Richard Farleigh trading talk

So I spent about 90 minutes yesterday morning listening to ex-Dragon’s Den member Richard Farleigh (RF) talk his way through some of the things he did in getting to the point of multi-millionaire trader status.

I guess it was pretty interesting because I made >16 pages of notes πŸ˜‰

The following are all Richard Farleigh’s opinions or comments which I’m reproducing so if you happen to disagree with any of them then you need to take it up with him πŸ˜‰ Any inaccuracy is also completely mine. If you want more detail then go buy his book off Amazon called ‘Taming the Lion’.

He had some major themes which recurred again and again. Interestingly he confirmed what others have said in that it’s harder to make money now…

Opportunities that existed (like arbitrage) in the 80’s and 90’s have been wiped out by globalisation and the advent of computers. Also, it’s no longer possible to really think of indices and currencies from different countries in isolation. Everything is now linked and interdependent.

He also talked about the change in how markets work. In classical economics the guy in the mansion (USA, developed economy) lends money to the guy in the shack (China, developing economy) so obviously were not in Kansas anymore…

Hearteningly, as a new trader Richard traded his own book and lost 4K AUSD of his then 20K salary in a year so let’s not all despair just yet, right?

Onto the interesting stuff…

Observations on price movements

Markets overshoot i.e. markets take time to react to news so if it’s going up it will carry on up further than anyone has predicted (e.g. Gold) and if the price is dropping (USDJPY from 400 to 80) it’ll drop further than anyone predicted.

Part of the reasons for this is that highs and lows attract interest from others which accentuates what’s happening.

Markets in crisis provide opportunity. Be nervous when the market doesn’t rally on good news. News that comes out against the trend is often ignored – this is a good buy signal.

Trends work. Period.

RF has proven with a bunch of researchers that trend following tips the odds in your favour 55/45 and this is enough to give you an edge in the market.

Forget the old price when trading, it’s no longer relevant. Keep the position open for as long as it’s moving in your favour and forget all the old data. People are also skeptical about new prices so it can take a while for trends to re-form.

RF believes that the markets are 95% efficient but contains repeatable patterns of behaviour since the price movement is the average of a number of possibilities.

On expert opinion and charting/chartists

This was very interesting to watch as RF essentially dismayed most of the people in the room by declaring he doesn’t believe in charts. Most people miss-interpreted this comment as he was a fundamentalist trader only but what he was actually saying is that he really doesn’t believe in chart voodoo like Fibonnacci, Eliot Waves, Gann Theory etc. etc. and I believe the actual quote was ‘Chartists are the astrologers of the market’ It was however quite amusing to watch the audience attempting to contradict the guy speaking who’s already made a fortune – lol

In fact he had very little good to say about expert opinion in general. Everyone has an opinion of where a price is going and why, but no-one can tell you why the price was at point ‘x’ last week. Professionals are not attempting to ‘outguess’ the market and they are definitely NOT talking to the press.

How to make money

Rule number one for beginners – DO NOT DAY TRADE. I will come back to this in a later post πŸ˜‰

RF has launched a fund in the UK which uses beliefs about fundamentals with technical analysis. In the talk it was clear that he’s very much in favour of holding positions for a very long time – up to 5 years in one case…

Strategies must be repeatable and give you an edge so that you can do it again and again. You need to build a structure with some basic assumptions then test your thinking by filtering it through a decision making process.

Look for bigger picture ideas like the rise of China. The fact that Australia is sitting on the commodity mountain they are after. The dollar will weaken long term. The rise of India. All these bigger picture ideas can be fed into trading a technical strategy – don’t bet against the global trend.

Psychology in trading

It may also be some comfort that RF himself hasn’t solved the ‘stop loss dilemma’ i.e. where to put it when trading

Having exercised disciplined thinking and run that thread through a decision making process you need to step back from the market and execute the trade.

Wild swings and losses are uncomfortable so each trade must be risk managed. Another way to look at this is to make sure no one trade is too ‘risky’. Don’t bet the house on any one trade.

Wait for someone else (the market) to agree with you before placing a trade. Let someone else take the risk of attempting to call the top/bottom of the market. This is a key point for having ‘entry triggers’ for each trade.

Be aware of asymmetric risk

So what’s asymmetric risk? (no, I didn’t know either) Well if you think about this it makes perfect sense. If you’ve got a system/strategy that has a 98% chance of making a 5% return year in, year out, then that’s great. What people don’t think about and usually don’t know is that the same system could also include a 2% chance that you’ll lose the whole pot. This is asymmetric risk. The risk is minor but if it actually happens the losses are near total.

Other interesting points

RF believes that markets form consensus about certain things like currencies and these move in and out of fashion. Pretty interesting point this. You need to be on the side of the consensus for a big move to happen in your favour. Sounds obvious when someone says this out loud!

Time is not a variable in trading. Now, I know this is important but I’ve not yet figured out what it really means or how to apply it. Would appreciate any ideas on this.

Even if you play the perfect game you can still lose money. Trading is not like chess. The unexpected can happen and you need to be able to accept it. Asses the risk, then double it. Be critical of your own performance, identify your own comparative advantages and stay with your advantages. Think about the techniques and processes you use to form a view – analyse the reasons for taking a position.

Summary

So it’s clear that Mr Farleigh is somewhat on another level in terms of position size so this necessarily has an impact on his trading style. He’s also incredibly patient and disciplined, working within a structure to analyse potential trades before taking them including using checklists and giving weightings to different ideas.

Some of these points are essentially at odds with what I guess the average guy in the street thinks trading is. However, the average guy/trader hasn’t made several millions of dollars, right? So maybe, the average guy (myself included) is doing it wrong?

Certainly I learnt a lot from Richard’s talk and fully agree with the point he made:

Most of your mistakes in trading come from you doing something stupid πŸ˜‰

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