Most investors spend plenty of time on strategy when preparing to enter a market, but when it comes to exiting, it can all fall apart.
That’s according to Adam Truelove, trading floor manager Australia at Learn to Trade. He told Nest Egg that an effective investment strategy is not just about when and where to get in, but when to get out.
In this episode, Adam also tells us about:
• Why past market behaviour is the best indicator of the future
• Why investors need to back themselves and avoid others’ dubious advice
• Why investors should try to learn from their mistakes
Thanks, Adam, for joining the Nest Egg podcast. You can stay up-to-date with what he and Learn To Trade are up to here.
David Stratford: Good day and welcome to The Nest Egg Podcast. Thanks everyone for tuning in. We're joined today with a familiar voice you may also know as Alex Whitlock. Alex, good to have you back.
Alex Whitlock: Thank you very much, Dave. Good to be here.
David Stratford: No worries. My name of course, David Stratford, and, of course, we are joined with a new friend Adam Truelove from Learn to Trade. Adam, welcome to the show.
Adam Truelove: Thanks for having me.
David Stratford: I think we should call this three pommies and a podcast from now on, anyway. Just talking about a few things. Basically today we want to cover a few things across the industry in terms of trading. Adam, we deem you as our expert this month, as that guy.
Adam Truelove: I'm very privileged. Thank you.
David Stratford: No worries. I think to open this up, there's a lot of things going on in the world at the moment. You've got anywhere from-
Alex Whitlock: There's certainly a lot of things dominating the news. There's all sorts of things going on in the world, but there ...
Adam Truelove: There really is.
Alex Whitlock: ... are certain things that we seem to hear again and again. We've had our Brexit. We've had our Trump being elected, and the current themes.
Adam Truelove: French elections, German elections.
Alex Whitlock: Yes.
Adam Truelove: War.
Alex Whitlock: Peace.
Adam Truelove: All that lovely stuff.
David Stratford: It all sounds a bit morbid, doesn't it?
Adam Truelove: I know but the wonderful thing about these major catastrophes is, it's as a trader you actually really want it to go wrong, which sounds awful, but that is when you will make the most money, because if you can trade the market up and down it's actually a really good thing. It's not so good if you've got physical things, but the style of trading that I do you could make money up or down which is awesome.
Alex Whitlock: Adam, we've obviously got some fairly seismic political things that have happened over the last 12, 18 months. Currently what seems to dominate the news at the moment is the rising tensions with North Korea. Things like the threat of conflict, does that have a similar effect on markets and the opportunity to make or lose money the same way as the political things that are happening?
Adam Truelove: Absolutely. Recently North Korea reacted to Donald Trump basically threatening war and said, "We'll shoot your planes out of the sky," and gold shot up beautifully, which was great. The thing is when those things happen, you can't pre-empt when they're going to happen. You do really have to be constantly watching the market, but generally from a technical perspective you can pre-empt things a little bit, and obviously if you're paying attention to the news, then you can put yourself in the right position to take advantage of it. We've made some fantastic money going up and then back down in the pull back yesterday as well, so about 170 pips up and then down. That's a fantastic, quick profit.
Alex Whitlock: Everyone can react.
Adam Truelove: Yes.
Alex Whitlock: We all respond. In terms of being pre-emptive, what are your strategies, or what do you teach? What do you get people to look out for?
Adam Truelove: Well, it's all about strategy. A strategy is just where to get in and where to get out. It's just your entry point and your exit point. I teach people how to trade. What I find is that everyone's an expert getting in, and then they completely fall to pieces as when to get out. This is where a strategy is really key. You can trade these high news items. You have to look at historic things, historic behaviour of the market around these news items. You can never predict. If I had a crystal ball, I'd be a trillionaire. You can never predict what's going to happen, but you can look at past behaviour, because really the market is driven by behaviour. It's driven by fear and greed. You really need to become a behavioural specialist with these things and learn how to technically look at the chart, execute the strategy, and hey presto, you get profits. You get the occasional loss, but you keep those to a minimum.
David Stratford: I think having a proactive strategy is key for a lot of these guys out there, especially on our readers and listeners here. I think the main thing for this, too, is having a portfolio which is actually safeguarded, so being proactive is one thing, but actually having something which is ready for these opportunities already. You can do that in trading. Correct?
Adam Truelove: Yes. Absolutely. It's all about diversification. I don't just trade currencies. I trade currencies, indices, which is groups of stocks traded as a whole, so it's a bit more economically led rather than just a quick flippant comment from the CEO, which will cause some serious volatility. If you're physically owning those things, it can be a real problem, and commodities as well. Commodities, which are physical things: gold, silver, diamonds, palladium, all of that stuff, they can be fantastic. Gold has been great, because everybody goes there as a safe haven first. If you diversify, it can be really quite beneficial to you.
Alex Whitlock: Adam, you've obviously worked with a lot of people who want to learn to trade and maybe think that they can trade in the first place. What are some of the common reoccurring things, flaws in people's strategy, I'll use the term loosely, when they come along and talk to you? What do people think that they know which is really leading down the wrong path?
Adam Truelove: Do you know what, it's more what they don't know, to be honest. What trading will do is it will teach you more about yourself than you've ever even contemplated was possible, because you're emotionally connected to money, because in the general grand scheme of things how hard do you have to work for money? You have to swap your time for a pittance in the grand scheme of things. People come in with that mentality, so it's a fear of loss and that drives the decision maker, which is us as the person. What always fascinates me is that I could have a room of 50 people, and very often do. We could all be sitting there with the same market, the same software. We've all got live trading accounts ready to go. They've all got the same teacher. We're all in the time-space continuum, so to speak, and pretty much everybody could walk out with a different result.
I could call a trade, 10 people could take it, and the rest of the people, "God." They're worried about it and they don't take it, and there we go. It's actually an emotionally led thing, but driven by fear because people are afraid of losing money. How do we counteract that? You have to have very strict risk management rules in place. One of the first things that I will teach people is risk management is key, and then the strategy, which is your entry and exit criteria and that defuses the fear, which makes it much easier to then make money and stay in as the long game. In answer to your question, that's the long-winded answer, but really people are gambling.
Alex Whitlock: Do you think, and on that level, do you think some traders or some investors go in without really knowing what they're really looking to gain from a particular trade or from a particular stock?
Adam Truelove: Yes. We're in the digital age now, and trading is not open outcry in the pits of Singapore and everyone's running backwards and forwards with sheets of paper and yelling at each other. Everything's driven by algorithms these days, with the human element in the background as well, but the face of trading has really changed since the 90s, the early to mid 90s. We have a trader that works for me on the trading floor. He's an ex futures trader, a guy called Tas. He's amazing. The knowledge is just insane. He's done the transition from open outcry directly to charting, which is really what tells you what the market is going to do. What tells you what the market's going to do? Terrible English.
Alex Whitlock: We know what you mean. Don't worry.
Adam Truelove: You know what I mean. In order to understand the market, you need to, as I was explaining earlier, you need to have a nod to the fundamentals which is the news, to pay attention to what drives things. However, when you learn to trade properly and come from a technical perspective which is how to read a technical chart and put the patterns that the market is constantly executing, if you have a nod to the fundamentals that will meet with the technicals, so you might as well have just looked at the technicals anyway. It's a bit like saying, right, I want to get to a certain destination, and you have a look at your roadmap first. You would always do that to pick a journey, otherwise you're just going to aimlessly bowl around the country and you might not even get there.
Trading needs to be driven by picking the destination and understanding how you're going to get there and what's needed to get there, and then the rest falls into place. You know? Did that work?
Alex Whitlock: Yeah. How much of an issue is time, and I don't mean timing of making a purchase, but if a trade doesn't go to plan what are some of the things ... How do people tend to respond? Obviously fear, as you say, is a big respondent, so when do you know when to cut your losses and when do you know to hang on and to see things through?
Adam Truelove: There's the age-old adage of cut your losses early and let your profits run, which still applies. The strategy is what gives you your entry and your exit criteria. If you were trading with no target and looking just to take the run. Last year I had a fabulous run on the cable, GBP/US. I know how to trade without a target and still risk manage. If that goes against you and you've not got anything else in place, it can go horribly wrong. You still need to come from a technical perspective, and like I said, have an entry, exit, and a stop loss criteria in your order with the broker, so that if it does go against you, it'll take you out. It's all about risk management, I guess, is what I'm saying.
Never risking too much per trade, so the maximum I would ever recommend anybody to risk on a trade would be 2% of the entire capital of your account on that one particular trade, and then if you're trading on a one-to-one basis, if you're risking 2% and your target is one-to-one, you'll gain 2%, and then if your risk-reward is five times what you're risking, you get 10% from your 2%. If it goes against you, you only lose your 2%. Then it's a numbers game. Trading less is actually more. Trading just because you can trade, doesn't necessarily mean you should. I was coaching somebody earlier that's massively over-traded and didn't basically listen to a word I said in the beginning. He's suffered that consequence. Again, that was a decision that he'd made. We can turn that round in absolutely no time and get it all back shipshape. It's a clear indicator that risk management is very important.
Alex Whitlock: What other strategy do you have in place? Dave, you've started, I'd say, reasonably recently. You started making some purchases in the stock market.
David Stratford: Yeah. I have. It's funny you should ask that. I was going to say I think risk is one of those things where I looked at it when I was first going into an investment, and I looked at things I could see, feel, touch, so you look at property, you look at commodities, you look at buying things like that. The more I learned and I felt the more confident I became, maybe the more risk I was taking. I wasn't quite sure where I sat.
Adam Truelove: Because you feel like king of the universe.
David Stratford: I thought, do you know what, I know this, I know that, I know that, so why the hell not? The more I looked at it and actually when it came to the finals of what I'm going to put my investment into, I felt like I was diversifying in the right way. I felt like I was growing in the right way. I think going forward from there, how is that sustainable? I always want to keep ahead of the curve, but like you said, I'm only ever going to get that from reading the right articles maybe at the right time or should I speak to the right people, and how do I get that information? That's what I'm always keen to learn.
Adam Truelove: Never listen to anybody else would probably be the best advice. I've been trading for 10 years, nearly 10 years, and in the beginning I made some very, very big mistakes by listening to other people. I generally find that's just a general thing in life. Listen to other people and don't back yourself, and you can have problems. Sometimes it goes well, but I generally find sometimes it goes bad. You're experiencing the "I made a great decision, I'm fricking awesome, I know everything," like we go. That's a perfectly natural, normal response.
David Stratford: You know that saying where it's, say, like it's not what you know, it's who you know. In trading that's not anywhere near relevant.
Adam Truelove: Now, you know me!
David Stratford: That's true. At the end of this podcast, I am going to exchange tips anyway.
Adam Truelove: Let's do it.
Alex Whitlock: I reckon Adam's tips would be better than yours.
Adam Truelove: We'll see.
David Stratford: I reckon so.
Adam Truelove: Just coming back to the point, it's really you need to understand the market. You need to understand how things fit together. Do you need to go and do an economics degree? No. Did I do an economics degree? Absolutely not. I'm not an academic. Really I'm a hippy to be honest. I'm most at home, I'm most at peace when I'm on the beach with a beer in my hand. I'm not one of those bods. I've learned how to trade myself, and got some really good education from many, many people. Once I flew to America for two hours to spend this time with a quantitative trader. It was £14,000 for the two hours plus all the flights and everything. I would say probably 20 minutes out of that whole two hours were absolute gold and the rest you could keep it.
Was it worth it? Absolutely. That 20 minutes really changed the face of what I was doing in trading. The value of education is key. Some of it will be rubbish.
David Stratford: It's filtering it. There's a lot of noise.
Adam Truelove: It's filtering it. You got to, it's like everything, keep going and find the good trainers that will show you how to do it, and then back yourself. That's the only way to go.
David Stratford: I think growing a portfolio successfully is managing the risk, of course, but even trial and error. It's not a bad thing to do bad in an investment. You learn from it.
Alex Whitlock: I think learning from your mistakes when you make mistakes is a key thing and not making the same mistake again, and again, and again, which I think just from my very brief dabbles in the share market, I know that I have made mistakes and thought that making more mistakes might be the best way forward. That's why I stick to property.
Adam Truelove: Think about a baby. How do they learn to walk? They need to bash themselves up a little bit and have a few accidents, and then all of a sudden that doesn't happen anymore. Is that a longevity game? Probably not. You'll still get some education and do it. Do it the easy way and not the hard way. I've bought houses before and it's been a complete disaster. Put all the money in and then something happens with the market, or you just pick the wrong location thinking that ... You talk to another developer and they're like, "Oh my God. What on earth are you doing?" Whoops. Something else in your portfolio will massively overtake the loss you had there. Like you said, diversification is key.
David Stratford: Yeah. Swings and roundabouts, or smoke and mirrors, ...
Adam Truelove: It's just life, isn't it?
David Stratford: ... depending on what you're talking about.
Adam Truelove: It's just life.
Alex Whitlock: Just currently looking at, and at the moment, so the umbrella over us all at the moment is the looming potential conflict. How is that influencing areas of opportunity just constantly for you at the moment? How is that influencing what you're looking at?
Adam Truelove: Commodities are a safe haven, so I'm not convinced they'll be that much of a safe haven. Past history leads everybody to gold and silver and places like that when the dollar drops. There's lots of talk about the death of the dollar, which if you look at the charts it's just plummeting. The Fed are continuing to talk this year about continued interest rate hikes, which means, well, the only reason they would do that is for economic strength, but everybody's pot less, so how they can say there's economic strength there is beyond me. To be honest, as a trader I really don't care too much about what they say or what they do. In times of strife, that's when you make money, which is a very loud statement to make.
If you look historically back at, if you looked at the S&P500 which are the top 500 companies in the US traded as a whole on the Standard & Poor's. If you looked at a technical chart back from 1993, you can very clearly see ... A technical chart would go in what we would call a wave, which is a phase one, phase two, phase one, phase two. If you were a surfer, can you surf on a pond? Can you surf on a pond?
Alex Whitlock: No.
Adam Truelove: You can't. You need the waves to-
Alex Whitlock: I can't surf on anything.
Adam Truelove: Me either, sadly. You need the waves in order to trade, and really that's what a currency chart will do. It will wave. It will go up and down, and up and down, and constantly do it. It's a bit like if you imagine breathing. As you breathe in, your chest goes out, and in, blah blah blah, and it just keeps going. It's picking the time to do it. If you looked at a technical chart in the S&P500 from around '93, '94, you can see the boom up to the dot com bust and the fall, and then you can see the boom straight after that, and then you can see the GFC and the bust, and come down. It's up, down, up down. If you're trying to buy at the top of a wave, if you're trying to surf, get on at the top of the wave, you're going to take on some water.
The best thing is to wait. It's a timing thing. You've got to wait until the start of the wave and then you ride it, and then you just have things in place to take you out when you're at the top. Really it's about being a trend following trader. One of the best books I ever read was by a guy called Michael Covel, which is spelt C-O-V-E-L, which is called Trend Following, and that's really a description of what the markets do, how they operate, what the big boys do. The big boys, the banks, they're just following trends. The amateurs are trying to get involved going against the trend, I generally find, and gambling to do it. Coming back to the technical chart with the S&P500, you can see these clear things in history, and we are now overdue for another one. That ties in with the fundamentals.
The world is in strife. You've got war. The dollar is backed by oil and war. You've got things going on in Saudi Arabia. You've got extreme weather conditions all over the place, popped out of nowhere. You've got crazy earthquake, 9.2 warning in California, and all sorts of crazy "that four letter word" going on. Just had to stop myself. That all coincides with what am I going to do? Is it going to be a war thing or is the world going to be wiped out by three mega hurricanes? I think there's one coming up to the British Isles at the moment. We've had two earthquakes in Mexico. There's all sorts. Is it one particular thing? No. It will be a sequence of events. What do you do to protect yourself? You look back in history and you see, okay, there's a pattern here.
The first rise up to the dot com boom was, I think, about five years, and then the drop was about two years, and then the next phase was, funny enough, about five, six years, then the next drop was about two years. We're now seven years since ...
Alex Whitlock: Since the GFC.
Adam Truelove: ... the start of the wave, since the GFC. We're massively overdue for something to happen. When's it going to happen? Who knows, but I'm going to triple my wealth when it does. I can't wait for that to happen. You've got to look back at, again, it's behaviour.
Alex Whitlock: It's behaviour.
David Stratford: Thing is we're all riding the bull or the bear. There's always an opportunity in both. I know we're mentioning about the trend, but having an opportunity where you're up or you're down. Just keeping your eyes on what's happened before is priceless information, having that data.
Adam Truelove: Priceless information. You've got to go bigger picture. In trading I always explain to people, look, you got to be like you're sitting on a beanbag. Imagine you're sitting on a beanbag and it's filling up with money. That's your long-term investment, your long-term trading portfolio, so your wealth is building, and then the faster in and out stuff is more like your cash flow. Does that make sense?
Alex Whitlock: Yeah.
David Stratford: Yeah.
Adam Truelove: It's all about balance. If you have a balance of the two, then trading could be very kind to you, very, very kind to you, and investing can be good to you.
David Stratford: All good. Adam, thank you for coming in. That was really helpful.
Alex Whitlock: Yeah. It'd be nice to get you back again another time.
Adam Truelove: Yeah. I'd love to.
Alex Whitlock: I think it's been a great insight into some of the strategies that you teach. Thanks for taking time to come and talk to us.
Adam Truelove: Thanks guys. Appreciate it.
David Stratford: Good stuff.
Alex Whitlock: Cheers.
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