Netto’s framework is a classic example of over-intellectualizing basic risk management to turn common-sense position sizing into a proprietary brand. It wraps disciplined gambling in enough jargon to satisfy the ego of any high-achieving quantitative enthusiast.
Install our extension to search inside any video instantly.
The Man Who Made Over 40%/Yr For 10 Years Straight - John Netto
Added:This trader didn't just achieve 40% of profits per year documented for an entire decade. He then went back to law school at 47 to build an edge that nobody can compete with.
>> When someone risks 1% of the risk budget, is 1% the right number? Maybe 2 and 12% is the right number? Are you adjusting for implied volatility? Are you adjusting for your confidence interval on your trade? What's your implied profitability percentage?
Because if your percentage of winning on this trade is 70%. And you can win two times what you're risking, then 1% is not the right risk threshold. Maybe 5% or 6% is >> introducing John Netto, former US Marine turned professional trainer, attorney, author, inventor of the Netto number, and a featured market wizard in Jack Schweinger's world famous book, Unknown Market Wizards. John breaks down how he captures a full day's trading range in 90 seconds around economic events. The system he calls risk budgeting behind that decadel long track record and why your small accounts traded correctly can actually be your biggest advantage.
>> I'm looking for edge. What quantifies or what constitutes that edge is really specific to each trader. And I'll share with you what is my biggest trade right now. Pretty sure that this is going to be the trade that a lot of people be like wow that has some durability to it.
So the first thing I asked myself in this trade was all right listen history history rhymes but it doesn't necessarily repeat and so I would give that qualitative analysis say the last two weeks or the last two months this has been what's driving the market but that's now changed so does that change flip things overnight maybe not but guess what that trade that won 75% of the time on support resistance may now in the last 3 days because it's events come out has only won 60% of the time well gosh John what win rate do we use then when we're trying to price out future trades and that's the art my friend >> most traders watching myself included we end up at technicals. It feels like we have control. We have cut off points on price. We have targets on price. And we have parameters we can work within.
Fundamentals to me and many others just feels vague. It's like I got to read so many headlines and synthesize it into ideas. I don't know how to have a playbook around this. Whereas in technicals, you can now control your variables, have predefined rules, have trade models, and then react to outcomes in price. How can you make playbooks around uncertain event releases and predefined decisions or data around outcomes that you don't know what it's going to be?
>> Wow, great question. So listen um >> a lot of things I've learned on this tour is around alpha the word what is alpha how do we achieve it and it's it's probably the most important word because the job of a trader is to make money good but then your response to that would be your job is not only to make money it's how you made the money related to risk and then you pioneered what we all know as the netto number I want to get into that later but what I what I'm most curious about is when you have returns the definition I got from others would A dislocation in the market is where you find alpha. So your job as a trader is to find a signal for a dislocation and then a models to exploit it. This makes sense to me as a technical trader. How would you identify dislocations from macro around news events around fundamentals? What is the dislocation and edge there for?
>> Well, the dislocation to me comes in terms of how how that repricing and what that repricing manifests itself of. So on an economic event, uh you could have a headline number where um let's say the non-farm payable jobs report is supposed to come out with a 200,000 person survey. Uh there's some mathematics involved in that certainly. Um first of all, how important is that number? So if you're going to find a dislocation, the relevance of that of that specific of that economic data and we can substitute the economic data for some other variable that that I'm looking to to benefit from that dislocation or that um that price discovery. All right. So, let's go back to the example of a non-farm payroll number. U the if the Fed is saying, listen, there's there's real doubt over what the job market is right now. There's real doubt over the economy right now. Well, then and and this job number is going to inform future monetary policy. It's going to inform um fiscal policy. Well, in that instance, there's a heightened sense of the significance of that job number. And and accordingly, the chance for a dislocation or or a nonlinear or a big market move increases. If the significance of that job report isn't so great, then the potential for dislocation, the potential for alpha then correspondingly decreases. Now, there's a lot of syllables I just used there, but but basically, >> yeah, let's break it down. So, I'm I'm assuming a news release or an an event, let's say, is where there is greatest mispricing and therefore greatest opportunity. Is that a good premise first?
>> I think an event that that brings dislocation potential. It doesn't have to be a news event. It could be a headline. So, there's scheduled news events and non-scheduled events. All right? And what we've seen under this uh under the Trump administration has been more non-scheduled events that have influenced the market versus, let's say, less um less less uh boisterous or less less communicative administrations. Some of his predecessors may not have been um so prominent in the news headlines or or maybe have have taken a different fiscal or political stance. In which case, the more the scheduled economic events would would bring more would bring more significance into those things. under the Trump administration um the headlines around him have been more have provided more dislocation and more and more of those gap reactions than have the scheduled economic numbers. I've spoken to a lot of pros on the show. I feel like the difference they have between a lot in the audience that may be watching that are struggling is most feel like they want to predict price and predict what price is going to do. And from technicals you you can or it feels like you can because you see a support level price should respect that a trend line price should respect that Fibonacci XY Z. So you enter a predictive mode whereas a lot of the pros I've spoken to are reacting whether it's reacting to technicals where it's a level plus confirmation or in your case you're reacting to uh the world in that case.
So is this another correct premise that we need to be not predicting but reacting or can you have predefined playbooks and predictions leading into events?
>> I'm going to use a dance analogy and say that you know as as a male we I carry the traditional role. So when I was in New York all right I love salsa dancing.
I love Latin culture. I love Cuban salsa. Puerto Rican Dominican have have huge presence in New York and particularly what's called an onto style. And it's known that as the male typically you're the lead. As the female you sort of assume the follow role, but in all reality even when I'm the lead I'm still reacting to the follow. And one of my one of my favorite dancers of all time out of New York, Frankie Martinez. You can follow him. He he puts out absolutely phenomenal content. Talks about that dynamic, talks about that role. I use that metaphor because right here it's much like a dance. There are aspects of what I do that are predictive and I talk about this in my book in that when the market is poised let's say the market is leaning one way all right while I won't necessarily predict that it will go the other way it sets up a riskreward ratio because the market is leaning one direction that while ne I'm predicting I am assessing market dynamic and saying okay I'm going to follow that or I'm going to p put that into practice and say okay listen there's a dynamic here that says that maybe I'm going to predict a little bit based on the riskreward ratio based on my expected turn on the other side. You know what?
There is a reaction component when listen, if this comes out this way, I'm going to actually have a position before and then I'll have a position after as well. So, if I'm if this position I put on before is up, I'm going to add to that winner presumably or I'm going to cut that loss and possibly reverse. So, I don't I don't think the answer is so binary. I think it's qualitative and threedimensional.
>> Extending off your analogy of of of a dance, uh what what are the things you're using to predict? For example, what what is something that is priced in versus something that could be reacting towards what what I'm getting at here to to put it more basically is most traders watching, myself included, we end up at technicals. And the reason we end up upper technicals is it feels like we have control. We have cut off points on price. We have targets on price. And it feels like we can we have parameters we can work within. Fundamentals to me and many others just feels vague. It's like I got to read so many headlines and synthesize it into ideas. I don't know how to have a playbook around this.
Whereas in technicals, you can now control your variables, have predefined rules, have trade models, and then react to outcomes in price. How can you make playbooks around uncertain event releases and predefined decisions or data around outcomes that you don't know what it's going to be?
>> Wow, great question. So, listen, um, something that that I would push back on a couple of those things in terms of that fundamentals are inherently, well, not that you said this per se, that they're inherently unmodelable, but that they can be modeled. Um there are but the key about that is finding the right way to outsource that. Yes, >> I don't have the staff of the team to sit around and and and analyze every global market in the world, crunch out all the numbers on that. But technology is changing that and I and if I can get a shout out, they're not paying me. This is just my experience. I found the work that Hedgei does on their institutional level and frankly for about a,000 bucks a year, you can get a lot of the fundamentals um processed at a pretty good price point and they give a lot of value there. So, so let me just check that box. But that doesn't mean that's your end all be all. That's just a framework that you can operate under.
But let me go to the economic event itself. All right? When you say, well, how do you know how it's going to react?
So, one thing in the same way that you would use technicals to get a historical sense of what's happening, i.e. this resistance up here, this support down here. I would look for historical reactions >> to an economic number. So, let's start with that.
>> So, there's a there's a method of the madness here. Okay. So, in the last 24 non-farm payroll events, whatever, we've seen the um we've seen the um gold, for example, move in the in the following five minutes, $57 have a $57 range.
Okay? Now, that's funny because these events do one unique thing. And I'm going to digress. I'm going to deviate just for a moment here. All right? And get to the strategy and say, you talked about dislocation. Your first question to me asked about John, what does dislocation mean to you? And I gave you the question. And I said listen, okay, dislocation means to me when there's opportunity for market um price discovery, etc. But on top of that is are the strategies you're using conducive to identifying market dislocations? Are the strategies you're using conducive to that? And what do we notice from economic data at least when it's trending well or even both scheduled and unscheduled economic data?
What we find is that the volatility that you might get on a daily basis, okay, is compressed into about 90 seconds. Now, if you annualize the volume on that, so let's say this, if gold moves $50, let's say gold's price did $5,000 an ounce.
It's not there right now. Let's say gold moves 50 bucks. Okay? Um that $50 move, all right, may represent a one daily standard deviation move, but one daily move in gold if you count the overnight market runs about 22 hours. Well, think about that for a moment. I've I've just built up a strategy that identifies the same volatility in 90 seconds >> as most traders may look for over the course of 22 hours. So now you have a whole different dynamic where there's almost certainly not always but almost certainly amount of price discovery when there's that much dislocation taking place in the market. So some of that comes just knowing that there can be that kind of dislocation is one thing.
And then the second component of a couple comes in do you have the technology? Do you have the knowhow? Do you have the expertise to then trade in that fast market? Because if something's going to move in 90 seconds, then it normally moves in one day. Well, then there's probably a liquidity issue in there. All right? Meaning that that that there's that price discovery going on.
So, people can't say, "Well, I'm not where I would normally trade 50 contracts, you know, $2 above $2 below.
I'm going to only trade five contracts $2 below because we've just followed this big event and there's a repricing going on right here." So those are some of the things I would keep in mind as you ask about dislocation.
>> The one word I want to press on is liquidity.
>> Sure.
>> I want to present two sides and you tell me which one resonates with you.
Liquidity I can also see as like a rising tide lifts all ships. So this could just be increase increased liquidity in the market. Another uh way to visualize it would be like a tugofwar where you have price equilibrium between buyers and sellers and then buying team gets 20 more people in. They have more liquidity and they win the battle. Which one is which one are you seeing liquidity as? I would approach it with a third option if I may sir third prong and and that is how viable how viable the price is and so under those scenarios a rising tide lifts all boats if I have more liquidity in the market I give more difference to that price action versus liquid I mean you've dealt with this with volume as a time and sales trader or as a technical trader how much volume traded at that price point how much volume traded in that five minute bar well that's funny that fiveminute bar had 300 contracts on it yet the price moved what it would normally move over 30,000 contracts.
Okay. So, there's a different level of respect you have to give to that price point if it had 1/100th of the volume at that point in time. So, when you ask me about liquidity, I use liquidity as a prong to gauge the viability of a price as much as anything else. It's like, okay, there's real liquidity there. I have a pretty good sense that if I had to like move some size that that that the assets I own are are respectively worth about that because of all the liquidity and all the trading that's happened at that point. Whereas a trade that happened at it at dramatically less than that is far less credible.
>> Hey Titans, let's take a quick break from the episode to talk about a sponsor and partner of the show that is Ola Prime. Now a lot of traders have been talking about Ola Prime because they were recently the winner of the fastest payout prop award in the IFX Expo here in Dubai. And something that you don't see so often is that they are backed by their own brokerage firm Ola Prime Markets. And a few things that I love about Ola Prime is that they have offers for futures, forex, and crypto traders.
And most importantly, they allow you to trade on over eight platforms. And further, they do a 95% profit split, basically unheard of, which means whatever profit you make, you keep 95% of it. And most importantly, because of their reward, they're one of the only prop firms that offer a 1-hour payout through a structured 10point 1-hour payout system. Your payouts are practically on demand, which means you can spend more time on the charts trading, withdraw your profits, and go back to the markets. With all these steps, measures, and awards in place, they are truly redefining transparency and trust in the prof space. So, if you want to work with a prof that you can trust and a partner of the show, click the link in the description or use the code toot for Titans of Tomorrow to get the best prices and discounts that I've personally negotiated for you guys, our Titans of Tomorrow audience. With that being said, let's get back into today's episode. Is this the nice foundation because the liquidity if correctly identified, I'm assuming around events, but let's wait on that. Does that connect nicely because then it brings momentum and then you can time your entry and then get uh well you know the standard deviations and then hence the exit. Would this be a nice cornerstone even as a macro trader?
>> You're hitting on something. So I'm a macro trader but before anything I'm a trader that looks to maximize return per unit of risk and you said well John what does that mean? I'm going to address your question about does that does that bring momentum etc. because that's a great point substantively that gives the viewer something that they could actually something actionable when they watch this show and we're all about actionability. All right. So, as someone that that is a macro trader, you would say, "Well, John, if you're looking to trade 90 second spots, how is that a macro trader? What's the big picture of that?" And I say, "Let me ask the tough question here, right? I'm I'm confused.
There's some tension in that." And we attorneys, we love finding tension.
Okay? We love getting into that and like because once you can settle the tension, you've you've probably identified some real value. Okay? So the tension here is, well, listen, if I'm talking about identifying a market that trades its daily range in 90 seconds, well then how does macro play into that? And I say it's precisely because I'm identifying a daily trend in 90 seconds that macro plays into that. What in the world would ever cause a market to trade its daily price range in 90 seconds? Well, that understanding probably only comes because you have the macro understanding. Because you can understand what is so significant.
because you can look at it and say, "Wow, this is an event that can shift a regime. This is an event that can shift perspective." And that's why in 90 seconds or 180 seconds or in 30 minutes that follow that, we can see two days worth of gains, 3 days worth of gains, a week's worth of gains potentially in that time frame. And what effectively amounts to annualized V at 400. So think about the VIX, which may be trading right now at 17. What's the VIX? It's volatility. represents one standard, one implied standard deviation of what the S&P 500 or OEX100 options should effectively move based on that pricing model. Okay. Well, if we're looking at an annualized VIX, all right, at 400 or something that's 30 times that or 20 times that, based on a 90-second withdrawal, if you had to price out a 90-cond option, that to me is why macro is so important to the short term. Would you go as far as to say technical trading only without the macro view means you're trading blind or you just got to trade somewhere else?
>> No. Listen, I think that there are many ways to skin a cat and I don't say that if you're because I begin as a technical trader. My first book, one shot, one kill trading was built upon and I and I highlighted again in the global macro edge Fibonacci confluence level. So Joe Dapley wrote a great book called trading with D levels came out in 2000. It was the foundation of my technical trading style. and what Joden Napoli effectively conveys in that book. And again, if you can't tell already, I'm about giving credit and collaboration. I stand on the shoulders of giants. I'm here because great mentors taught me. And because of that teaching and because of my ability to synthesize those great learnings, I'm able to share this with you and your esteemed audience, sir. So, when we talk about technicals, I think technicals are a great place because they force a risk discipline. And when you talk think about quantitative trading, is quantitative trading technical or is it fundamental? And frankly, I think it's a little bit of both. All right, depending what you're doing. If you listen, I'm going to chart the number of times that this pattern happens and I'm going to superimpose or overlay that on this thing right here. I think that has its anticedance in technical trading because technical trading is a basis of whenever my whenever whether it's Ballinger bands or whether it's support resistance line or whether it's a a moving average crossover, if it's a momentum or reversion strategy, there's a discipline to that. Yes. And disciplined trading should tell you if you have the right risk parameters because I'm all about risk and risk architecture. The technical trading will tell you, hey, this is losing now. This has broken my rule. And as long as you can manage risk, you can be better than that super genius guy who lets his ego determine where he's going and he blows up. We were speaking earlier about the architecture of you can build a playbook and actually back test around fundamentals and therefore you can come into an event with a plan which was something new to me. I would assume it would be reactionary but then we can actually have playbooks. With that being said, I want to build a skeleton around it because if I'm to imagine how would I build a playbook around macro, I feel like I need to read everything and then I'd always feel like I haven't read enough and then if I take a loss, it's always my fault cuz I didn't get a piece of information. So I would assume a healthier approach would be these are the things I have to consider and as long as I check these things then I've done my job. If I take a loss that's fine and therefore I don't need to worry about everything external the whole world. Would you put things inside a box and say these are the things to focus on?
>> Sure. It is that's a great synopsis and and and the illusion of being able to factor in everything is what models run into problems that models run into all the time and you just hit the nail on the head with that. So well done sir.
Um, and I would say yes, this number matters or it doesn't. What are the two or three key drivers that that do it?
And even for me, I I just mentioned at the outset, I gave the example of a non-farm payroll, and I walked through six numbers. The headline, the revision, the two two-month revision, unemployment rate, average hourly earnings, um, and in participation rate, but I don't weigh those all six things equally. I take two or three of those, maybe two of those six, and those are going to drive what informs my analysis. Those maybe it's the unemployment rate and the headline number. that's going to be the big factor in there. And those other and those other ones may be subtle. So that playbook you talk about, you really want to keep it simple but also not so um focused or so >> overfitting overfitting that you've that you that you create problems and I think that you you hit the nail on the head.
>> When I think of KPIs in trading key performance indicators, the metrics I see is uh the unit of risk which is your area of expertise. I'm very curious about this because risk is everyone everyone talks about risk but then when I try and press on it it's just like oh just use 1% risk per trade there wasn't much behind that world but I think with you we can explore it deeply but then alongside that you have win rate which is something that could be connected then you also have risk-to-reward another factor uh and then I'd also say rates of return your trade frequency uh if you have good win rate good risk to reward and good risk but you take one trade a year is not worth it so I want to see there's a healthy balance between these I wonder if there's another you would consider but the the reason I'm bringing this up is if I have great win rate and great riskreward and a decent trade frequency, why is risk important?
As long as I'm not doing reckless behavior, uh what is the place of risk in if as long as I've measured everything else out?
>> Well, the preposition there as long as is what is what is what informs that whole sentence. So, yes, those factors that you mentioned, your win rate, um your risk your riskreward, uh those those are all critical. Um I take a three-dimensional approach and and this is where what where the netto number arises from and the book is called the global macro edge maximize and return per unit of risk. And so what does that mean conceptually? It means how can I risk a little to make a lot but that's only one part of it because the idea that I can risk a little risk a little to make a to make a lot is that just riskreward.
>> It it's riskreward.
>> Okay. But it's from an exanty perspective. And so and so you touched on that earlier. When someone risks 1% of their risk budget, you effectively have the spirit of that. Okay. But what I don't know is is 1% the right number.
Maybe two and a half% is the right number. Are you are you adjusting for implied volatility? Are you adjusting for your confidence interval in your trade?
>> So what's what's your what's your implied profitability percentage?
Because if your percentage of winning this trade is 70%. Okay. and you can win two times what you're risking, then 1% is not the right risk threshold. Maybe maybe 5% or 6% is or 7% is all things cater all things being equal. Okay? And so that that confidence interval you have in your trade based on a number of factors which could be historical returns based on your own proprietary model um >> tells me that >> intuition is absolutely factor- driven well that there's qualitative aspects of this and I would but again I think intuition can be more systematized than people give credit to but it doesn't have to be perfectly systematized all right I think intuition is a huge you know intuition is the analysis manifested um is is the is the manifestation of the analysis performed by our subconscious let me say >> what about its deep suppressed emotions or unclear ideas masking as a good idea, greed masking as a as a intuitive thought. Uh a gut instinct, but it's actually just FOMO. How how would you separate that?
>> That that separates Great question. So I would not define intuition as those things. Um but but that's definitely a part of the emotional equilibrium and inner self work that we all do. I I would give some credit on this to Denise Schull. She's she's come out with she's very well respected. She wrote a chapter in the book as well to really understand um how performance coaches are working today. Many of the top hedge funds if not all the top hedge funds in the world are hiring top performance coaches to help win the mental game. So people who are listening to this if you've always kind of thought, "Wow, I wasn't my my mental equilibrium wasn't where it needed to be or I wasn't right where I needed to be." Well, you're simp you're you're uncovering something from some self-thought that already many billion dollar tens of hundred billion dollar hedge funds are already using for their proprietary for their trading managers.
>> So we run a little bit I'm going to cover all of these because these are intuition and psychology wonderful topics to bring it back to risk you said basically or is describing there is a right and wrong amount of risk. Uh, and I wonder what that's paired with because I I I explore this a lot with guests to be honest. Yeah, which is there's two camps I find. One is standardized risk because you just got to keep rolling the dice and allow the edge to play and the moment you add discretionary risk to it, you might erode the edge. Whereas the other side of people is 80% of my returns come from 20% of the year. I need to well, as I have drunken Miller's quote in front of me, you need to you need to know when to be a pig.
>> Uh, and and then when you are winning, you go big. And in fact, I spoke to Larry Connor just the other day and he was mentioning that you your whole thesis is on power laws which is mean you need to get asymmetrical gain. So it's risk and let it run. So this implies you need to have high conviction plays and risk big. But then it goes against the other camp which is how do you know what is high conviction uh without intuition coming in and market experience but also data. There's a whole web I I would like to unpack with you. So I fall in the drunk and Miller Connors camp but I don't fall out of the other camp that talks about standardization of risk units because I think the both both can be harmonious with each other. So I look at camp one and say I just want to make a standardized bet every time but that's that's specific to or principle to that strategy. If your strategy is that I've built a system, all right, that generates these amount of returns and I haven't attached a confidence interval to it, then in those instances or for that system attaching a standardized risk budget is the right way to go because you haven't you haven't built a confidence interval that says that any one of these trades as a placeholder is any is any better than the other trade.
So if you don't have if if every trade is puditively or allegedly equal, then in that case, a standardized risk budget of 1% or half a percent based on the historical win rate is what's appropriate. However, to Connor's points and Duckham Miller's points and Soros's point, whether you've interviewed him or not, this is where they're going here.
But but effectively, what I'm getting at is that >> is that 1%'s the wrong risk budget if you're risking one to make four, and you have a 70% chance of winning that. Think about that. I'm only risking one based on all this work I've done, based on this thesis I've done, based on the fundamental framework, which we can get into later on about some of the fundamental dynamics that arise, also some of the technical dynamics that arise, and you have a vehicle to manifest or express that trade. So, wow, I can put a trade on for this risk budget. Maybe it's an option. We'll talk about that later. Okay. I have this fundamental dynamic taking place. It's a one-off event that's really difficult to quantify, but but I have the the fundamental and in and in and and macro knowhow to to to quantify that, at least sufficiently quantify that. And then I have this mathematical process is whoa, I can make this kind of return off it because the market's positioned in this way.
>> Well, that's not a trade, my friend, you risk 1% on. That's a trade where you become a pig. In other words, that's a trade where you takes an outsized bet and you say, "Okay, listen. I'm going to in a risk-fed manner risk 4% of my portfolio and it makes me 20%." Now, on $100 million, there's 20 million risking four, but it's again that 4% is of what you can possibly risk. And that's where a risk budget comes into play.
>> Cool. I like this a lot.
How do I find a confidence? Basically, I want to understand how we derive to knowing this is the play to put it on.
This is the place where I need to put my outsized bet on. So, you were mentioning price action parameters. That was one and it was confidence interval. Uh, and I guess that's based on historic. And there seems like there's a correlation between win rate and risk.
>> The better the win rate, the better, the higher the risk should be.
>> Help me make this from vague ideas in my head into kind of a step by step.
>> So, the win rate, let's make sure we disting distinguish between a past win rate and an expected win rate in the future. And that's where having an analysis the regime you're in.
>> So for example, we spend the last two weeks on a day trading strategy and I'm not meaning to digress here. I just want to like I'm an attorney so I like to just like get very delineated on on very specific granular things. All right.
>> The last two weeks the win rate on this strategy has been 72%. Okay. But what's gone on the last two weeks? Well, we've had no economic data. It's the last two weeks of the summer. Volume has been running at 70% of its annual average rate and we've had nothing to sort of give us a catalyst. Okay, but every time that the the market's come to this resistance, it's turned back. Every time it's come to the support, it's bounced off of it. Well, if I use the win rate of that last two weeks, okay, which is which is viable. It's credible, but but that regime has changed because guess what? It's now September 1st. We have um a Fed speaker coming out about to give about to give a commentary in front of the Fed decision coming on September 15th that now the market's paying attention to because we've all been waiting for this Fed speaker to come out. We've all been waiting for this non-farm payroll number to come out. I never thought of that, but it's so right.
>> Okay. Right.
>> Yeah, it makes a lot of sense.
>> Okay. So, so if you're going to apply the historical win rate, but you haven't applied the regime on top of the right regime, that's where people get in trouble. And that's where model decay can destroy you. So, I'm trying to analyze both model decay, which says, wait a second. Well, every time this has happened, well, is it different this time? So, listen, history rhymes, but it doesn't necessarily repeat. And so I would give that qualitative analysis say hey listen common sense here is over the last two weeks or the last two months this has been what's driving the market but that's now changed. So does that change flip things overnight? Maybe not.
But guess what? That trade that won 75% of the time on support resistance I mean now in the last 3 days because it's events come out is only winning 60% of the time.
>> Well gosh John what's what win rate do we use then when we're trying to fight price out future trades. And that's the art my friend. That's where some of the art is. But at least if you can have these conversations and you're aware of these, your your viewers now can say, "Well, now I know what to start to look for. I now know what questions to begin asking, then I can identify this stuff."
And that is instructive and valuable.
>> For the last 2 years, a proud sponsor of the show is a top ranked leading prop firm, Alpha Capital. And for the years that I've been working with them and the thousands and thousands of viewers, you guys that have been working with them through the discount codes of Titans of Tomorrow, it's clear for me to see why they are a top ranked prop firm in the industry. They have also reached a monumental milestone of hund00 million in payouts. And with the multiplestep plans and the multiple package types they have, there's going to be an option catered specifically for what you're looking for. So you can buy an evaluation account catered to your needs at the most competitive prices. And with our discount code toot for Titans of Tomorrow, you're able to get the most unbeatable unmatched prices in the industry with a leading trusted prop firm. And with that being said, let's get back to the episode. Okay, so we have the parameters around expected versus current win rate and regime to affect the decision. That's one layer.
What else is the layers of risk? So you mentioned confidence. How does this differ from win rate?
>> Win win rate that I just referenced was historical. Confidence is on an implied basis. So let's compare realized volatility versus implied volatility. So what's realized volatility? Let's say on the VIX, it means what was the range of these markets looking backward. So if I say what was the 10day realized volatility means what looking backwards did this market trade at it traded at an average of 27 points a day. So I would effectively look at that as you know and and that's expressed you could see a Ballinger band. What's a Ballinger band doing? It's taking the realized volatility of the past or or some an some analog to that and it's and it's you know pricing it like that. the different than me saying, well, what's the implied volatility? Meaning, what's the market think the range is going to be going forward? And those two things are not always the same. All right? And so you would say, well, what's a factor that would influence implied volatility?
We know what we know what realized volatility is. I can measure that on the last day, the the last 10 days, the last two months, the last year. What's realized on a daily basis over the last year? Boom. Chad GB can tell you that in 10 seconds. Okay? But what's the implied volatility going forward? That's where the models get in the battle because my model may say, "No, I think the way you're pricing this is a little bit off.
I want to use this factor, this factor, and this factor." And when you buy an option, you're buying the option based on that implied volatility. Okay. Now, there's again, we promised we wouldn't get wonky here on looking at an option chain and the smile and different price points and where the deltas are. But that option, that option price and that option smile is based on that implied volatility. Now realize volatility can play a factor into the model of what implied volatility would be naturally, but it still ultimately is what we look at price going forward.
>> By extension as well, is there a correlation between potential risk-to-reward of a trade and the size of the bet you should place?
>> Yes, the the the bigger the riskreward, the bigger your bet should be.
>> It really is that simple. Okay.
>> So it's conviction in a sense is derived from implied volatility your uh win rates and how we dissected it and the potential yield of a trade.
>> Win rate is d implied volatility impacts win rate more from a risk management perspective. In other words, how much size should I put out there. Okay. Okay.
My confidence interval is what determines how much of my portfolio I should risk. Implied volatility determines how I should size that bet.
>> Okay. So, so if implied volatility says, let's say I want I think that um go gold overnight, okay, has just traded $300, okay, and I and let's say gold overnight trades 300 bucks. I believe going forward that gold's going to put in a snapback bounce and and I want to buy a one-day option. That one day option is going to cost me $55 for the call and $55 for the put. Let's just say I buy the at the money call. All right, my confidence interval says, "Okay, I think gold's going to go higher. I'm going to use that implied volatility to say, okay, if I want to risk 3% of my portfolio on this bet because I really think that this this sell was overdone.
Gold's in an uptrend. Non-farm payroll numbers tomorrow. I believe the payroll number is going to come out weak. I believe the Fed's going to have to adjust. This just has all these things lining up for me. And I'm just walking through one hypothetical right there.
So, if I want to risk 3% of my portfolio, because I think gold's going to snap back all $300 tomorrow, okay?
And I believe that there's a 30% chance it goes back $300. There's a 20% chance it goes back $150. There's a 10% chance it goes back 80. 10% chance when it goes back 40. 10% chance it trades neutral.
10% chance it goes down 40. I mean, see the probability model I'm creating here to the point I get to obviously 100%.
All right. And that leaves me with an expected return. The gold's going to end up returning $112 tomorrow. Okay. Well, the gold option tomorrow is $55, but my but my expected return tomorrow is 112.
Okay. So, that determines All right. So, I'm looking at a two and a half to1 or two 2 to1 riskreward ratio. Okay.
>> I've never heard of that, but that that's pretty cool. This is how I'm breaking this down. I'm kind of riffing in real time. So I I ask for grace from the audience. This is all from the top of my head and and we're making some magic here in Las Vegas, Sin City. We're making some magic. Okay. And so so so that so that becomes the dynamic. So the volatility informs >> the sizing I can do because if I can buy that option, let's say gold's implied volatility only. I have to buy the option for $25, okay, versus $55. Well, why is 3% of my portfolio? I can then buy twice the size, okay? But I can't risk but the 3% of my portfolio at $55 for that for that one day option is going to take more of my portfolio out of that. All right. So so implied volatility just helps how you architect and we are risk architects here. Okay.
I'm a legal architect as an attorney.
I'm a risk architect as a chief legal macro strategist at Review Capital and as a trader for over the last 20 plus years and as a market wizard because I'm a risk architect brother. It's what I do. So that's how we architect this trade.
>> I I love this man. You're so good. Uh I want to understand I spoke to Samir Varma recently is a trader I really look up to and he he told me I asked the same question and I assumed to be honest that you would say the same which is uh because you're you're concerned about gains related to unit per risk. It's risk adjusted adjusted gains. So I would have thought you would have told me today that you would not modify risk because you don't know how the trade is going to play out until it's all said and done unless you're Soros is is how Samir put it to me. So yeah, I've understood how you've created a formula around it in your head to determine when it's justified. But I also then want to understand how would you explain outsized gains related to outsized risk and create that into something that's still viable to see as a performance.
>> Sure. So outside gains versus outside risk comes into comes comes to a structuring question. It's how you structure the trade. If you're long the underlying then then how you prevent outsize outsiz losses is through a perfect stop loss or you you have some mechanic in there or you or you've bought an out of the money put which effectively you know eliminates what you can lose before a certain price point that comes with with that that contains both feature and bugs that you know buying puts or buying optionality has certain fleas to it time decay um the probability of of that ultimately expiring in your favor etc. But that does still provide you with a way of preserving so you don't have outsized losses. Okay. And still giving you the chance to keep outsized gains. Now, if you end up risking more than your risk budget, um, allows you provides you to do, then you can still end up with outsized losses because you still went beyond your risk budget. But that's what I would call an Xantiissue. And by Xanti, I mean it's something you determined before the fact versus next post issue, which is what happens after the fact. The reason I brought this up is because I can imagine someone listening in and thinking, well, if I have the criteria you mentioned to think this is a high conviction play and I size up appropriately uh or modestly, let's say, not not excessively, and then it plays out in my favor. Cool. I made more money. So therefore, the logic is >> more risk equals more gains. I'm therefore always going to do more risk.
Uh and therefore your whole uh success is around the fact that it's not the annualized gains you have for a decade of 40 something%. is the fact that your draw down. It wasn't it wasn't the numerator that's impressive. It was the denominator which is adjusted to risk.
So therefore I I assume your superpower is not knowing when to size big. It's the riskreward size because it's adjusted to risk. Does is this where is this correct?
>> You nailed it. But by numerator my numerator over denominator you can add a zero to it. Okay. Like like I generated 40% a year as as documented by Jack Schwagger. Um and let let me say I'm not past returns is not an indication any future results. Blah blah blah. you know all the risk disclosures as a lawyer you should yes all the legal disclosures and all the financial disclosures that we now give as part of things >> but yes okay so my max draw down is articulated on on the risk budget that I had you know I made you know okay 40% a year I had draw downs I think two draw downs it was articulated of 15% over that 10-year period two separate draw downs of 15% on on that risk budget which is which is great which is fine but that's a gearing exercise we could have made that an 80% return versus a 30% draw down we could have you see see what I just tweaked that right Yes.
>> So what professional risk managers do is they'll look at someone's trading style and they will tweak the allocation to them to and hopefully the strategies done in a non-correlated way, right? And so what you do is you take seven John Netto, okay, or or seven other traders that have non-correlated strategies and you size them based on their expected volatility and that gearing is what takes place. And that I talk about in the book, you know, the better the brakes, the faster you can drive your car. So, if I can build 20 non-correlated traders and I truly qualitatively understand what their strategies are doing, how those strategies work in different regimes and then understand how to identify different regimes that are going on.
Now, I can build a multiple non-correlated portfolio with 25 different strategies or 20 different traders and say, "Wait a second, I can leverage this. I can gear this." Okay?
Because I'm I can look at their net own number. I can look at their return punitive risk and I understand what environments those strategies work well and in what what environments they struggle in. So I can dial those accordingly. Like that's the magic brother.
>> The faster the better your brakes, the faster you can drive the car, >> right?
>> What does that mean in trading?
>> It means in trading that the better your risk the better your risk um metrics are, the more you can risk.
>> Okay. So >> there's two visuals I'm having off that analogy, which is >> I'm driving a car way too fast and then I have good brakes. This is my safety net. So, it's systems that I can rely on when things are going wrong. I need to stop because there's a wall here.
>> But then you also have, >> let's say I have a spoiler and the spoiler, it goes up to add a bit of air resistance. So, this is not it's not breaks, but it's something that's slowing you down when needed. What how I'm segmenting is you have things that are full fallbacks or safeguards when things go wrong around risk. But then you also have the confluence side of I'm going to get into a trade because of not just this reason but this this this this confluence sets I'm saying these are my safeguards in motion like the spoiler versus the brakes which is if things go wrong would would you separate it somewhat I I'll go one I'll go one higher I'll give an actual example of what that means that that way we can take this somewhat conceptual conversation and then make it practical for people who are there. Okay.
>> So when I say the better the brakes the faster I can drive my car. All right.
That's as much about the vehicles that I can trade, I don't mean automotive vehicles, I mean like the actual products themselves, right? As it is about the philosophy behind that.
>> Okay. So, so let's apply what that means.
>> The Fed came out two days ago. All right. We're filming this um we're filming this in June of 2026 and Chairman WH just came out with his first decision. Okay. The market um was used to the summer of economic projections.
Um came out. They suggest there'd be a rate hike for the rest of the year. And again, I'm I'm I'm not saying I made this trade, but I'm I'm giving you example of how this could have played out as a concept. All right. He comes out and and surprisingly to the market, they call for one rate hike in their sum of economic projections. And just for some backlog here, these sum of economic projections for the last, I think, 10 or 12 years or even more than that, um on a quarterly basis would come out and and the governors would 18 people would 19 people would vote. They'd say what their projections were and the market gave this a lot of attention four times a year. Well, this this event came out and to the surprise of the market, they called there actually be a rate hike for the rest of the year. The market was surprised, the market sold off. Okay?
So, I'm apply this analogy now. All right? At that point in time, if you thought that the market overreaction was overdone, you said, "Listen, this is they've overblown this. This is a new Fed chairman. They're recalibrating all of this. These summer of economic projections don't mean anything anyway because they they've made a recalibration. I'm going to buy the call options that expire in two days for a defined risk point because I know that if I'm wrong, let's say this was a material move, let's say the market really does think, oh my goodness, this one rate hike put on the SE which are no longer viable anyway, which has been a major shift in Fed policy in terms of how they're going to communicate Fed hikes. I think that's worthless. So, I think the market's going to go back to where it was. So, I'm going to buy some out of the money call options. But guess what? because you're defining your risk on those call options. The product and the vehicle are the brakes themselves because I've been able to define what my risk is that I don't have to take a big bet by just going long the market and oh my god it goes against you and now what do I do? I realize there's this there's there's a situation where implied volatility's come down the Fed's already come out with their event. So I can buy optionality for a reasonable price and I'll play it for the next two days because this market mean reversed because they've overreacted this event.
So that's what I mean by the faster the breaks. I can leverage up a bet >> if on a call option where I've defined the risk and still get a big return and still go really fast.
>> You mentioned vehicle in terms of what you could trade.
>> Sure.
>> And this makes me curious because I mentioned it to your your colleague as well >> Neil this idea. Yes. This idea of >> um the vehicles I can pick are going to be for example the S&P. Right now the S&P has appreciated a lot >> um >> more than it usually does. But when you look at what's driving those gains, it's not all 500 companies. It's around 49.
And if you look at the bottom remainder 4 uh 50 something, 51, uh it's flat. The gains are flat. So you could say a specific driver has led to the returns and then I wonder how and that's normal.
The AI is the move. And then I spoke to Larry Connors about this and he said, "No, you should lean into this because these are the unicorn options or opportunities, sorry." And he said, "You go further. You go first order which is the chips, second order which is the energy, third order around it which is Dualingo could go down because AR is up so sell that. So he's building a moat around one driver, no diversification.
And then that goes to drugiler be a pig.
And then I have the other side which is the Ray Dalio. His formula is like diversification 8 to 8 to 15 diversifications through different drivers which is I got from Mike Dev of Brandy Wine. He said people are taking outsiz risk not by because they're investing in something diversified. It's because they're concentrated on a driver or a single idea. So therefore, I'm curious now when we talk about risk, how do we break it down in terms of drivers or the vehicle itself that you're choosing and is that considered in risk or do you just do correct position size even if it's on the same idea and take the Larry approach which is then first, second, and third orders on the same idea?
>> I have to tell you, you sound a little fundamental with that last sound. Are you sure you trap preparation for you?
>> There's some evolution coming on here. I love it. Um, listen the we talked about that one specific so that driver that I mentioned in this last in this last hypothetical was about monetary policy and market reaction to to to to liquidity and how the Fed's going to move on rates. Okay. So that that that was the driver for that price period.
Now is that driver going to overcome the AI driver? Probably not. But be but it comes to understanding that for this regime from a tactical and strategic standpoint from a tactical perspective for that 90 minutes or maybe that next 24 hours Fed policy can overtake the AI driver. Now if it sounds a little wonky or like okay he's talking out of both sides of his mouth that's a fair criticism. All right but based on experience and based on again at the end of the day man we're taking risk in the market. I can't say for certain what's going to happen, but in my experience, when the Fed comes out and there's a new chairman and there's possibly new regime, it's something we want to pay attention to and and when liquidity may not be at its highest point, the market may may people may back off a little bit to kind of understand what's taking place, which can provide opportunity.
So, to your point about well, there's a mo there's whatever. Yeah, those are factors I want to consider in, but at the end of the day, I'm trading fixed income products, I'm trading gold, I'm trading silver. All right, the bond market has its own dynamic, but it's not a dynamic of there's 49 products that are leading most of the gains of it. The 10ear treasury is the 10-year Treasury.
And if I want to own um European fixed income, if I want to own Asia fixed income, that's a different kind of conversation. But from the standpoint of good news usually makes the bond market sell down and bad news usually helps the bond market rally. And I'm talking about price, not yield. Okay? So, if there's good economic news, yields are probably going to go higher. All right? And price is probably going to go lower. If there's bad economic news, price is probably going to go higher and yields are probably going to go lower. So when I look at these things about, well, are you going to partition this or partition that, that's something that that is probably beyond the scope of this interview, but they are factors that I contemplate to to answer your question.
>> One one reason I've and it might just be cope. So I want you to uh help me question my own beliefs.
>> Yeah. is the reason I try to be tech or focused on technicals and shorter time horizons like day trading or intraday trading as opposed to position trading long-term hold swing trading with fundamentals is for one clear reason and and it's how I visualize uh let's call it certainty decay where if I know where price is today I I can have a higher degree of certainty of where it's going to be in the next 10 minutes a little bit higher a little bit lower and I can use technicals to understand where there's momentum reaction and play that certainty range if I'm trying to forecast where it's going to be in a year. It could be way higher, way lower, and most importantly, the information I have today could be valid, but then as we approach that one year, new information ruins my analysis, and that's not something you could avoid.
I'm curious to know how you use fundamentals on longer time horizons, knowing that there's always evolution in the world and that can negate your good idea and good trade.
>> Wow. Okay. Great question. There's a few things I'd push back on or not push back on. There's a few things that I would ask you to evaluate internally on that strategy. Okay?
>> And that is that we know historically that and believe me I'm not saying everyone go buy and hold. Okay? But when you say in a year from now I don't know where the market would be. I would argue actually I think based on the historical returns in the market that we're in actually you probably do have a pretty good idea that if you were going to do a liability matching mandate that if you were to say that we have you know a 63% or 64% probability that the the S&P is going to be trading between down 9% and up 12% in the next 12 months. Yes, I'd say we could reasonably say that based on implied volatility in all historical models. All right. So I would it's not completely de void of of where the market's going. True. But but I take to heart what you're saying that in terms of the path dependence to get there is rocky and and there are certain um um liquidity dynamics that offer themselves for for opportunity for your strategy to work that regard and I think that's where your real edge is.
>> You can model all you want and have correct predictions and then the straits of is is closed again even though it's supposed to be a piece a few days ago.
Things like this.
>> Sure. So so so in that regard I'm I feel like I went off track for a second. Ask again so I can so I can get to your point. It's about how to effectively hold trades for longer durations because if I think how would I hold trade for a longer duration, it's price action. Oh, I just want the break of structure. I want the 4 hour, the daily and and it's just projections based on not much. But then when the reason I cap it early therefore is because I don't know where the price is going to be based on price action, neither on fundamentals because it evolves and changes and it could slam my train back to break even.
>> I would say it's it's a dog with a different set of fleas. Okay. Long-term trading is a dog with a different set of fleas as a is short-term trading. Fleas.
>> Fleas. Fleas. Things that bite a dog.
Yeah. So, here's the thing.
>> Long-term trades bring a different set of benefits. So, for me, my biggest long-term bet right now, the area that I think provides the most opportunity when we talk about SpaceX. So if you so even you even you could admit all right that even though you're a short-term trader if you had a chance to get in on SpaceX IPO all right that's something that a year a year and a half ago that you would probably want to have access to because even though it's doesn't fit per se the next 10 10 minutes the riskreward on that and the return on that profile is something that you'd probably be fairly comfort you might be comfortable taking on even though it's doesn't fit that per se. So for me maximizing return per unit of risk the temporal aspect of it the time aspect the duration aspect of it is one component but the concept still is fairly similar. Okay each time frame you go in has a different set of risk for longer term there's a chance a greater outlier can happen between now and then but hopefully I've budgeted that I've risk budgeted that by saying okay but to hold this this long I need to have this amount of deviation in my in my risk budget because I'm holding it for a longer period of time. Conversely, when you only hold a trade for a short period of time, you'd have a small a correspondingly smaller risk budget as well. Okay. So, to me, >> I think actually you're already tailor made to be a long-term trader. It's just a question of calibrating what you risk versus what you take as a reward because the concepts are all the same. I finally have a special offer to share with all of you from the US or my futures traders which is over 20% of the listeners of the show and that is Alpha Futures a leading futures prop firm that is working with trade of eight and ninja trader that are compliant with CME regulations with the largest end of day balance draw down in the industry a 90% profit split and same day payouts and with the most competitive pricing in the industry with accounts starting at just $79. On top of that, just by being a viewer of the show, you get up to 40% off all evaluations. So, why not get started with an evaluation right away?
Trading $50,000, $100,000, and you already know the power of prop firms and larger capital. So, go ahead and use the link in the description or code toot for the best prices in the industry, plus the best discounts in the industry to make this a home run offer if you are a futures trader. Let me let me throw another thing at you that that challenges me is >> let's say I've got a a day position >> and by I know the ATR of the day. So therefore I can have a riskreward with a higher probability that I know I should take a partial or something off the table cuz it doesn't move more than this on average day and then overnight I'm not I'm not a long-term holder. But anyway, the question that comes to my mind is let's say I'm floating 1 to three on a position. I risked a,000 and I'm floating 3,000. Now I can forecast it could go to 1 to 10 and I just project it for whatever reasons I have.
As I creep there, I'm no longer thinking of my riskreward of I risked a thousand and I could make 10. I'm thinking I could forego my three unrealized gains to hold for another seven more. That makes sense. There's a positive risk reward to holding. But as I approach it now, I'm risking eight to make two.
>> And and and I don't want to lose that.
So therefore, I'm curious because your whole philosophy is gains per units of risk, which to me feels like hold run hold winners and let them run, but then how do you do that? Because then you could have a huge opportunity cost on your P&L, which is all the trades that could have been but went back.
>> So I I think we need to separate and there's a threedimensionality to this and your question I think necessarily assumes that you're dealing with simply one unit and I would argue that most of us deal with multiple units and it's not so binary. It's not that I'm either in or I'm out. there's a you are trimming along the way.
>> You are trimming along the way >> to dampen some of that volatility. Okay.
So, so my first point would be well listen >> I would almost take them in a modular perspective and not one continuous perspective. And by modular I mean okay you got in this with an expected return.
You're going to you're going to manage this trade. All right. And then look at that second point as maybe a second position and you apply the same metrics to that second position. Whether you've got in or not it's almost a synthetic exercise. Okay. If for some reason something's changed that wasn't part of your confidence interval on the first one and it forces recalibration, then >> I see >> you're always going to have these price targets. I mean, let me be clear about that. I'm always when I get into a position, I'm looking to stagger or or or or stage my my exits, okay? Or partition my exits on the way out.
>> Is that on the day of entry or is that see how things >> whatever the respective time frame is?
Like I wouldn't get so caught up in the day of entry. are margin dynamics that are applicable to this specific day. But let's just take whatever time period is.
Okay?
>> If I'm going to be in for five five whatevers, five days, five weeks, five months, okay? Then for me to get out on day two when that wasn't part of my my my plan, there's not been a material change the position. Now, here's where I would give myself some leeway or some latitude if I'm in on a day position and the president comes out with some with something that can throw that off. Well, then now I'm in risk risk mitigation mode and that's excusable. Well, that's defensible.
>> But if you're in the position and nothing's really come to change it, >> then in on balance, you usually should let those things, you know, play themselves out per your plan absent some major catalyst that that comes into play.
>> Therefore, I can conclude and summarize saying the feeling of I don't like the riskreward of holding a trade when it goes negative because I could forego more than I could potentially gain. It's not something I should consider unless something in the world has changed.
>> Yeah, agree. Agree. And how would you effectively trim the trade along the way? Because this is something that makes a lot of sense to me intuitively.
And then I spoke to a few recently who who are well esteemed traders in their own rights. They've told me the to the effect of you can go broke taking a profit and if you took a profit too early on Nvidia and all these things that I've run, you wouldn't be sitting in the situation that they're sitting.
So they're actually saying it's fatal to take a profit too early.
>> Listen, I don't know the issue is taking a profit too early. The issue may not be getting back in again.
>> All right.
>> Okay. So, so again, it sounds a little lawyerly slide of hand or slide of words, but in reality, when traders say, "Oh, I'm sorry. When you got Nvidia traded, they did Nvidia go from $1 to 300,000 in three days in one straight line." No, it didn't. Nvidia during some of the tech sells has pulled back 25 30%. All right. So, this idea that that I can only be in this, I can get in one time and I can never get in again.
That's a self-reflection issue the trader has to work on. All right. Do you only trade the NASDAQ one time and never trade the NASDAQ again or the S&P or EuroUSD? Right? You trade it multiple times. So, and and listen, if it's the ego that says, "Well, I can't buy it at a higher price." Well, guess what? For as many times you end up buying that or selling buying at a higher price or selling at a shorter price, you may end up buying at a lower price or selling at a higher price. So, don't let the ego get in the way of getting a next trade because if it matches all your criteria, who cares if you sold Nvidia at 100, it's now at 110. Because if your system tells you it's going from 110 to 120 and only have to risk, you know, to risk five to make 10 and you have a 53% chance of winning that, that trade has a great profit factor, which is another thing I would add to your to your um collaborate is the profit factor of of the position, which basically multiplies or calibrates all wins, the size of all wins versus the size of all losses, and then you get a profit factor around that based on the trade.
>> What is your thoughts on the Kelly criteria or a fractional Kelly?
>> I like them both. I mean, to be honest, I need to to update myself on the Kelly criteria. speak that but but effectively the killer criteria and I'm do very similar strategy is that listen based on the size of your portfolio and based on the deal you're risking a certain percentage of of this account on that I love it I love it but but I want to but but I calibrate that based on my confidence interval so I'm Kelly criteria based on confidence interval that outsized bets because and and maybe I'm maybe I am effectively manifesting that so my my apologies to all the Kelly criteria enthusiasts out there but the reality is that that I'm risking a percentage of the portfolio that's my risk budget o both in strategy, but then managing within a risk budget is very important. We should spend some time talking about that actually. Um, >> was this trade management >> trade risk budget like how to create a risk budget and then manage within a risk budget. That's a key key component to if you're going to maximize return per unit of risk, you better know what a risk budget is.
>> Yes, let's get into that because as a day trader, it's which is most of the audience too, it's very rare you're in 10 trades at once. But as a position trader and you're building ideas and you're re-entering and getting very creative is portfolio construction is meaning most of your capital is likely deployed um how do you then yeah budgets accordingly where in my case it's just like I could do 1% per trade and tomorrow I'm out the trade so I can I can re replenish and reuse that same risk and recycle what happens when you have a lot of exposure of your portfolio and different ideas and diversified but nonetheless you are exposed >> so let's start existentially okay let's start like big picture on a risk budget all And this is the importance here because I think I mean I think I know and I' and I've written I've articulated repeatedly that that trader manager manager skill is a real thing and someone who can risk a little to make a lot there's a way to quantify that and that's the netto number. But in order to to compute a netto number I need to know what your risk budget is. So I'm going to take you and I say listen I'm going to give you a million dollar account. All right. But if you lose $100,000 of that I'm going to pull the plug. Okay. I take trader number two and I give him a million dollar account, but I say if you lose $200,000 of that, I'm gonna pull the plug. So, his risk budget, not right or wrong. There are reasons for doing one one of the both.
Not right or wrong, but you guys have a different flexibility premium. What I call you only have $100,000 of a risk budget. He has $200,000 of a risk budget. So, what the netto number does is it says, "Hey, listen. I'm going to take based on the size of the risk budget, but then I'm going to put another factor as well, and that is what was your draw down from the principle.
So that million-doll account I gave you, let's say you never lose any money and you go on a beline more or less to where you make $100,000, but you give back $25,000. Well, if you're giving back $25,000 in my profit, so you're at a million, you're at 1.1, now you give back 25, so you're at a million75,000.
Am I as worried about that 25,000 you gave back from profits versus the 25,000 you gave from principal? No, you're not.
Because you know why you know that?
Because you're a prop trader. You do this for a living. You get it. Okay. The way that you feel emotionally losing principle is much different than the way you lose giving back some profits. Okay?
So the net number, right or wrong, doesn't punish you for giving back some of your profits to compute the netto number. Okay?
>> And so I'll say at the end of the year, wait a second, you made me $100,000. All right? you never had a draw down for me from principal and I only gave you a $100,000 risk budget. So that's going to result in a pretty decent net number.
Let's take the same approach for someone I gave $200,000 to. He had the same exact mathematics. His net number will be a little bit lower. Why? Because I gave him more of my capital to risk and it generated the same return with the same volatility. Okay? So he's probably going to have to generate if I'm being practical about 170,000 where you generated 100,000 on that same volatility to come up with a comparable netto number. But all of a sudden, what did we just do? We normalized 10 managers, but not just 10 managers. I can apply the same mathematical concept to stocks to a to an FX. So I can say, okay, what was the what's the netto number of the EuroUSD? What what risk budget would I have to put in place based on the implied volatility to recreate that netto number to recreate that risk or analyze the performance there? Okay, >> let's go there because I was thinking net number sounds useful, but unless I'm a CTA and I'm allocating funds or I'm going to hedge funds and I'm trying to split my own capital.
>> Yeah, >> it's a performance number to to equal the playing field and see how others do.
Why is that relevant for me? Like, could I use it on myself? And if I do, then is it just a performance number? But you can use it on asset classes.
>> I love tough questions, brother. I love I just fire me the hard balls. I didn't This is Las Vegas, man. I'm a former New Yorker and I'm an attorney. I love I love a tough jerk. All right. So listen, the whole point of it, I wanted to create this univers this universality.
All right? The the universal nature of this. How can I make this to where it's not only applicable? Now listen, there are some some some tweaks, okay? And I even I'm even going to put in a real estate example, but let's first talk about how we can apply to the market. So in my book, chapter 8, and and thanks to Jason Rooney, I've learned this concept from Jason Rooney. He's based out of um Texas. He spent a long time in the Chicago in the pits of Chicago proprietary trading world. Jason knows Neil Isus very well. He's someone you should absolutely have on the show. Um he's at Kersner Trading right now in Texas. Just a phenomenal, brilliant market mind and well respect in the industry. He was my mentor on the macro space. Can't say enough great things about Jason Rooney. Jason Rooney. Jason Rooney. All right. He taught me the Rooney ratio and the Neto number took all these different things I had out there, but it was the idea of the Rooney ratio, which which is a different formula, but it's in the book. Okay? And I said, "All right, listen. I want to measure the market based on this implied risk budget or I want to measure NASDAQ.
I want to measure tech. I want to measure fixed income based on how they're performing relative to their implied volatility for that day. All right? And I want to measure them based on the draw down they've had that day.
So implied volatility, what their draw down is or what their what's called maximum adverse excursion. For a lot of systems testers out there, they're familiar with the term called MAE or MF.
Maximum favorable excursion meaning how much a trade goes in your favor. Okay.
After you get in maximum adverse excursion, how much trade goes against you. So really I I call the the the ecstasy to agony ratio. We want a lot more ecstasy than we want agony in our trades. Okay. So what the net number does effectively to apply it to to to the here and now is it says okay the NASDAQ today has provided a lot more agony than ecstasy and it's also performed well relative to the implied risk I would have had to take. Now in a perfect world what do we really want? We want a market that has a very low implied volatility. Okay? meaning it didn't expect much only went in your favor and had a big outsiz day because what does that effectively mean? It means I could buy optionality for cheap.
>> Yeah.
>> And it only went in my direction. Those are what whereas if something like Nvidia which maybe have like a daily 3%, pardon my hiccups, Nvidia has 3% volatility. Well, Nvidia has a 3% priced option, you know, but by 3% call option.
That's much different if it goes up 6% on the day because great, you doubled the value of the call option. That's a lot different than an option with 1% implied volatility that goes up 6% because whoa, all of a sudden I got a big outsiz move in my favor based on that implied volatility. So that had a much higher netto number with a 1% volatility than a 3% volatility on Nvidia. That's a lot and I'm fire hosing you, but that's >> I'm building a picture. I'm building a picture. I'm curious to know another misconception I have around macro trading. I think the audience would too is that fundamentals and macro traders, they can't time the markets per se. So they get into a position and they may hang around the entry for a while and then eventually go if they got it right as in things that are that are in your analysis sphere take time to play out and therefore you can't be in and out quick and most certain well unlikely you can be in and it goes in your favor immediately. Is this a misconception or can you time the market?
>> I think it's both right and wrong. You know we have to everything's about definitions in the law. That's about def. The first thing you do as an attorney, you have issue, rule, analysis, conclusion. What's the rule?
The rule is the definition.
>> Well, define me. What what does timing mean? What does early mean? What does that context mean? And the definition here means whatever time frame you are trading because even macro people have to have an out. So, if your time frame is three years and you've budgeted accordingly, well, if it doesn't work in that three years, then you can't time the market. Okay? If it does, then it means you've identified that there's a greater degree of variance in this trade and you structured or you insulated prophylactically around that by putting a timing structure in place that that can account for that. And it goes the other way as well. Sorry.
>> As in you would get out of the trade if it's not moving in the time frame you allocated it.
>> Correct. And that has to be part of your analysis. So So I look at the timing as is not good or bad. It's just a factor.
And in labeling someone a macro trader, a day trader, I get it that there are practical differences between both of those. But if we look if we really want to distill this down to the trade, and this is why I think macro traders can get a lot out of your show and why day traders can get a lot out of your show, because it still comes down to architecting return per unit of risk and timing. Whether it's one week or one month or one year, there are some exogenous factors, i.e. tax returns and realized gains and and operational costs that go behind us that are practical factors which we can which would which which maybe inform more exogenous inputs. But otherwise these concepts should be fairly uniform and and um and universal.
>> This timing thing that you mentioned of you enter a trade, you allocate a timing budget accordingly and if it expires and it hasn't moved as you needed to, you will exit the trade.
>> Right. this feels wrong because I could because it could just go then after that uh and and if if nothing has changed if the reason you got into the trade is still present and price is still where you got in it's the same position it's the same trade why is time decay uh degrees decreased certainty as opposed to using a news catalyst and then if it fails on you then you had a catalyst and failure that makes sense or came to a price discovery level it was supposed to react it didn't react therefore get out I understand from that lens but not this lens of time decay.
>> I love the push back, man. Just keep firing, brother. I love this. Okay, so I I don't I don't want something to preempt or preclude someone from staying in, but if I put in if I get into a trade and I have a three-month time budget, it doesn't mean I can't reinitiate or synthetically stay in, but I can't do it under that same metric.
Okay? So, in other words, I say, I'm going to be in this trade for three months. Here's what I'm looking for.
Here's my budget. Here's my risk budget.
and my risk budget if I put on an option structure is probably set to expire in 3 months. So if I go through an evaluation process and say you know what it didn't work during this time however I've done another analysis again I've identified factors you know x y and zed all right and because of that this is worth another one month or two months that's a different process than saying oh I'm just going to stay in this trade because it didn't happen no my analysis was was going to happen in these three months because I had a driver to think that based on all the historical options data I've done based on all historical price action I've done based onto fundamental fundamental analysis I've done it was going to happen so I need to have that boundary These are effectively your brakes. It's like I had my 3 month brakes. Brakes are now gone off. Can I accelerate again?
>> Exactly.
>> Can I start the engine again? Let's go and drive down the highway again. But otherwise, so so it it doesn't mean you can't, but it has to be part of a new rigorous process to say, okay, this is worth staying in.
>> Can you use macro to d to generate trade ideas and technicals to generate trade execution of said idea?
>> I'll go back to the very first question you asked me at the outset. We went, how could you be macro? And I said, you know, is there tension here? The very first thing thing we talked about is, well, I can identify trades in a 90 secondond period as a catalyst and I could have two weeks of nothing, then 90 seconds sheer terror. I can do that because I have the macro perspective.
>> The macro perspective tells me that this Fed decision is a barn burner that that this non-farm payroll event that that came in $150,000 150,000 jobs above is a catalyst and that the minutes that follow are going to reset volatility and reframe things. So, it's the macro catalyst in many instances which informs how I'm going to what I call volatility target. And I want to volatility target options that are priced at, let's say, 25 VIX and they're trading at 100 VIX or 150 VIX because now I've identified and I do this in the legal profession as well and some other stuff that I'm developing on the legal side and in legal trades. um identifying volatility that's mispriced because where these outliers happen or these dislocations happen, the market has not properly priced that in or they have priced it in on a longer term perspective but their shorter term optionality is not properly priced in and that gets a little little wonky there but yeah >> the reason I feel most stay away from events that you're leaning into uh is because >> I feel and maybe you can correct me is >> there there's waves of players getting in where let's say the news event is here prior to it you have the insider information. I don't know if that's real, but I feel like people could be getting in prior assumption. Then after that, you have the instant reaction entries, HFTs, algos, people that could snipe. By the time I've processed it, they're already in. And then I become the exit liquidity. I don't know cuz I see Jane Street enters and exits in nanoseconds. So you have that that group. Then you have people like me that would be reacting to the news discretionary. So discretionary traders.
And then I would imagine the big players, they would take time to build their position with an average price. So with these waves in mind, where where is the dislocation and opportunity or price?
>> The dislocation opportunity is on all of them. Okay. So I >> So it's not about earlier is better.
>> Not necessarily. I mean, if you can get in earlier at a better price, it's always better. Okay. But I'm going to go back to a to a to a presentation I did 5 years ago. If you Google me on Twitter, and this gets sound sound clipped, and maybe we'll do the same thing here again. All right. But when you see the spike fall an economic event, there's only two questions, my friend. Do you go with the spike and the direction spike or do you fade it? Okay, because that initial spike the market ain't going to say that exact price point. It's either going to give it back, okay, or move on to this.
>> So, let me let me tell you exactly what I used to do on my year one of trading.
NFP's coming out, buy stop, sell stop and I was going to go one way and then it whips both and I take a loss both sides. Me to say I I stopped doing that because I feel like >> you're guessing. Is it going to go? Are you going with it or you're fading it? I I don't know. Is there a system behind it?
>> Yes. And that's the macro side when I talk about understanding fundamentals.
All right. All of a sudden when you're looking at, you know, okay, this job number came out and this is where we talk about HFTs. I've been at all end of that. I wrote over 12 years proprietary software called impact software which I built to process news headlines, process Fed events to give a quantitative number which I then execute based on. So, not only do I have the macro mindset, I took all of my trade secrets and built a proprietary execution system, which I talk about in chapter 20 of the global macro edge that says, okay, I know that when I trade economic events, I need to have these this type of order functionality. I know that I need to have this type of position management. I need to have these things and I also need to have a visual thing because you never leave a machine to do everything.
I want to have the human manual override because stuff happens, mistakes happen.
And as good as data is, you may get bad data and you you may need a manual override. While I have risk parameters in place, sometimes a manual override saves me from from from even potential bigger loss or or from giving back gains if something else happens. So I've banned every section of what you just talked about the HFT side and I'm still currently still have that developed etc. So I can speak to all of that and I can say that when this firm gets in in nanconds, what's the liquidity of that?
Oh, you got off 20 contracts. Okay, I'm glad you spend a million dollars a year on that so you can get off 20 contracts.
It's okay. I'm a little behind you, but I spend a fraction of that. You know, I'm not saying I'm being arrogant. Like, it's a it's a business calculus. All right. And that's why I say that first spike. Well, what if you have a netto number that score? Because let me not I score these events and that and it says, well, if this score comes out of this level, I'm then going to fade that if it gets this high. If it comes this level, then I'm going to look to buy that dip or go with that spike. And so that answers that question is that I score and create an index and normalize these things and then then I put the macro context and I talk about the position premium the market position premium that how important is this? So you may get an outlier but if the but we talked about this at the outset but if the market doesn't value that outlier even if it's an outlier even if if it's a really strong beat even if it's positive but if the market doesn't care much about that event you may get it but going with that event is wrong because the market actually is focused on something else entirely.
>> Yep. So when I spoke to Neil the other day, he I asked him what should I ask John and I didn't fully understand what he was hinting at because it was a hint and he said I don't know if you'll talk about it so I want to ask it and see if you understand the code which is something about an embargo room and latency advantage.
>> Neil oh you son of a gun Neil. Okay.
Okay. So embargo room. Yeah. This is great. So what Neil's talking about is that up until 2020 all the major news releases were released out of Washington DC room. Bureau of the Bureau of Labor Statistics would would fire and so all you're talking about 40 to 45 news agencies would go in they would get the economic data they would they would have to turn in all their cell phones they would have to um give all their computers etc and they would go and they would have to pay for the special line that would release the econom would release the jobs report of the CPI at once. Okay. And that embargo room dynamic existed up until 2020. Um, President Trump, some people speculate that due to attention with Michael Bloomberg, changed that embargo room and wanted to make it only released on the websites.
Okay.
>> Oh, >> yeah. So, right now, non-farm payroll, CPI, um, GDP, they are all released on a website, which puts a premium on the ability to scrape a website. So, I've developed proprietary web scraping software. I'm beating Bloomberg right now on the majority of events. I'm beating the out of the box providers on the majority events. So me and my team has developed a web scraping event that that can scrape those things. So I get non-front non-front payload faster anywhere from not not every time because there's there's some randomness in this but but most occasions and by that I mean 75 to 80% of the time I'm beating Bloomberg um on the non-farm pay release. I scrape it faster. I get it half a full half a second or second faster.
>> Wow.
>> How? Yeah. So I'm not telling you how.
Okay. But you could say wow. All right.
But but but I've developed a technology that does that.
>> Wow. Okay. Um and >> and is this therefore an edge for you?
Is this something that that second matters?
>> Do you think it's an edge being half a second ahead of Bloomberg and 300,000?
>> If I was sniping the trade, I'm going for the reaction, but you're building a long-term position.
>> No. Well, no, I also trade the reaction as well. I built an entire career on trading the reaction. And also, but but I'm also not not agnostic to being in a position if it if it lends itself to profitability by actually taking a bet on where the market will on where that forecast will come in at, where that data will come in at. Cool. Cool. Okay.
And there are other factors in that which again shameless plug for my book.
But the process this we we get into on that regard. But no, so I've built the technology which I would call probably more exogenous alpha because when you build a technical edge, let's say you have a tax benefit, you have uh execution benefit. You I would say those are things that >> exogenous alpha >> meaning something that's outside being able to predict market direction. Okay.
So predicting market direction.
>> What is the difference between exogenous alpha versus beta? B3 is exposure to the bucket.
>> Okay, we may be mixing up terminology here. So, let let me just reset this for a sec. Okay, so I have two components. I put buckets into two categories generally. And I talk about this in the book. What I call indogenous alpha and exogenous alpha. And by indogous alpha, I mean, you ask what is alpha? And this ability to identify dislocation. Well, I identify alpha more as an ability to generate excess returns over the market.
So indogous alpha means my ability to look at the S&P and say listen based on these seven macro factors and based on this moving average crossover the market's going to go higher in the next 10 or 15 minutes and that's indogenous that means it's in it's endemic it's part of the market ecosystem itself it's there it's that price action is whatever I use to determine why price is going to go higher that's endogenous exogenous means hey guess what instead of trading stocks I trade futures and you know what my tax liability on futures is I trade long-term capital gains. So, I pay a 23% if you blend the top tax rate versus the long-term capital gains component. And as an attorney, I do tax advice and asset structure, etc. So, I pay a lower tax. So, that's exogenous alpha. Okay?
Because I can put on trades that affect that. I would even argue that that the vehicles I use are are a manifestation of that as So if you trade in a CFD account and they aren't quite as fast on data as maybe the market itself, I would regard that as more of an exogenous alpha because that's a vehicle issue.
It's not predicting up or down.
>> Okay? It's not predicting price direction.
>> So I think it's important to silo as you look at your business plan what's indogous and what's exogenous alpha. To Neil's point about my embargo edge, I look at that as some exogenous alpha because it's my ability to get something out the market can at a faster pace or bring a benefit that's not necessarily because if I get that news, I think it's going higher. All right? But my ability to to to create a delivery mechanism to get me that impacts that >> exogenously, okay? Because I don't take the trade if I if I can't get it that quick. Still, I would say I make just as much money fading these moves 10 minutes later, 5 minutes later because I understand what liquidity does to these things as I am going with it, you know, because the market still has to reset itself.
>> So, I've just switched out uh to have your book because I want to go through some things because it's it's a hefty book. But before I uh throw some things at you from here, I was thinking there's when we're on the topic of alpha, alpha for me is for a day trader perspective is like you're finding dislocations, pockets of price, pockets of reactions and data mining. Whereas when you are trading on a longer time horizon, you're not looking for dislocations. Maybe is it more just you're looking at money supply and money flow and and it's more the idea that if institutions if institutions buy with enough intent, it becomes self-fulfilling. Is that the area you are focused on?
>> I think what you ask is as much a definitional question as anything else.
I'm looking for edge and whether it's in a 5-second in and what what quantifies or what constitutes that edge is really each, you know, specifically to each trader. And so for me, when I'm looking at okay, what is causing this? And for me, let's take a longer term perspective. All right? And I'll and I'll share with you, you know, what is my biggest trade right now? and something that you can look at this whether it's today or a year from now or three years from now I'm pretty sure that this is going to be the trade that a lot of people will be like wow that that has some durability to it and so the first thing I asked myself in this trade is all right what problem is this trade solving okay what's what's the solution of this of this dynamic and for me home equity agreements real estate right now there's about $35 trillion trapped in people's homes okay meaning I'm a homeowner I make $120,000 a year I'm a I've been living in my home for 25 years now, but outside of taking on debt, there's no real practical way for me to access that equity in my home. But it makes up an outsized, and this isn't just United States phenomenon, this is everywhere in the world, okay?
Especially major urban metropolitan centers where people have this this outsized real estate appreciation in the last 20 years, etc. And so you say, all right, this is a $35 trillion problem in the US. What's being done about it? And where are we in that life cycle? So we've seen the securizations of home equity agreements come out with uh firms like Splitero, Home Tech, Point, Unlock, Unison, and major firms uh in in insurance companies and pension funds are investing in these secur these securized home equity agreements. And when I look at that, I look what's happening and I look at the HELOC market, which is, you know, about three or 4 hundred billion dollars a year. And I look at the home equity agreement market which doesn't require you to take on debt which is you know about a$8 billion year industry. That to me is the SpaceX trade. Okay. But it's a riskreward trade that has to happen you know over three four five years. That's fine. That's not right or wrong. That's just a temporal classification a temporal distinction.
>> So I hope that when you say long-term traders it's about this liquidity. It's about that. I mean, these are practical factors, but it still comes down to maximizing return per unit of risk. I wouldn't put that trade on to maximize return per in the next three days because that's not how that works. But it's what I think optimally we do is if you're a day trader, you have a set of strategies that lets you maximize in the next three days that you run continuously. You have some that help you in the next month, some in the next year, some in the next three years, and then you allocate to those proportionately based on your own internal liquidity needs. I've spoken to a variety of guests on the show and a unanimous common denominator between all of them is the emphasis they put on data and actually knowing the inner workings and the insight of your edge and your performance. That's why I'm proud to bring a partner of the show, Tradzella, the number one journaling, back testing, and all-in-one insights experience created by traders for traders. What Tradesella really gives you is deep insights about your trading that would ordinarily not be visible. Whether it's through understanding your trade types and playbooks or even insights powered by artificial intelligence through Zella AI. Whether you trade forex, futures, cryptos, the stock market, it all seamlessly connects to Tradzella. So there is no additional work. You've seen me reference it dozens of times and all of the benefits I've had in my trading from the insights I found from my Tradella. So join myself and thousands of other viewers of the show. You'll get the best discount using the link in the description or code toot for Titans of Tomorrow. I want to move towards technicals. Yes.
>> Flicking through your book, I can see charts and uh because the audience hasn't gone through it all yet and I encourage them all to do so because we've already referenced a very a few very good chapters. What I'm picking out from the charts is you're looking at reaction lows, you're seeing Fibonacci and confluence areas. I'm also seeing EMAs uh in here. So, I'm curious to see how you build a thesis around technicals for your trade ideas.
>> Sure. And I want to give give you know so much credit and not only do we cover one chapter on Fibonacci, Todd Gordon writes a chapter on Elliot wave analysis and the global macro edge. So I say this with the most amount of difference. I cut my teeth on technicals and as I learn more about the market as a pure student of the market, as someone who is still a student of the market, we should hopefully all of us are looking to grow.
That's why you show up to watch Titans of Tomorrow cuz you want to grow, you want to learn, you want to, you know, sharpen your craft. And so I began on technicals because it was something that I could identify and and resonated with me early and it gave me a place that I could without without compromise define risk. But then how could I further accentuate those skills? So to your question um when I'm looking at risk when I'm looking at Ellie wave principles and I look at Jodapoli Jodapoli specifically identifies inflection points and confluence points.
So what does that mean? All right the market rallies over you know a 3-w week then a fiveweek then a five-month period. What are we doing? We're identifying major turning points we're going to draw Fibonacci lines from.
Okay, it's very straightforward. It's not an end all beall, but it gives you an a point in time of okay, this is likely where this market's going to find a liquidity support point and and generate a reaction. So, let's and again, I don't have the chart in front of me right now, but we can feel free to to take the chart from this book and put it on on your podcast. I don't know. I can't recall off the top of my head which charts there right now, but the idea is that we have a trending market up or down. There are multiple inflection points. I'm measuring multip Fibonacci points and where the where where a 382 Fibonacci overlays with a 618 Fibonacci overlays with a more shallow maybe 786 Fibonacci and there's these confluence this multiplicity of these points that becomes an area where if it matches up with a fundamental narrative. So that trade's worth itself probably on its own. Okay. But that trade becomes very interesting if you have a fundamental catalyst like a non-farm payroll event that misses or you have um a Fed event that comes out or you have a statement from the president on something or there's a Fed governor make a statement. So if you can marry or harmonize those Fibonacci confluence points with other fundamental factors, the system becomes even more robust.
>> So this stacking of um zones or Fibonacci in this case uh would define your confluence area. Correct.
>> And then you've you've marked it out on a chart. this is my confluence area.
>> Then you're waiting for a catalyst in the area to confirm the entry. So it's not technicals that drive the entry.
It's zone for technicals, entry based on the the catalyst.
>> I'm agnostic. I'll go both ways. I'll both provide liquidity, wait for a short-term trigger. I I'll I'll anticipate and provide and also then wait for a confirmation. So it'll hit that price point. I'll start to bid in, you know, with that level. Um again, I want to also monitor what's going on.
Like if there's some crazy news catalyst that happened, well then that can, you know, maybe all bets are off. But in most cases, absent some huge catalyst and it's just doing its price action thing, then I'll actually just bid in at that level. I'll put price points there, I'll structure options around that. Um, and and then if we get a catalyst on top of that, maybe that's something I add something even further. But that that is a vanilla example of how I would use Fibonacci analysis. Now, you overlay that with with some Elliot wave analysis. Of course, what are we looking for? You're waiting for a wave three pullback. Well, does that wave three pullback coincide with those Fibonacci analysis points?
>> Okay.
>> Okay. So now I'm going to anticipate I may get in and then I don't necessarily need a wave three confirmation by by subsequent price action either an ABC correction itself and again my colleague Todd Gordon did a phenomenal job with this. I encourage anyone Todd appears a great deal on CNBC and he's someone probably worth talking to for your show.
But that's at least conceptually from a 30,000 foot level how I would incorporate both the inflection points the Fibonacci levels and the LA wave analysis to go with that.
So, interesting enough, I told you about where I first started, which was NFP, buy, stop, sell, that mess. Then I transitioned to uh Ichimoku Cloud. That was weird place to be in. And then I moved on to Elliot wave. So, I spent a lot of time on this.
>> Um, and a few grievances I had and then I'd like to hear your thoughts. Number one was I could do a count, uh, you know, and then I say, "Okay, I've got my five wave. There's a high chance I'd have my ABC retracements." And then as price would do something else, then you could just recount. And I was like, "Oh, I just I just moved the goalpost here."
And then I was, "Okay, I did this a lot." And then eventually I just had the thought, especially to you your case, when you see price movement or when you're when you're entering a position, you're trying to understand the why.
You've trying to get a fundamental macro analysis on the why. So you want to get the causation and and I feel like Elliot wave is not causing price to move. It's a correlation of price. Similar to Fibonacci, it's correlated zones where reactions are likely to happen. like a bell curve. It's a distribution peaking at the 61.8, >> but it's not the reason price is moving.
I'm curious on your thoughts of that correlation, causation related to technicals.
>> I'm going to throw another C. I'm going to call it characterization. So, you have causation, correlation, character.
>> I'm going to go characterization. I think what Elliot does is characterize the state of price. It characterizes where we are at. Okay. and not and and and what what it's characterized as human emotion, human buy and sell emotion and and and manifesting through the price what ultimately is happening through supply and demand. Is it foolproof? Absolutely not. But at the end of the day, we are risk architects.
We've hit this theme throughout this entire interview. I'm a risk architect.
You're a risk architect. And whether people in the audience want to believe it or not, they're risk architects as well. And so nothing is foolproof. I can find as many fleas and bugs with with Elliot wave as I can with fundamental analysis. And the same way that Elliot wave can kind of take this whole iterative thing and and give you multiple counts and wait what just happened and I thought I was in this count now I'm in this count. Same with fundamental analysis. Well, the fundamentals are still good but well the price is 25% against me. Okay. So every every discipline comes with good things that it does and natural drawbacks which is fine. That's part of paradoxically that's part of why the alpha is there >> because if they all work perfectly the alpha wouldn't be there but it requires a process to vet and synthesize and delineate >> that's huge I think where is the idea of a broken clock is correct twice a day if something never worked no one would believe in it no one would trade it and it wouldn't exist so the fact that it works sometimes is the crumbs and your job is to make it work and find that part where no one else did so I'm curious to know and to op to optimize your view it's layering Fibonacci with Elliot waves and stacking confluences with the fundamental narrative behind it, the tailwinds. Curious to know, would you execute on the the third wave being usually that's the the largest in magnitude and then you're entering before that or are you waiting for the full five count then the ABC retracement and then new wave to come. Are you entering at the beginning or on the third leg?
>> I I think that that's as much as cosmetic as is substantive. Okay. And that may sound like a a weird convoluted reply. What I mean is that either or will work. It's because because I have the macro narrative behind it.
>> If I have a compelling technical setup, either A or B, which you just mentioned, then I'll go with either one.
>> Sure. Yeah. I thought maybe you'd have a preference, but it seems like it's just whatever is presenting for my opportunity. I want to move towards now the legal side. I don't have a single question in mind. All I know is you're the one maybe the only person that has blended fundamentals, technicals, risk in a huge arena plus legal. So how can you take legal as an edge for trading?
>> Sure. So let's if I can just lay a little foundation start at the beginning.
>> So I when I was an 8 n 10 year old boy I I wanted to grow up and be an attorney and I just love the I just love the law.
I love watching Perry Mason like a lot of people. There's a lot of Hollywood that goes on w with with with those of us that watch legal shows. Um and then I was turned 12 and I watched the movie Wall Street and I just at that point in time fell in love with the markets and knew I was going to become a trader. Um, I became a bookie in high school. Um, and I ran a gambling operation for three years. Um, and I helped people prognosticate on the outcome of I provided liquidity for those who wanted to prognosticate on the outcome of sporting events. Okay? And as someone from the UK, you guys can appreciate where sports betting or sports trading has been legal for far longer than it has been in the United States. But but I remember a long time when sports trading was outside of Las Vegas was not legal.
So the bottom line is I spent this career in the markets. I I love the law.
I never stopped loving the law. it. Um, but living here in Las Vegas is a part-time school. Uh, the law school here, UNLV, the Boyd School of Law, has a part-time night program, which allows professionals, which in Las Vegas, there's a lot of people that work a lot of different jobs, especially service industry workers, etc. So, I went back to law school and I didn't know when I went to law school in 2022, how this was all going to turn out. And this is something that Jack Schwagger talks about in the book. And I'd actually gone to Pepperdine for a year as well. And I just my my one year at Pepperdine, I was became so fascinated that I didn't want to just get a master's degree. I want to get a full JD jurist doctor and make it happen. So finally after co all that I go to law school and while I'm in law school I'm realizing wait a second I work in chambers. So I work end up working for two judges in law school. I work for um at the Nevada Supreme Court the state supreme court not the the federal supreme court for Justice Christina Pickerine who is literally one of Nevada's most iconic jurists. She's ruled a number of opinions and I spent three months working under her guidance and working under her law clerk's guidance and I realized wait a second there are mechanisms in place and the way that these these judgments are delivered that create some real alpha huh and then going back to school I then uncovered um that I worked for with the discovery commission and what happens in discovery that's where documents get traded so I literally briefed the discovery commissioner here in the eth judicial district that's Las Vegas state supreme court state court about how all these documents happen and how these things take place. And I realized working in chambers, the way that these decisions get sent out, if you're a high frequency trader like me that scrapes government websites, and now I realize that these jury decisions happen over Zoom and you listen to these sellside calls. The way the sellside analysts ask about the legal risk of these of these companies that are in in major litigation, and a lot of these decisions rely on a jury. some some injunctive relief doesn't but whoa there's a there there's an ability to actually synthesize the law as a major macro input and credit to Neil Aus we believe what we created I'm the first chief legal macro strategist I'm not a legal officer of a firm where I rule on compliance issues or legal risk for the firm itself I actually analyze the law and legal issues from the standpoint of how it impacts company's balance sheets so I'll add one more thing to this all right and that is while getting my MBA I'm finishing up my MBA actually Right now at the lead business school I have an accounting focus. All right. So what does that mean? So accountants will all understand what what are known as ASC accounting standards codification. All right. Did you have a question? I'm sorry.
>> No no I'm listening. Yeah. Rock and roll. So so under accounting standards codification specifically under ASC 450 and the traders out there will get this.
You'll appreciate this entire conversation we've had is about business asymmetry. All right. And ASC450 helps firms address how they report on their 10K and 10Q statements loss contingency. So what does that mean?
What's a loss contingency? Well, it means let's say you're a law firm and the FTC is going to come and and they have an action against you or let's say someone's suing you for intellectual property. Well, based on the probability of that loss happening, because all all firms use GAP accounting, generally accepted accounting principles, you have to acrue for that loss. Well, there are rules that tell you how you acrew for that loss. Let's just think about this for a second. Do I want to give away my hand? Let's say I'm in litigation and I have attorney client privilege. And what's attorney client privilege? This is communications protected between attorney and the client. And so the way that I acrew for this potential loss, it's not a realiz. It's a potential loss can give away information to the other side.
>> Oh, yes.
>> Because if I say, wait a second, we're in this really nasty case and man, we could lose a lot of money here. Well, what happens to settlement leverage of us in that case? All right. And so ASC450, accounting standards codification 450 comes up with three prongs and I gave a presentation on this and and we can talk about this further in future future interviews. And so there's this remote possibility and it says hey listen if it's not so if the chances is remote that this is going to actually be realized against you. You don't have to disclose it on your 10K or 10 Q. If it's possible if it's reasonably possible then you have to disclose it in your footnotes but you don't have to acrew for it. Okay?
meaning you have to actually put it in your earnings. All right. And the last prong, and this is where it gets juicy, okay? Is that if it's >> both probable and you can estimate the loss, meaning yeah, you're not only you not only think you're going to lose, but you can actually tell us what you're going to lose. And that's a two-prongong. And that's that's why it's important the two-prong. All right? Then you have to put that you have to put that in your earnings or crew that in your earnings tink. So if you're going to lose a billion dollars and your current earnings are $2 billion, you must acrew for that $1 billion hit.
Okay?
>> Okay. But let's look at this last prong.
And this is where the traders out there will appreciate this. That third prong I talked about, the first two are kind of meh. All right, but that third prong is it not only needs to be probable that you're going to lose, but you need to be able to figure out and actually account for what that loss is going to be. So what happens if you can't account for that loss, well then the chance of an outlier event if you do lose comes into play because you didn't acrue for it. So very few earnings analysts actually ask about how you've acred for that because and again there are people out there with legal backgrounds but it's very rare outside of the compliance person for the firm itself that's giving their conference call. Okay, and the attorney who definitely help draft those accounting disclosures. All right, very few analysts sellside analysts are licensed attorneys. So, something that we do at Rare View, something that that I'm developing is analyzing these outlier events because if a if a firm now has if if a if if a company has a major lawsuit that implicates their IP or implicates how their business model will work and it's in a state court, which it may be at a state court, that jury decision is going to come over Zoom. And as as someone who worked in legal chambers, I know how to get and how to communicate with chambers, how to access publicly available Zoombot podcasts because I've built scraping technology at the highest level. I can figure out what the jury decision is, what the jury instructions are because I'm not I'm a trial litigator as well.
And so I draft trust and state plan because Nevada I should say to everyone look at getting a Nevada trust even if you're not a Nevada domicillary because our Nevada domestic asset protection trusts are great because if you make $10 million trading but then you give it away because you didn't put in the right domestic asset protection trust Nevada is the place to go. That's a little plug. I won't do any more plugs but that's where so the bottom line is that this mechanism is a synthesis. I understand attorney client privilege as an attorney. I understand high frequency trading. I understand getting edge to market and now what do you do with publicly available information that a lawsuit decision just came out okay from a jury which you never know when a jury can take three days take three weeks take three hours okay and so if you're around when that jury decision comes out can you buy call options or put options on that company ethically because it's publicly available information this is a black box very interesting and very unique I'm curious to know first of all your results and performance in in the Jack Schwea book and everything that's been documented was without this edge without >> I'm curious to know as you've evolved as a trader not only your experience your you've weathered storms and so forth I'm wondering if does this lead to a material edge or or is it just a different edge >> so I have been you know for the most part an event trader and I and I would you know basically volatility targeting around events okay most of the performance you saw in Jack R's book that wasn't the only thing I did but I would adapt strategies and incorporate other strategies as well but principally it was event trading I view this as a subseries of event trading because I'm looking to isolate or target volatility around a decision that that potentially impacts a regime shift of this company's profile.
>> Yes.
>> Okay. And this is an area I think that is still unexplored and could be further developed dramatically because the dislocation, remember that word, the dislocation of information and how to process that information because there are a lot of attorneys out there that hedge funds hire to handle their own compliance. There are a lot of macro strategists that that work at funds to handle larger macro pictures. There are very few firms that have synthesized legal as a as an as a place for alpha.
>> So it seems like most legal professionals in financial institutions are responsible for >> endogenous alpha >> exogenous compliance making sure it's making sure the taxes are right and XY Z we're bringing it endogenously >> I'm making it I'm making it an input into how we decide to buy or sell. Very cool.
>> So, it's indogenous. Yes. It's internal to the market.
>> You've completed a whole degree for this and you got your expertise and background. So, I think it's going to be tough for me to even get something out of this. What I'd rather do is how can someone learn something from you that is relevant and they could apply without having the background legally.
>> Uh, follow me on Instagram, John Netto ESQ. Um, reach out to my email and buy the book and and I'm very I'm very responsive. You know, my law firm, you unit of risk legal adviserss. uh you know and a lot of I think the value I bring to my clients on the legal side is that having spent having run multiple businesses having still owned multiple businesses having constructed portfolios having traded having done that and making that this is you know my synthesis not my not my new career it's a synthesis it's a way to make me even better an even better attorney an even better portfolio manager an even better markets person and you know um reach out you know if you have a real issue I I have a lot of ways to solve it in a team around me the the place I want to end off is give you an open mic because you've got a very unique journey from from military to then now lawyer and everything else in between. Plus you've got the credentials not only the track record but also the the public things like uh the book Jack Schweaker's book you have a abundance of knowledge and abundance of experience. I wonder what would you say to an up andcoming trader as the most effective advice?
>> Take well there's multiple bison and let's not just let's not try and silo it to one. Thank first of all, thank you for the mic and thank you for having me on today. It's been a profound pleasure and I appreciate you guys not only being here with me but but my family to come as well. Thank you so much for that.
It's an experience we'll remember forever. Um and thank you for coming to Las Vegas. We appreciate you here.
>> Community here was great on the mic. I don't know if it'll make the final cut, but she was a superstar on the set.
>> Good stuff. So, so my advice would be is to look at things paradoxically. Okay, by paradoxically I mean take what is your perceived biggest weakness and make your biggest strength. So let's put together an example what I mean by that.
I'm a small trader. I only have 10,000 or 15 or $20,000 in my account. I only have $5,000 in my account. How can I possibly compete? My biggest weakness is I don't have much capital. No, my friend, that's your biggest strength.
You don't have to deal with the liquidity issues that the billion dollar fund does. You don't have to deal with the strategy decay that a firm does for for seven years. You don't have to deal with the same kind of problems of personnel and staff and approval of major boards. If you see an edge, you can get it a one lot or a micro or a mini and take advantage of that and possibly make a living on that because you don't have the same capacity constraints. So, I don't have much money means well, I can find any strategy out there because liquidity is not an issue for me. I can trade the release and even if I get in a two lot from my $10,000 account, I can double that account in a manner that's really not practical for someone that runs a billion dollar account. True. because they're under certain mandates etc. So that's one example of paradoxically find the biggest weakness and make your biggest strength.
>> Very cool. The ability to be nimble and take advantage of alpha is not something I even thought about until I met institutional guys and they said I love what you're saying. I love the way you trade. I just can't do it. It's not feasible and then you realize it becomes an advantage. John, it's truly been an honor to have you on. As I mentioned prior, this is the most prep I've done for a conversation. I had a whole iPad.
I put it to the side because I was just curious and I loved everything you spoke about. I know the audience is going to love it, too. Thank you for joining us, my man.
>> Thank you for having me here. All the best to everyone. Good luck.
>> Boom. There we go.
Related Videos
0:10
Business
Drop the Loser Mentality
houseitlexi
180 views•2026-04-20
1:03
Business
Arrête de louer en Floride Tu passes à côté d’une opportunité énorme !
thierryburtincfde
104 views•2026-04-21
21:16
Business
SINGAPORE UNCOVER INVESTIGATION - Eco Ring Japan luxury goods buying centre in Singapore
PaulPlutaPrestige
5K views•2019-03-29
12:57
Business
Humanizing Data | Stan Lee | TEDxUTAR
TEDx
472 views•2019-03-07
46:32
Business
Mastering the Restaurant Industry - From Dive Bars to Michelin Stars
RestaurantRockstars
118 views•2025-04-06
43:04
Business
Ep. 35: How to Send Lots of Satellites to Space (for Cheap)
crossingthevalley
188 views•2025-03-05
12:40
Business
Ford CEO Jim Farley on the Future of the Essential Economy
markets
56K views•2025-10-04
29:56
Business
Motivating Behavior
GreggU
5K views•2019-11-08
Trending
13:25
Business
Playstation NO DISC/NO BUY Fight Is Over...
DavidJaffeGames
4K views•2026-07-23
16:52
Anthropology
Americans Confused in Australia for 17 Minutes Straight
IWrocker
17K views•2026-07-23
7:38
Blockchain & Crypto
Bitcoin Social Interest: Dozens of us Left
benjaminjcowen
12K views•2026-07-23
11:32
Business
Tesla Profits Plunge & SpaceX Stock Continues Fall
TheJohnJohnstonLounge
6K views•2026-07-23