This podcast is brought to you by the award-winning prop firm, Fidel Cret.
And it's for entertainment purposes only.
So not to be like too cagey about it,
but three or four weeks ago it was half a million dollars over two days.
I've never done that before. Whoa,
I've never done that before and I honestly don't ever expect to do that again.
I really identify what the idea of there's beauty in
simplicity and I think most traders go through this parabolic curve where you
don't know anything, you're not using any tools,
then you're looking at every tool under the sun,
but you're not really seeing anything.
And then you start to identify what lets you see what you need to see.
And typically it's pretty simple stuff. One of the,
the hallmarks of successful traders long term is pattern recognition.
So by forcing myself to manually input my trade data into an Excel sheet,
I am reinforcing pattern recognition.
And I can tell you I even view those patterns probabilistically,
but I recognize that in my subconscious even without me knowing I am processing
vast amounts of information.
Episode 223. Alright folks, we've got Eric Smolinski in the house today.
Now Eric is a real deal trader who is trading a large amount of capital enough
to get him that half million dollars in two day scenario.
You're gonna find out in the show how he got there. Uh,
other things that he did,
which was quite interesting is he automated a lot of the stuff to get the
probabilities that he used to then trade them manually.
So you're gonna find out, uh, more about that in the show.
But if you are looking to do that or take that kind of approach,
then there's links in the description to my Robot Builders Club and a various,
uh,
raft of other things that you might find useful and be able to get you there for
the mediterra for and five platforms, which I know a lot of you are on. Um,
look, folks, there's so many nuggets in this interview today.
I know you're probably gonna have it on repeat for years.
Eric's done a great job of sharing the whole story and everything he does.
Please do listen to the end though because the,
there are the nuggets just keep coming. Alright, uh,
other things going on here at Trading Up.
We've got a new live streamer on the show from South Africa,
so please go and check that out. He trades Luce's. Uh,
he did learn from his fleet Luci now I think he also has his own style as well,
but uh, Le Lascik is a South African trader who was on the show back in the day.
Uh, other things going on there on the live streams.
We've got Herrera who is just about to pass the full-on Fidel CRE 50 K challenge
and there's something new hitting the channel very soon in line with this kind
of stuff. So stay tuned for that. Uh, other things,
if you are a Trading View user bet you want Trading View Pro,
then there's links in the description to these guys who give you Trading View
Pro for free when you sign up and you've just gotta trade one lot a month and
you're gonna get it for free. Alright folks, enough for me,
let's get on with the show after hearing from my sponsor, Fidel Crest.
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Find out more. Alright folks, here we are on Trading Up.
We've got Eric Linsky in the house all the way over there in Sandy Ogo.
So welcome to the show Eric.
Ah, thanks man. Super stoked to be chatting with you.
Well look, Eric is, has been trading since 2007,
so he is got a lot of experience and uh,
the bulk of his 3 million net worth is made up from his trading income.
He's a stock options trader on the retail side.
There's a lot of technical analysis. So folks,
we're gonna dive into that and start off with Eric's journey on,
I should mention ears from ES invest as well. So that's his own channel.
So we've got him on the show. So Eric, how did it all get,
how did you get started back in 2007? What were the, what was the journey to,
to where you are now, which is what are we over 10 years,
14 years into the future?
Uh, pure dumb luck is really what it comes down to really. So yeah,
so I started when I was in high school. I'm one of those weird,
weird people and the only reason why I started then is I had a high school
teacher and he saw that I was working a lot because I came from a single
mom. Like we essentially struggled to pay the bills.
It's like the same story that most traders I talk to.
We all start from some sort of disadvantaged financial situation,
so take that mold and slight differences for me.
But I was working a lot and I was saving cause that's all I kind of
figured out to do. And that high school teacher said, Hey,
what are you doing with all this money that you're saving? And I was just like,
uh, just saving it. And he is like, well you need to look into the stock market.
And at that point, you know, I was still in high school, I was like, what?
In uh, ninth grade I think. And he's essentially saying,
well you need to do this because it'll essentially make your money work for you
that whole bit.
So I started with some buy and hold in individual tickers and I got super lucky
with some of the stuff I picked that is also pure dumb luck. And,
but I was a very little amount of money is like $3,000.
So it's not like I was making a bunch of money,
but I saw early success and that's what changed everything for me because I was
like, oh,
this can actually do something and I have a very natural obsessive
personality. So as soon as I saw that,
that's when I wanted to consume every single resource I could find on it.
And that's why I tell people, um,
I do the math periodically out of curiosity and as of right now I think I've
spent over 32,000 hours on the markets and it's just because of that obsessive
personality. So it's really how it started. A high school teacher said,
you should look into this. I started it, saw some early success,
very fortunately, and then from there it was, you know,
had had or what is it, hook line and sinker down I go.
And so, so like you leave high school and what do you do?
Or even in high school were you sort of sort of, you know,
spending hours and hours at the charts learning stuff or,
or how did that all play out? I mean,
I'm guessing there was some ups and downs along the way as well.
Of course. Yeah. So when I was in high school, a lot of it was, um,
it was reading. I actually, this is, I'm older, well not super old,
but like I'm, I'm 31,
so we actually still had like a book library and you would go to the book
library and talk to the lady and she would say, oh,
here are the books you can find on that. So she helped me, you know,
navigate the card catalog to go find the books I was looking for.
And I just started reading everything I could about the stock market first and
then that's really how I bumped into derivatives. And I was like, oh,
those sound just interesting. I'm generally curious about things.
And derivatives at first seemed completely insurmountable to
me. It's like this completely foreign language with all different kinds of
terminology that none of it makes sense. It's all fairy dust.
So I had a really hard time like understanding it and that actually turned me
onto it even more.
And I'm thankful for that because when I first started trading derivatives,
it was my first year of, uh, investing in general.
I had no shortage of pure failure and thankfully I
wasn't using a lot of money,
but I was attempting to trade a hypothesis and then
I would realize that it just isn't working how I thought it should.
So then that forced me to study that much more.
And it's just kind of this cycle that perpetuated itself.
And that really went all the way through high school.
It definitely wasn't like as focused of a learning period for me.
I was still spending time on it literally every single day,
but I was still going outside playing basketball with my friends and stuff like
that. It wasn't really until I went to college, um, that I like really, it,
it, I consider it my second degree.
I literally probably spent equivalent if not more time learning about trading
than I did actually in academia.
Right. Really. And so what, what did you study in college?
So my undergrad was in criminal justice and statistics. It was,
I was going through uh,
a Marine Corps program cuz there was no way I could afford to go to college.
And that same mentor that turned me onto, uh, the stock market, he said,
well you should apply for the scholarship cuz I wasn't gonna go to school.
And he said, apply for the scholarship. I did,
thankfully I got it and it was a full ride to Rochester.
I instituted technology, so it's just a tech school up in New York.
And I started getting exposed to statistics through the lens of criminal
justice.
And I started to realize like how much I love statistics as a worldview,
as a perception of risk reward. I think the,
I think life is statistics. So actually when we, you know,
dive a little further into the session today,
you'll notice that a lot of the tools I use predicated on statistics
and it's because it's an observable pattern,
an observable dataset that starts to remove more and more of my
subjectivity as a traitor.
Because what I like to tell people is I don't trust myself.
I might have an idea, I might have an i a hypothesis I want to test out,
but I never think to myself because I thought this idea,
it's inherently correct, I need to prove it somehow.
And statistics have been a huge lens. I apply that through.
And so if you had to sort of like,
cause I mean stats is is a big part of trading, right? And I get,
I've had traders on who, you know, say they know stats about this,
that and the other thing and they'll reel 'em off. What, what, uh,
I suppose what's a good thing for somebody to do based on your degree
around stats that will, I suppose,
solidify or help with their trading? Like,
so what's a good thing for them to do? Like if they're gonna go, well,
I'm gonna try and find a stat out about like, uh,
how many times a certain pattern happens and goes in my favor, what, what,
what would be something that would need to back that up with to make sure that
that stat wasn't like a complete, you know, useless step?
Yeah, and I think that's such a great question because what was it,
mark Twain said there's lies,
damn lies and then there's statistics and it's for that point precisely is
you can overfit models,
you can over quantify things to a point where you just have numbers falling out
of your ears for the sake of it.
So the way that I think about applying statistics to something is there needs to
be a discreet problem I'm attempting to solve,
then I'm looking for data. It's not even like a specific stat,
I'm just looking for data to back up whatever this problem is I'm trying to
solve. So for example, if I'm trying to, speaking of derivatives,
so if I'm trying to trade variance, risk premiums sounds kind of complicated,
it's really not. But if I'm trading that phenomenon,
I need to quantify it. So I'm gonna look for data to quantify it.
And as I'm collating the data, now I have an opportunity to see, huh,
there's a propensity for this relationship to emerge under these conditions.
If I apply this rule set to that,
this is the most likely outcome and I can project it forward.
So I think the idea of using statistics as a way to view data in
the service of solving a problem,
I also will say that using statistics to understand risk
is probably one of the most slept on parts of statistics.
It's one of the things I'm essentially an evangelist for.
And the reason for that is I think that people have way
too much of a secular focus on reward opportunity and trading.
If you talk to somebody and they're placing a trade,
one of the first things out of their mouth is always, oh, I'm gonna,
I can make this much or I plan to get out at this much profit.
Guess what homeboy, that's like the one part of the trade you cannot control,
you have no say if a trade moves into profit,
the part you can control every single time is your risk.
So unless we apply good thought process on how we're gonna manage our risk,
and then correspondingly the probability of that risk against
whatever our perceived opportunity is,
and the probability of that opportunity is you're just kind of flying blind.
So this is why I'm such a huge fan, what I just described to you,
not very eloquently, but nonetheless is, uh, expected return or expectancy,
which is a statistical function.
Right. And, and so the one thing I was hoping you'd say, which you didn't,
but may be an answer in here, uh, what about like the quantity of, you know,
if you, if somebody says, oh, I'm gonna go back and I'm gonna test this out,
and they go back and they test 10 scenarios, is that gonna be an issue?
Or in like a, okay, well it was a, it was a 60% win rate over the past 10.
Is the, is the number of like, uh, iterations,
is there sort of like a minimum that you would say, you know,
if you're gonna go go and get a bunch of data,
you need to have a certain amount of data before it becomes statistically valid
and what would be that number? Yeah.
Uh, typically we need at least 30 and equals 30 is like the minimum viable.
But I would argue in trading that's still way too low. Like I, and again,
it depends on, um, the sample that you're talking about,
but I actually love that you're talking about that concept because the law of
large numbers essentially tells us that as we achieve more samples in a data
set, we are gonna approximate towards the mean result of,
or whatever that data set is.
So the short answer to the question is the more you can put in,
the more representative the outcome is going to be of the data set that you
observed. The problem with it is there are a lot of, especially in trading,
you can look back and when you back test something,
it, it, who doesn't look smart in a back test,
I can literally spend four seconds and show you the coolest, you know,
system with incredible numbers on a back test.
So I think in trading it's even more important to have a larger sample size
because of the periodicity of markets. We go through different periods where,
for example,
last year people were so shocked that bonds and equities
were moving so closely in tandem with one another and they're like, well,
what's going on? This is supposed to be an inverse relationship. And it's like,
well not really fam if you look back at other in,
and this is speaking about the US markets, um,
but if you look at like previous inflationary periods,
that's actually not that uncommon.
So unless you have a wide enough data set to capture those circumstances,
you just completely missed that boat.
Alright folks, I'm here at Blackpool Markets headquarters in Auckland,
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So when you are doing like your own testing, what would you,
what would be your number that you'll be going for? Like if you said, said,
okay, well if, if 30 is like minimum, what would be your number and saying, oh,
I'm happy if I, if I do 75 or whatever it is. What, what would be that number?
Oh.
I would say if I'm testing a system, one of 'em,
and not to give you another conditional answer, but it kind of is if it's like,
um, like a day trading trigger way more like at least 150 samples,
like absolute minimum.
If it's longer term timeframes with longer term triggers,
you inherently have less samples to pull from.
So that's when I would start guiding that number down at least 50 as like at
least 50.
If you can't find 50 samples of something for a system that you're attempting to
like reliably deploy going forward, you're gonna struggle anyways.
So actually what I tend to do is get thousands and I'll use something like
Python to run through the large data set,
and then I will do a, what I call a personal sample.
I'll pull up the time periods that I saw a trigger go off,
and I will essentially look at the actual chart with my own eyeballs and I
will look at it and trade it out.
And that's kind of that hundred minimum sample that's like a manual sample
with the way that we can automate so much data now there's no reason for most
things not to have thousands of data points,
especially for shorter term timeframes.
And so, so going back into your journey and, uh,
you're at college and you're sort of, you know, you,
you're learning stock market and you're learning the statistical stuff with the
criminology. What happened after that? I mean,
and did you apply something to come up with your own approach?
How did that pan out?
Yeah, so while I was still in school, it was a,
a lot of trading and then I was going through the ROTC program,
the commissioning program for the Marine Corps. So once I got outta college, um,
I was on active duty in the Marine Corps for six and a half years. Um,
so I was a marine officer, loved that gig, but I traded that full-time as well.
And the only thing I did,
that's one of the cool part about derivatives is I can adjust my strategies to
fit my availability and timeframes because a lot of people paradoxically think
I'm gonna trade for freedom and control over my time,
then you fast forward 10 years and the successful traders,
a lot of them are strapped to a screen all day and it's like, hmm,
that doesn't actually sound like freedom to me, not what I'm going for.
So I wanted to make sure that I have different approaches to trade different
timeframes so that I could take advantage of opportunities,
but then also remain involved in the markets when I was time constrained.
So during college, it was a lot of both trading and that,
that learning side of things. Afterwards,
even when I was on active duty in the Marine Corps, um, I was trading,
but all of the systems that I run now,
and it's not even that complex if I'm being completely honest.
A lot of the stuff I do, I would consider to be very simple,
but I I create and maintain large data
sets on all of them, both back testing and again,
I am wary of back testing.
Overfitting is a real thing and it's very easy to make a back test look good,
but the way I view that is that's like the minimum threshold.
If you can't make something look good in a back test,
good luck making it look good in real trading real, real tough.
So I maintain those data sets and I optimize things actually quite a bit
based on the data and the statistics that I'm seeing. So, um, for example,
last year, a lot of my premium selling strategies,
I would change some of the Delta selections for the options based on a shift
in perceived optimal delta exposure based on the numbers that I saw.
It's interesting. So, so you, I mean, it sounds like you are, um,
you are manually trading these systems even though you've built algos to to,
to go and back test them. I mean, how does that, how do you manage to do that?
How does that work out and how do you sort of know that you're,
you're taking the right trades or is it just a function of you can't execute the
trade automatically? Yeah.
Yeah. If so, the reason why I still prefer to trade manually,
especially in the, the way that I trade, it's very difficult.
I believe at least as of right now for retail traders.
It's not like algos are becoming available to retail traders as of recently.
It's like big thing in the last few years they've been around for decades and
they are already deployed large scale by huge
resources. All the high frequency trading, that's all gonna be done via algos.
So it's very difficult to compete against algos specifically in very short term
timeframes. So that's why most of my trades will span anything from, you know,
three days, four days out to 60 days.
So even though I look to offload a lot of the backend
work to view large data samples for me to execute,
it really doesn't take me that long to deploy the strategies myself.
And I still insist on data logging my own stuff.
I import some of this stuff via like r t d data relationships with,
um, the platform I use in like Excel or whatever.
But I still go through and I plug in what the ticker was trading at when I
entered to the trade, what was the implied volatility when I, I do it myself.
And it's because I think even though we can automate all of these things very
efficiently,
the relationship I've been able to develop with the products is second to none.
And that's one of the things I'm really big into reading, um,
papers about trading and markets. And you can check out,
I'm not sure if you're familiar with S S R N, have you used that before?
No.
Writeable resource, it's essentially all different kinds of, um,
scholastic papers on different things we can look at.
And you can look up all sorts of stuff on the stock market and trading.
Barbara Lee and Odine are three of my favorites.
Most of them are from University of California Berkeley. And one of the, the,
the hallmarks of successful traders long term is pattern recognition.
So by forcing myself to manually input my trade data into an Excel sheet,
I am reinforcing pattern recognition. And I can tell you, um,
I even view those patterns probabilistically,
but I recognize that in my subconscious,
even without me knowing I am processing vast amounts of information.
So I'm trying to equip that as efficiently as I can so that even though I might
look at something and think I am like looking, okay,
what's the linear aggression channel at? Where's support,
where's resistance behind the scenes of all of that very process conscious
processing is all of this subconscious processing that's occurring.
And that's when you get that feeling of, hmm, something doesn't look right here,
or, ah, I gotta just dig into this a little bit more.
And I'm trying to feed that. So I automate a lot of stuff.
I automate at least what I would consider to be the more menial tasks,
and then I still remain intimately involved as much as I possibly can in the
rest.
And so, so diving back into your journey again, like you're at college,
the first trading system you started to trade, I mean,
did were you profitable outta the gate or did you have some hurdles along the
way?
Yeah, first,
the first series of trading systems I attempted to deploy were like just very
basic long and short options. And it did not go well.
It didn't go horribly. Like I wasn't bleeding,
but I was kind of just carrying sideways, maybe at a slight negative carry. But,
um, yeah,
I think what really started to change the way that that worked for me is
when I started to actually quantify all this stuff. Because like most people,
when I first started trading, obviously I was gonna be the one,
and I didn't have a trading log. I didn't have a trading plan written out.
It was all just kind of winging it.
And when I was first trading my initial system, I didn't even write it out.
I was too cool for that. It, you know, I couldn't be bothered with it.
But then when I was like, huh, this isn't working the way I thought it should.
So then I started just kind of logging some stuff down and I was like,
wait a minute, why would I enter at this point?
That's not what I thought I would be doing.
And that's when I realized that I can't trust myself.
So in the beginning it was kind of inefficient at best,
but it was also probably the most important learning experience that I had that
really transformed the way that I approached things.
And so on the second attempt, what happened then?
So I started forcing myself to define what I thought I was going to do.
So this kind of starts to build out the trading plan and then I started looking
at what data points were important to quantify the success of what I
wrote down on my trading plan. So it was kind of a bifurcated approach.
I was theorizing what I thought I was gonna do,
and then I was tracking what happened and then I kept,
I wouldn't like just inline edit, like delete what I thought as I updated it,
it,
I would keep 'em and then I would just iterate on it so that I could review what
I originally thought, then what I thought the next time,
then what I thought after that. So for me,
it was a very iterative process for me to start backing into things.
And this is also when I started coming across really just transformative
work, um,
via books that just 100% accelerated the learning curve more than I
ever could have on my own.
And that's why I'm such a huge advocate of kind of the scholastic style of
trading because if you feel like I thought the same, we all say like, oh,
I learned better by doing. Sure, I think that's fair for all of us,
but if you are unable to learn from other people's doing, go ahead,
make all the same stupid mistakes, waste all the money,
waste all the time when you literally could just learn it just from reading.
So I kind of started to change that mindset quite a bit. And that's when I,
I grabbed, this is like my bible, it's why it's right there.
It's called options As as a Strategic Investment and it's by Lawrence McMillan
changed everything for me.
So it was an iterative process that was then drastically accelerated
by reading works like that.
Wow. And and so you didn't, you didn't do any sort of online education.
It was purely had had copy books, hardcover.
Books. Yeah, it was, it was the majority of hard copy books at the time. The,
so when I was really, really getting accelerated,
it was probably 2010,
11, 12, 13 kind of in there. So there were definitely online resources,
not like the internet wasn't a thing or anything, but it,
it wasn't as robust as what it is now.
So the stuff specifically for options trading as well wasn't super deep.
I did start watching things like Tasty Trade because that was when they were
first coming on the scene. And I, I like,
I like aspects of tasty trade.
I actually interviewed Tom on my channel not too long ago. I liked them.
I've had a long relationship with Tom, like literally over a decade.
So I, but I found a lot of, um,
minor faults in the way that they do things compared to the way that I was
seeing things. And I started to realize some of what that was. You know,
they're making really complex financial tools,
as simple as they possibly can. In the process of doing that,
you're gonna cut off some efficiency and optimization,
which is totally reasonable. I get why they do it.
It just doesn't align with me.
Like I am obsessed with efficiency and optimization obsessed.
So that's why I really enjoyed like actually taking a
book down and reading a book.
It's for that same tactile function because there's nothing else to distract
me if I pull up a computer, I consider myself relatively disciplined,
but more often than not, an email pops up, something pops up,
and then I'm distracted a little bit. And even though I get back to my work,
there's still that intermittent distraction slows me down. So books,
I don't have that. Um, most of my books now are online like, uh,
on a Kindle or a PDF so that I can, I can review them more quickly.
But I still am very,
very dedicated to that style of learning cause it's served me pretty well.
And so did the, the, did the books give you the ideas around like, yeah,
you mentioned, you know,
having a linear regression channel and that sort of stuff,
the technical analysis side of it.
Did the books give you those ideas or did you just sort of come up with them
yourself after trial and error?
Glorious mix of both.
So actually some of my like favorite technical analysis tools
are from equity traders and they're from, um, people like Elder Menini,
like people who trade like can slim esque style.
I deploy a lot of their stuff for general trend analysis.
I like Jesse Livermore's work.
So I dr I read a lot of equities traders books on just
overall market construction and technical analysis.
But there's a handful of tools that I use that I haven't seen in a book.
I'm not saying I made it up, I didn't, they're there already,
but they're just not as popular I think for like equities traders,
like the linear aggression channels like I V H V plots, um, things like that.
But even my technical analysis has gotten very paired down.
I really identify, um,
what the idea of there's beauty and simplicity
and I think most traders go through this parabolic curve where you don't know
anything, you're not using any tools,
then you're looking at every tool under the sun,
but you're not really seeing anything.
And then you start to identify what lets you see what you need to see.
And typically it's pretty simple stuff.
So a lot of my technical analysis tools have been informed by
equities traders and then I kind of adapt pieces of them to fit, you know,
whatever I'm attempting to do.
Cause I use different technical analysis tools for different trading hypothesis,
different timeframes and stuff like that.
And so if you just sort of break it down into like, uh,
your tools and let's call 'em indicators versus price action,
pure price action and, uh, I suppose options, strategies.
What would the percentage of each of those sort of comprise and uh,
over an average set of your strategies that you trade?
Uh,
do you mean the level of analysis I would put into those three buckets before
placing a trade?
Yeah, yeah. How much waiting on each of those, like, so how much waiting,
you know,
do you rely 90% on if the indicator does this and that da da da I'm in,
I don't really care about price action. So that's like 5% in option strategies,
like 5% as well. Or is it much more heavily weighted in different ways?
Totally understand. Yeah, it's,
that's actually a really fascinating question because the way that my trade flow
typically works, there's,
I either am looking for a specific piece to fit into my portfolio's
puzzle or I saw something that looked interesting to me and
now I'm trying to figure out what makes sense for that.
And I know it's kind of a weird answer,
but based on which part of that tree I start down,
what I weight is very different because let's say I see a really cool
opportunity in stock Apple and the opportunity is based on a technical
analysis indicator that I see, then in that scenario,
I'm gonna form fit a strategy that lets me take advantage of the theory
that I have. Whereas it's kind of the inverse.
If I have a specific gap in my portfolio and I know the strategy I want to use
to fit it,
I'm then gonna apply technical analysis to screen to find things that
fit that hole in the portfolio.
And then price action for me is like price and volume is king
in almost any timeframe, but if we're talking about actual order flow,
I probably only care about that intraday training,
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Um, and, and like sort of,
you talked about the hole in your portfolio and plugging it, I mean, what,
can you give us an example of a hole that you would would consider to be a hole?
For sure. So the way that I like to break my portfolio out, I have a,
what I call my core allocation and my speculative allocation.
And the way that I differentiate between those is my core allocation.
In the Marine Corps we have what we call a main effort,
which is like your bid for success.
That's how I'm attempting to achieve my investing objectives.
My core allocation and my speculative allocation is as I'm looking at things as
I see, um,
S P X bumping up 41 95 what on the second of Feb and then it just can't
get back up there.
That's a speculative hypothesis that's developing in my brain because I'm
thinking weakness. I want to trade this to the downside and fade the move.
So when I'm looking at a core, the core allocation of my portfolio,
very simple. There's a handful of tickers I trade for the core allocation,
and there's a handful of strategies that I use.
So if we come up on an expiration Friday for options and
there's a bunch of positions falling out,
that means a lot of risk is coming down.
It's time for me to add more risk in order for me to continue to meet my
investing objectives. I now have a hole in the portfolio.
I need to add risk if I'm gonna continue to meet what my typical monthly annual
targets are. So that's one example of a hole in the portfolio.
Or if I close a trade down that's a profit and I need to add more risk,
it's another example.
Or if my deltas my overall directional disposition of the
portfolio starts to get overweighted one direction or the other.
So if I have too many long deltas and I I'm not that bullish in general on the
overall market, then I need to add some short deltas somewhere.
So I typically apply like a top-down portfolio approach to when I'm then
deciding to look for trades if I'm talking about like the core allocation of the
portfolio. So that's a couple different ways that I, you know,
plug these gaps that I see in the portfolio as they come up.
And and how did you educate yourself on, on portfolios?
Because it sounds like you are quite sort of on the top end of, you know,
where you should be from managing portfolio of, of uh,
well portfolio, investment portfolio. I mean,
what was your steps to get to that level of education and
knowledge?
Yeah, it's a fascinating question. Um,
and there's really two things I can hang my hat on. The first thing is I am,
like I was telling you a compulsive planner,
it's one of the main things I did as a marine officer and it was only bolstered
during that timeframe. So at no point do I look at a portfolio and think, oh,
how am I doing today? How I'm doing today is part of it,
but it's inconsequential against a longer runway that I'm executing here.
So what I started to do is quantify and add observable metrics
that I can track towards intermittently throughout the year,
throughout the years so that I can make sure that I'm on the right path.
So I think that's a really big part of how I've developed my portfolio
management theory.
And then the other thing is I had a trading mentor that I
stumbled across.
He was a old army doctor that traded options and he was an
ornery old dude that wanted nothing to do with me and I loved him.
So I started mentally manipulating him to get him to interact with me,
which worked beautifully. And he and I actually kind of spurred a,
a long-term friendship,
but he identified with me a lot of the faults in the
way that I was approaching not just my trading strategies,
but portfolio management strategies and some of the input that he gave
me, like, you are going to blow up your account at this rate.
I took it very seriously. Mm-hmm.
So getting some of that external input was probably the most important stuff for
me to develop kind of the way that I think about portfolios, strategies,
and then individual trades.
Awesome. Now, now, um, what about like finances and,
and getting the capital to trade initially and talking about blowing
accounts. Did you blow any accounts along the way?
How did that all play out on your journey?
So I started working really young. Cause like I was telling you, we,
I didn't come for money. Like again, most traders,
so I used to split wood for a dude that I hunted on his property,
sold Christmas trees, which, uh, cheat code for anybody that's,
there's the tips in Christmas trees is really good.
Like literally a couple times my mom,
my mom literally thought that I was selling drugs . And I was like, no,
I'm, I'm literally selling happiness. I'm selling Christmas trees. Um,
but like the, the tips were insane. And, um, I used to work at a bowling alley,
long story short, worked a bunch of odd jobs. Then when I was in college,
I started getting into kind of different kinds of businesses.
I got into angel investing,
hard money lending to friends that were starting small businesses.
I was flipping cars, flipping motorcycles,
I didn't race for money. Um,
so all kinds of stuff like that. And I,
I made a commitment to myself early on based on the
projections that I made on a 15% per year return.
I wanted to be aggressive but conservative. And that was my goal,
15% per year.
And I projected out based on my current principle investing balance,
my current savings rates, my expected growth in my savings rates,
when would I start to hit what I would consider to be escape velocity and
am I comfortable with the trade off? And when I first ran those numbers,
the answer was a resounding no,
it was gonna be like essentially 55 before I would've hit where I
wanted to be. So I was like, okay, that tells me one of two things.
I need to either make way more money or I need to save way more money.
So I decided to try and do both.
I got even more serious about finding different sources of income and then I
got even more serious still about saving and the,
the sacrifice of saving early on.
It cannot be overstated in its utility to accelerating compounding returns.
Doesn't seem like it.
But if you pull up a compound growth calculator and just play with it for a
little while, start with your original principle balance.
If it's $10,000 and then say that you're gonna save $100 every month
for 20 years at 10% just standard market returns, whatever,
and see what the number is, then bring that to $150 monthly savings,
$200 monthly savings. You get the point.
But the point being is you start to see a big change
in the outcome in the timeframe it takes you to get somewhere.
So embracing that delayed gratification and truly
prioritizing savings early on, it is second to none.
What I tell people all the time is like,
you're not gonna trade a $5,000 account into a meaningful amount of money.
Well, I don't like to speak definitively,
but the propensity for that to happen from a probabilistic standpoint is
astronomically low. Is it possible? Yeah, baby, probably not gonna happen.
So I wasn't willing to allow my future wealth to be predicated
on a low probability event.
I knew that I had a single mom that needed to be taken care of.
I am the retirement plan, I pay for her mortgage, like I am her retirement plan.
And I'm cool with that. That's part of my job.
So in order for me to be able to do that though successfully,
I couldn't wait my effort on low probabilistic events,
I need something that was essentially assuredly gonna happen barring some sort
of massive fallout in the world.
So that's really the way that I thought about saving early on
and then increasing income. If you can do those two in any sort of way,
you are going to be light years better off for it.
And did you have like a sort of a, a time where you were, you know,
you'd finished the trading week or, or the month or something and,
and you'd actually sort of were quite shocked at how much you'd made?
Absolutely, yeah. There, there was a couple times e even recently this year. Um,
I, I haven't given out any details. I I haven't even made a video on it yet, um,
just because I'm waiting to see if the same situation emerged. But I have made,
um, massive, at least relative to me, uh,
amounts of money in very short periods of time.
So not to be like too cagey about it, but like what,
three or four weeks ago it was half a million dollars over two days.
I've never done that before. Whoa,
I've never done that before and I honestly don't ever expect to do that again.
But it was essentially a lifetime of
education that was able to identify a
very rare opportunity and I was able to move fast enough to capitalize on it.
But like that definitely is probably the most on a dollar figure,
um, amount.
But even I've had more impressive percentage on the over account moves,
you know, longer terms.
But I think the thing is is for me it was always the consistency
year over year returns.
That's what I care about year over year returns,
because that is what was going to get me again to the, to the escape velocity.
But there was plenty of those instances where I'd looked and I was like, damn,
like this is actually working. There's something to this.
But to answer your question before actually that I missed, uh,
I've never blown up an account,
but I've had a massive drawdown on in the account actually when I was in
college. And that per,
it's the largest percentage drawdown on a dollar basis,
it actually wasn't that much money, it was less than a hundred thousand dollars,
but on a percentage of the account it was massive.
And that was like the cleanest shot across the bow
that I've ever had to force me to essentially reconsider everything I was
doing. And that's kind of what spurred and reen reinforced a lot of this,
um, dedicated tracking and review protocols that I run now.
Well, and and were there any sort of like, you know, uh,
similar kind of days when you were after that big drawdown that you,
you actually have were going, what the hell,
I'm only 21 and I've managed to do X amount of dollars in,
in a week or something like that. Was there anything like that?
Yeah, I think so.
There was a couple times that I made slightly outsized returns,
but unfortunately most of those instances I,
I really tra trading as a business.
I do my absolute best to avoid any sort of emotional
irregularities that means highs or lows, elation or sadness.
And as soon as I saw would see like larger returns, I would always say,
what risk didn't I see?
What risk did I just expose myself to that I didn't perceive?
And sometimes there was none.
And then that's actually when I would pivot more resources to that opportunity.
But after that drawdown, my,
my mandate to myself on the way that I emotionally interacted with the markets
changed a lot.
And it also forced me to start the idea of really trying to decouple
the investing capital from me.
It's very difficult to maintain a healthy relationship with trading,
investing in any endeavor. If you look at the money in the account as, man,
this is my hard-earned money, this is X hours of work.
When you start doing that,
there's all sorts of emotions that start poking through and it's so difficult to
maintain like a pragmatic approach to the market.
So I started going through a lot of efforts to reconfigure the way that
I viewed the money, the money that went into the trading account.
It's so colloquial, but it's exactly what I did. It's gone,
it's like the South Park episode where Stan goes to the bank and he gives him a
hundred dollars that his grandma gave him, and the banker goes and it's gone.
And he's like, what? Where'd my money go? It's like the same exact thing, right?
And doing that is probably the most important things I've ever could have done.
Now, now talking about sort of emotional side of it, I mean,
did you struggle back in the day with, with the emotional side of trading?
I struggled with it in the regard that I didn't,
I didn't respect that it was there, especially at that point I was, you know,
a young aggressive dude. I played rugby, I was doing martial arts,
I was getting ready to go in the Marine Corps, right?
So I have like this tougher than thou, I am unbreakable mindset and it's like,
oh, emotions in trading, whatever.
And that was probably one of the worst possible things I could have done because
what happens in those instances is, you know,
whether I feel like I should experience emotions doesn't really matter.
They're very often subconscious processing of information and inputs.
So I would have emotional responses that I didn't even
identify accurately as emotional responses.
And the way that I would identify that is I would go through my trade log and I
would say, Hmm, that doesn't line up with the way that I've run this strategy.
Why did I do that?
And in the notes I would read the notes that I would put in and there's no good
reason. And I was like, that's not a correct trade,
there's something wrong there. Even if it was a good trade,
even if it made money.
The thing for me is I'm not interested in like one off successes. Like I said,
it's the consistent viability of of an approach that really mattered to me.
So I started realizing that there were definitely emotional decisions that,
that were being made subconsciously that I didn't know were there.
And I didn't even really acknowledge it much at the time. I always thought, oh,
maybe I just saw an opportunity, I wanted to go for it.
But the more I looked back at that period,
the more I realized how emotionally driven a lot of it was.
That's why now I tell people the idea of like,
trading like a robot is nonsense. You're not a robot, you never will be,
but that doesn't mean that you don't control and regulate the emotions.
But the only way you can successfully do that is if you identify they exist.
If you pretend they don't exist, there's nothing for you to control.
You're gonna fall subject to 'em.
Good, good. Great answer. Great answer. Now, now what about, um,
walking us through your typical trading day? What does that look like?
For sure.
So I used to trade the opens most days and in the last,
I don't know, like five years, I,
I don't really bother with it because I like to train martial arts.
So now I'm going to do jujitsu or Muay Thai first thing in the morning.
I'm Pacific time. So for me, the market's open at 0 6 30.
Um,
so normally I'm out training at that point and then I get back and
I will pull up kind of my preferred news sources.
I'm very careful and this is actually an important note for people.
If you just subscribe to every single news source that's free that's out there,
you're gonna do what most people do,
which is you're gonna get 35 emails every single morning.
And because it's too many emails,
you're either not gonna read them or you're just gonna delete all of them
without reading them. You've done nothing in that scenario.
So I'm actually pretty careful with what I subscribe to for information sources.
But I will normally hit the hot tub in the morning and I'll just start reading
through some of the news for the day.
And then after I get through reading the news for the day,
I'll check the portfolio.
Now this is all predicated on a couple things that I have no overnight trades on
that I needed to manage that morning,
which I do sometimes if I have an earnings play that's coming up,
I will absolutely sit there and watch the market open.
So it's not that it's always not there at the market open,
but it's just not the inverse where I'm always there.
There has to be a reason for me to specifically be observing.
And then normally I'll just run through the portfolio real quick,
make sure that all the risk metrics are where I want them to be,
see if there's any trades that need to be managed,
whether it's based on time or profit or loss management targets.
And then that's when I'll start kind of casually looking for
opportunities if I need to add risk to the portfolio.
If I don't need to add risk,
then I just kind of casually look through the markets anyways at a collated list
of things that I look at pretty much every day it's like 65 products from
Futures bond or um, commodity futures, um, equity futures,
bonds, a lot of ETFs, sector ETFs,
and then a handful of individual tickers that I like to follow.
And from there it is as of late either trading
announcements.
So things like C P I for here in the US or the rate statements here in the
us, those are really big tradable events for me.
So I'll base trades around those,
whether it's before the announcement to trade volatility,
if I'm trading the follow through, if I'm trading earnings, so on and so forth.
And I'll start structuring my trades and there's kind of two primary trading
periods that I look to expose myself to typically would be mid-morning here,
which is kind of afternoon on the east coast, which is what most people,
you know, tend to quote market hours in and then before the close.
So that's also a, a big time while our run through, make some adjustments,
a lot of times there's an uptick in liquidity, stuff like that. But overall,
like unless there's a specific desire or want,
I'm not behind the screen all day, A lot of the day I'm playing with my dog,
I'm going for a drive like that.
That is really the whole purpose of why I do what I do is to give me freedom.
But I will tell you,
I look at the markets nearly every single day and most of the
trades that I think about, I think about them after hours. So, uh,
later tonight, right, there's a handful of trades that I put on today.
I'm gonna review them all tonight and the market's closed. There's no rush,
there's no emotion. They're on, they are what they are.
And I use that market closed period almost more effectively than when
the market's on because a lot of times there's just so many things that pull my
attention in different directions.
I've become very calculated with when I'll review active
trades because essentially what I'll do today is on the trades that I need to
take a look at, I'll say, um, okay,
let me update my risk metrics, profit metrics,
and if I see X, Y, or Z,
then I'm going to do whatever my management protocols are and I just do
that after hours and then I can project out essentially when I intend to apply
those management protocols provided that they don't, you know, come up sooner.
And and how many typical, typical trades a year gonna take in a day?
In a day? Um, I think if you average them out,
well there's days that I don't take any trades to be very clear,
but if you were to average them out over the year,
it can be anywhere from 2000 to 10,000.
It really depends on just how busy of a year it is and what opportunities there
are. Especially like during the,
the Covid crash and even last year busier years for me and it's just because I
kept seeing a lot of opportunity,
but if I were to think about like the number of day trades I take like in a week
would probably a good metric for me. It might be 15,
but it's not always centered on one day.
Like today I didn't day trade literally at all. I looked at it,
there was something I was trying to put on,
but it didn't look the way that I needed it to look,
so it didn't go on and Okay, no problem.
And what about win rates and things like risk to reward ratio?
What would you put those at?
Those vary a lot by strategy for me.
So I have strategies that are lower win rates with much higher
payouts because I'm playing larger themes. So if I'm applying some sort of,
um,
ratio diagonal that's designed to take advantage of a longer term trend,
those have lower win rates for me because I have very tight risk control metrics
and I'll get stopped out a lot.
But the overall size is very big for wins relative to the
size of the losses, whereas it's kind of, uh,
inverse for a lot of the variance risk premium strategies that I run.
A lot of those have very high win rates, but much lower win sizes.
So I like to break it out by strategy because it's a little more scalpel in
terms of what I apply when. Um, so yeah,
it's definitely dependent on the strategy.
Cool.
And I suppose last question before we d dive into a bit of a quick fire round.
What would you,
what steps would you give a retail trader probably working a day job, uh,
to what steps should they take to get to the point where,
or close to the point where you are?
I think the first thing is commit to it.
Like if it's this hobby thing that you kind of do sometimes when you feel like
it and you don't do it, when you don't,
you good luck achieving anything like that. Very difficult.
So I think if it's something that somebody like truly wants to make happen,
it's the only way that you can make the time for it to happen.
That's one of the most frustrating things. I hear people, I have no time,
we all have time, we all have the same amount of time,
but how you use that time tends to vary widely. And that's okay.
You're gonna have your priorities,
but let's not pretend that we don't have time. You have different priorities.
Anyways, rant aside, . Um, I think the,
I think the first thing is to commit to whatever it is that you're attempting to
do. And I think it's important to define it.
But then the second step is probably the least popular piece of uh,
just personal advice I give to people is if you are new to trading,
I would probably stop trading real money.
I would invest in in index ETF and I would paper trade.
And it's so unpopular because paper trading gets this really bad rap because
it's not real trading. You never get the full emotions.
And what I tell people is, thank God the military doesn't think like that.
If the only time I get to practice getting shot at is when I'm
actually getting shot at,
it's a real tough way to learn to perform under pressure.
So that's why I talk about paper trading is if I look back at
what I accomplished in my first two years of trading, nothing special,
I probably racked up way too high at commissions and I didn't make any
meaningful amount of money. I probably,
I actually genuinely think I would've been better off with buy and hold at that
point. And I think by paper trading though,
you do a couple things while you're paper trading,
you write out a trading plan,
which is a very difficult process cuz it's overwhelming and one of the most
nefarious things starts to happen.
You become responsible for what happens. A lot of people will say,
oh, the market did this today. Who could, could have saw that coming? Whatever.
It doesn't matter.
You're interfacing with a unlimited variable input
machine, which is the stock market. So by writing out a trading plan though,
you start to become responsible for the pieces you can control.
It's very difficult for our ego to accept that responsibility cuz it means we're
gonna be wrong a lot. But it's an important step. And then trade log.
I would trade log everything you're doing from your paper trading plan
and your paper trading itself and see how you do once you start to establish
actual observable, quantifiable profitability, sure,
start going live.
Maybe give it six months at least and start going live with the small testimony
of your money and then slowly scale from there. The fact of the matter is,
again, you can go on to S S R N, and this isn't to dissuade people,
but the vast majority of day traders,
day traders is the worst group they wash out at the highest rate.
But then traders in general,
active traders also tend to underperform the benchmark, especially after fees.
And after 11 years,
3% of them remain small cohort man.
So unless people are willing to actually put in the time and effort to become
part of that cohort, you're gonna, more likely than not,
probabilistic become part of the statistic that just wasted a bunch of time and
money and fell outta something because it was a half committed haphazard
approach. So I don't say any of that to dissuade people.
I actually say it to encourage people and motivate people because it is entirely
possible. I'm not that smart of a human being.
I am from the same starting point that a lot of people are.
But if you take a very calculated, pragmatic approach to stuff like this,
it breaks a huge impossible problem down into tiny bits
that now become solvable.
And just about anybody that passed high school can solve those problems.
The problem is too many people just look at the entire problem set and try to
solve all of it at once. And it's very difficult to do.
So if we understand the challenge,
I think we have a much greater efficacy rate to actually rise to that
occasion.
The last analogy that I'll use here is if somebody wanted to climb Mount
Everest, they need to understand how tall it is. How long does it take,
what kind of food do you need? What kind of sleep do I need?
What kind of hydration do I need? You have to plan for it.
You don't just start trying to climb Mount Everest and statistically
peop uh, statistically speaking,
the number of people that attempt to climb it is not too indifferent,
that succeed compared to successful traders. Mm-hmm. Interesting.
So just kind of a Yeah analogy.
Great analogy. Yeah, great analogy. In fact, just what you were saying before,
I was actually thinking about a minute before you said it, I was thinking, damn,
this guy's smart . And you just said, I'm not,
I'm no smarter than anyone else. I'm thinking I man,
this guy's like at a different level here. But, um, anyway, let's let's.
Jump into the, yeah, don't feel that way.
. Let's jump into the quickfire round and then we'll wrap things up here.
So, um, how long did it take you to go from newbie to consistently profitable?
Uh, probably consistently profitable, I would say. I mean,
really starting year three I was making money, but I,
I still had high variance in returns. So I would say probably year five,
year six is when I essentially at the start of the year had a pretty good idea
of where I was gonna land and what my movement bands were gonna be.
So that's when I would consider a little more efficacy in the returns.
What's your favorite entry setup?
Favorite entry setup, again, depends on the strategy, but more often than not,
I like things that are high volatility where implied volatility is drastically
overpriced compared to historic volatility.
I know for a lot of people that doesn't sound super sexy,
but for a derivatives trader that is, that's where it's at.
Uh, what about strategies for exiting, uh, or managing trades? What do you do?
Easy, easy day.
That's all predefined by the strategy before the trade even goes on.
So the favorite method is literally following a predefined approach.
And the way that I think about that is I think about the strategy.
What am I trying to accomplish on a profit side?
What kind of risk side makes it positively expected? That's.
It. Uh, what book or resource would you recommend?
Um, there's two of 'em that I think should be reads for everybody specifically
When we talk about derivatives, it's a little different.
So I would kind of save people, um, that side of things.
Although I do think options as a strategic investment.
I'm pulling up my little Kindle library here cause there's two books, um,
that I think are useful.
Reminiscence of a Stock Operator by Edwin Lefa,
that's how to Pull it up. I can't say that dude's name. Um,
that is probably one of the more,
the more transformative books I've read.
And then the same thing is there it is, sorry,
how to Make Money In Stocks by William J. O'Neal.
Those are like my two kind of preferred equity, um, equity pieces,
broader trend pieces, stuff like that.
Brilliant. Well look, um, last question. If you could leave our question, uh,
our listeners with one piece of advice, what would it be?
Um, get serious about it and make a plan. Otherwise it's not gonna happen.
Awesome. Well look folks, before we wrap up, uh,
what's the best way for the traders to get a hold of you?
Um, so I'm on YouTube at ES invests and on Twitter at the same. That's it.
Awesome. Well look a big thank you to Eric for sharing with us today.
Everything we've discussed here,
along with all those links will be in the show notes.
To find them simply you search for Eric in the search box on trading nut.com
and that's E R I K, is that correct?
Yes, sir.
Until next time. We're show my listeners training Happiness and Success there.
Folks interviewed Dan and Duster with Eric.
Now we did shoot a video after the show where he breaks down his mean reversion
strategy in full detail.
It takes about 15 minutes to get through the whole thing. In fact,
I think it's even less than that. Uh,
you're gonna learn that strategy and how Eric applies it and he'll take you
through a trade example. So that's coming up on the YouTube channel.
So if you're not there, go and subscribe to that.
Other things do remember, you know,
he talked about automating stuff to get the probabilities.
Now if that's something you're after or interested in using the Mediterra four
or five platforms, then my Robot Builders Club is probably perfect for you.
If you wanna give it a go, we'll try it out.
There's a $1 trial of the Robot Lab live where we actually build out strategies
a bit like this, what Eric's put together, um,
all live and all recorded it as well.
So you guys not just get to see the recordings, uh, or attend the lives.
You also, uh, get the downloads at the end of it as well. Uh,
other things going on here at Trading Out,
we have got those that new live stream of this week.
So Trading Lascik strategy or a variation of, we've got Herrera almost ready to,
to pass that Fidel CREs 50 K challenge.
And there's something new that I'm not gonna tell you about just yet coming up
on the channel, which I know you're gonna absolutely love. Uh,
and if you do want that Trading View Pro from these guys, you know where to go.
Links below the video or in the podcast description. Alright folks,
enough from me. We'll see you in the next episode.