when I’ve got too many signals, I’ve got 20 signals, but I can only take three.

It’s mean reversion, I’m looking for high volatility, whether it’s historical volatility ATR, or any other way of measuring volatility that you like, that’s the way to go.

Back again, with trend following, and low volatility, I find low volatility works well.

It tends to have good returns and reduces the drawdowns a lot too.

Then yeah, those are my favorite ranking methods and the reasons why I kind of like those.

Rayner (1:43:54)

For breakup, would you be looking for high volatility or low volatility?

I tend to like the high volatility on that one.

But something, you know, actually I just wrote about this, my private trading group.

Is this exact thing testing both, in the sense of sometimes testing what you think won’t work it’s like…

“Okay oh! you know high volatility seems to work well let me just test low volatility because one of two things is going to happen or one of three things can happen”

Okay, let’s say…

You got a strategy you’re testing high volatility ranking then it’s working it looks great and you say…

“Oh yeah volatility ranking works great”

You know I’m ranking by highest I’ve got a great result

Now you say…

“Let me just test low volatility”

One of three things can happen.

You rank by low volatility and the results go down a lot.

Okay, well that did exactly what you expected, right?

Because if I’m ranking by highest and if I go to lowest, I should respect my results a lot.

Great, that works great.

The second thing that can happen is nothing changes.

This has happened to me.

It’s like, wait a second, nothing changed.

That’s telling you your ranking method is not doing anything.

So that means you should look for a better ranking method.

There are only two ways.

So that’s sometimes doing the opposite or trying something opposite and seeing what happens can be very instructive.

It is instructive especially on the ranking side because it can tell you whether you’ve picked a good ranking variable. After all, if, you know, like I said…

One of two things, either you get exactly what you expect and the results get worse or nothing changes.

That tells you, your ranking variable is not very good and you should go find something, you should find something else to rank by.

Rayner (1:45:38)

Oh, right. Earlier you mentioned it.

For breakout, you’re looking for low volatility and then the trend following is for high volatility.

Cesar (1:45:43)

Other way around.

Trend following low volatility, breakout high volatility.

Rayner (1:45:45)

Right, okay.

I was thinking that these two are very similar strategies but their ranking method is the inverse, right?

Here’s another one. What are some things that traders think is true but are false?

For example, the risk-to-reward ratio is 1 to 2, but by now with data, you know that’s not true.

Cesar (1:46:07)

So, I guess, one is you always have to have stops.

Rayner (1:46:13)

Oh yeah, that’s a good one.

Cesar (1:46:16)

That one is I think Larry and I wrote a book.

Did we write a book on this?

I think Larry and I either wrote a book or something about the…

“Seven things’ people think are true that aren’t true”

We wrote something about this. I don’t see a book out there.

So, alright, one would be stops.

Another one is over believing that complicated position sizing is the solution.

I see so many people come with me, clients come to me to test things that have very complicated positions, or not very complicated, have the standard complicated position sizing. Kelly formula, fixed rate, etc.

I mean just these different ways of doing position sizing and not understanding that just the simple equal position sizing works so well.

I mean that’s another one of those things. Another one, not my favorite, is thinking that being a systematic trader or a quant trader means there are no emotions in trading.

That all emotions are dealt with.

You don’t have to deal with them anymore.

That’s just the biggest lie there is.

What else?

Trading is not about the money.

If you’re trading for money, you’re trading for the wrong reason and you’re going to eventually lose, you’re not going to make it in the long term.

I think you have to view trading as a puzzle, as work.

The money is, yes, do I want to make money?

Do we all want to make money? Yes.

But that’s your main focus.

You’re set to fail.

I mean, is that a… I don’t know, this is a tough question you gave me here, Rayner…

That’s all that comes off the top of my head.

Rayner (1:48:13)

Okay. Sounds good.

Yes, okay, this is another one.

I’m just kind of like a yes-no answer because I was just thinking out loud.

Have you ever thought of, you know, because this is something on crypto that I noticed that, you know, the crypto market is still quite nascent, quite new?

That usually, right, I think what I’ve noticed is that when the overall crypto market, like I said…

“Bitcoin goes down one, two percent, right, and you manage to find certain coins or tokens that didn’t go down, maybe up three or four percent for the day, right”

Those are usually the stronger coins that will likely outperform the market, at least in the short term.

So, I’m thinking, have you done anything similar for the stock market where the overall market is down, but then there are certain stocks that just didn’t go down but maybe just up for the day and then maybe happened?

Cesar (1:48:54)

No, I have not. You know what?

Put that on my list of research right here.

Rayner (1:49:00)

Okay.

It’s a relative strength concept but you know I was just taking it from the crypto markets and kind of like yeah bring it over to the stock market.

Cesar (1:49:07)

I like that idea.

I put it on my infinitely sized research list.

Rayner (1:49:13)

Okay, hopefully, it’s at the top of the priority.

Alright, let’s move on to the closing section.

As mentioned, close to two hours, you’re almost two hours now.

So yeah, anything that you changed your mind on recently doesn’t have to be trading.

Cesar (1:49:26)

Yeah. Ha ha ha, doesn’t have to be trading.

Yeah. Now let me think,

I got to think about what I’ve changed on my mind recently on trading.

What’s been recent on trading?

I got to think how far back I have to go. I’m looking at something here.

I’m sure there’s, I’m always changing.

I’m always learning new stuff trading, but I’m going to try to think.

What have I changed my mind on?

I think changing your mind is good and there are lots of other things I could tell you that I’ve changed my mind on.

But not trading-wise, nothing pop kind, I know.

Oh, this is a tough one.

Rayner (1:50:02)

Okay, trading-wise there.

What?

Can be trading,

It can be related to trading or non-related to trading.

Cesar (1:50:07)

Well, I’m trying to think of a trading one.

That I’ve changed my mind on.

I keep reinforcing.

A lot of what we’ve discussed, I’ve just learned through the years.

I’m going to say I’ve changed my mind, but there’s just been so many things I’ve learned.

Unfortunately, I can’t think of anything and I think that’s bad.

Hopefully, I have changed my mind on something trading-wise.

No one’s spotted.

Let’s have another one.

Other personal stuff that I’ve changed my mind on, but I’d rather not go into it’s just, it’s personal stuff.

But yeah, there’s other personal health-related stuff that I’ve made changes on.

Big mind changes on.

Rayner (01:50:57)

And I recall, right, last time we spoke, you were into, was it Jiu-Jitsu?

Are you still doing it?

Cesar (01:51:02)

Yes, we do Jiu-Jitsu.

I know I’m still doing that.

Been doing that for 13 years or so. Yeah.

Rayner (1:51:08)

I should have asked this at the start, but what made you get started in this sport?

Cesar (01:51:14)

So, I started actually, I started trading general martial arts in 1997.

The school I started at was doing Jeet Kune Do and Mu Tai and a little bit of Brazilian Jiu Jitsu at the time.

He was kind of teaching multiple things and then the school through the years started doing more Jiu-Jitsu and then in 2010 or so went to all Brazilian Jiu-Jitsu.

So I’ve been at the same school since 1997 but we’ve been just doing Jiu-Jitsu for the last 13 years.

For those of you know a lot of people know Brazilian Jiu-Jitsu because the UFC and Gracie’s doing all that.

So yes, yeah there I’m always changing my mind and learning new things.

Rayner (1:52:05)

How does your tendonitis come into play when you’re doing Jiu-Jitsu?

Does it affect you?

Cesar (1:52:13)

Yes, I’ve had a flare-up that’s happening right now because of that.

The way it affects it, actually it’s a good thing, a bad thing.

It forces me to change what I do.

For those of you who are familiar with Jiu-Jitsu, I like doing chokes.

I like using color chokes.

That requires very strong grips.

Between I just overdid some exercising and kind of inflamed that.

So that pushed my game in a different direction.

So now I’ve just been doing more leg locks and now I’m going to go back to chokes, a different type of chokes that don’t require colors.

I can go back into choking.

My two main attacks are either choking somebody out or breaking their feet.

So that’s how I, that’s my thing.

But yeah.

Jiu-Jitsu is great because it’s always learning.

You’re always being pushed, you’re always learning.

It’s physically demanding.

And I’m a small guy, so that makes it even more challenging.

Rayner (1:53:12)

I’m glad I’m your friend, right?

Cesar (1:53:13)

I don’t have anyone coming to break my legs.

Rayner (1:53:23)

So, speaking of which, when you sit, when you work at your desk for long hours, and that’s where the tendonitis flares up, is it because I’m guessing the elbow is resting on the table?

That’s why it’s…

Cesar (01:53:28)

I don’t know what, I mean, I don’t know if it was the resting just the long hour, I mean, because it doesn’t happen as much nowadays.

I mean, it seemed to be very common back then.

I don’t know if we’ve just learned better to take some rest or what.

So yeah, I don’t know.

But now, you know, for now, it’s usually when it flares up for me, it’s usually, you know, I’m exercising either too hard or doing jujitsu or gripping too hard at jujitsu, usually it’s a combination of two things.

Usually, I do two things too hard at the same time.

That’s what happened this time. I was working on my pull-ups.

My pull-ups were too hard and I was working on my chokes too much and doing both things too much kind of made my elbows mad at me.

Rayner (01:54:06)

Alright, and what are the projects that you are working on right now?

Cesar (01:54:11)

I am always researching new trading strategies.

One of my strategies right now that I’m looking at is an S&P 500 breakout strategy that I’m looking into.

So that’s always kind of the…

I’m always doing research.

I’m always trying to find new strategies.

I believe strategies will eventually, I believe the strategies I’m trading will eventually, their edges will die.

I believe they will die, whether it’s tomorrow, a year from now, or five years from now, they will die.

As you asked earlier, what strategies am I not trading?

There are a lot more that I couldn’t remember that I’ve stopped trading for various reasons because they just stopped working.

And so, therefore, I’m always looking for something new. I am, you just gave me another idea to try, because this is the S&P 500. I’m always looking for, I’m always trying, like I said, the index or the sector ETFs, I’m always looking for the sector ETF strategy.

So yeah, to me, that’s, hey, I just love doing research. I love doing research, and I love coding, and that to me is where trading me is boring.

It should be boring at the end of the day.

It’s the research that I enjoy, coding up the strategies, testing the strategies, breaking the strategies, and trying to figure out what I did wrong.

That’s what I enjoy, that’s what I do.

Like I said, putting in the orders, after we get done with this call, I’m going to have to put in my orders for the next day.

Yeah, that’s boring. Five minutes later, I’ll be done.

Rayner (1:55:38)

When you say strategies stop working, would you refer to it maybe conceptually, like earlier we talked about mean reversion, stop working, would it be conceptually or maybe more towards the technical, exact parameters happen to stop working?

Cesar (1:55:52)

More of the, it’s two things, more of the exact parameters stop working, but I do not go back and like re-optimize and find new parameters to make it work.

I figured that the general area was probably broken or either broken or the edges disappeared.

Also, edges have been getting smaller and smaller and smaller through the years.

So that’s also another thing. It’s not necessarily broken, but I think there will be a time sometime in the future, or at least for me, where it’s not worth my time to trade, just because I’m not, for that time, it takes me to trade and the commissions and all that.

Yeah, I can just put it in the market and, you know, do a simple 200-day moving average following, trend following, or whatever, or something strategy.

It’d be a lot easier than what I’m doing now, just because the edges are getting smaller.

I think we’re, you know, a lot of my edge now, or a lot of the edge I’m looking for is reducing drawdowns.

I’m not looking for the big gains, but I’m looking to reduce the drawdowns.

So that’s where a lot of my focus is.

My trading is like, okay, how can I reduce drawdowns?

Rayner (1:56:55)

What are your thoughts on, as you see that the edge gets smaller and smaller and smaller, then maybe you reach the point where it’s so small nobody trades it and it gets larger and larger?

Yeah, it might be, yes. I don’t think so.

There always will be people wanting to trade.

There are always crazy bull markets will always pop up.

And that will always get lots of people interested in the markets and wanting to trade again.

I’m seeing an uptick after last year’s very strong market and an uptick in the number of people who are interested in the markets.

Rayner (01:57:30)

Is there anything else that you wish to add that I didn’t cover in today’s show?

I don’t know.

We covered a lot in two hours.

I was wondering what we were going to talk about in two hours.

You surprised me. On the whole, what we decided to start with.

But no, I think it was great.

I was honored to be here talking to you and your listeners.

Hopefully, I conveyed something that will teach people even one little nugget.

Rayner (1:57:57)

I learned a ton just by speaking with you for the last two hours.

Where can the audience find you and connect with you, right?

Cesar (1:58:05)

Yes, so I’ve got two websites.

I’ve got

https://alvaresquanttrading.com

That’s where I write a blog there.

Every month or two I’ll do some sort of research thing that I’ll write there.

If you’re getting into trading, especially medium version trading, or just want to understand trading, that’s a great place to start.

I’ve been writing on the blog for 10 years now.

There is tons and tons of content there.

Also, if you’re an Amibroker person, I’ve got information there on Amibroker that you can get there.

Then there’s my

HomeV4

Where I give signals and also my private trading groups.

We’ve got forums and people can talk and ask questions.

This is a good place for you know, you’re trying to learn some trying to figure things out.

So those are the two places.

Both places have contact me, I answer all emails.

If you say contact me, I’ll answer within 24 hours.

I love talking to other traders.

You got questions, some general questions, anything like that.

I love talking about trading.

If Rayner and I had gone for two hours, we probably could have gone for another two.

It’s getting late for me here.

Rayner (1:59:09)

I’ll put all your links and stuff that you mentioned in the description below the show.

For those who are interested, the link will be somewhere below there.

You guys can access it.

Before you go, Cesar, I just want to say a huge thank you once again for your time, and your generosity.

I’ve learned a ton from this time speaking with you.

I appreciate it and thank you for being the guy who’s always taking my ideas and testing them.

Writing up the code for me on Army Broker.

I get an easier life.

Thank you so much once again, Cesar.

Cesar (1:59:36)

All right, thank you, Rayner

Rayner (1:59:42)

Awesome, thank you.