Automated Futures Trading

Optimus Futures Interviews KJ Trading Systems – Ep 15

Matt Zimberg interviews Kevin Davey, a trader whose sole focus is creating automated solutions for the futures markets. We conducted the interview to explore whether automated trading has an advantage over discretionary trading. Our goal was quite simple: To illustrate that automated trading requires the same level of discipline and faces the same level of risk as discretionary trading. We hope you enjoy the podcast.

Optimus Futures, LLC is not affiliated with nor does it endorse any trading system, methodologies, newsletter or other similar service. We urge you to conduct your own due diligence. There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.

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Episode Transcript

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Welcome to the Optimus Futures Podcast. A place to learn from an industry insider with over 20 years of experience in commodity futures and options. Gain insight to the newest technology, platforms risk management, trading philosophy and advice about the current state of the futures and options markets. For futures trading platforms, deep discount trading commissions, overnight margins and instructional videos. Feel free to visit our website at


Please remember that this matter should be viewed as a solicitation to trade trading futures and options involve substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. Optimus Futures LLC is not affiliated with, nor does it endorse any trading system, methodologies, newsletter or similar service. We urge you to conduct your own due diligence.


Now here’s your host. Founder and CEO of Optimus Futures, Matt Zimberg.

Matt Zimberg: [00:01:11]

Hi guys this is Matt Z. Welcome to our podcast. Today I have a special guest who will talk to us about algorithmic and systematic trading. His name is Kevin Davey. I thought it would be relevant to bring him today because the world of Algos HFT’s is completely taking over the exchanges in all asset classes. We’re talking about stocks, commodities and institutional Forex. So, I thought somebody who has been in trading or an automated trading for such a long time can also give you a perspective he trades his own systems. He builds his own systems. So, without further ado here’s Kevin Davey.

Kevin Davey: [00:01:52]

Oh well thanks for having me Matt. It’s a pleasure to talk to you and your audience.

Matt Zimberg: [00:01:58]

Thank you. So, what I’m going to go through right now is just a bunch of questions. Pick your brain on automation and again, you know I’m very curious to see what you think of those things. But before we get there can you tell me how you got started in trading in general?

Kevin Davey: [00:02:15]

I got started probably the way a lot of people out there get started. I received something through the mail. So this was good old U.S. you know, paper mail it wasn’t an e-mail ad or anything like that, but it was the same kind of thing where it was a pamphlet and it talked about commodity trading and I hadn’t really heard much about it before that point but I read through this pamphlet which showed how much money could make trading and in particular it showed the sugar market which had recently gone through this huge bull market and the approach that this person was taking was well if you bought near the bottom based on a chart pattern and then kept adding up, you’d probably have millions by now. And you know the funny thing was I saw that I was like wow this is great. You know you can actually make a ton of money and not have to work that hard. And of course, this pamphlet didn’t really talk about the risks involved and didn’t say well yeah that this hypothetical example has maybe 100 contracts of sugar on and every time the price would drop you go through this horrendous draw down. I only saw the good side and I remember buying the course because they had the money and it turned out it didn’t work. And I was able to get my money back. But at that point I was hooked. And ever since that point I’ve continuously just looked for new ways to trade commodities in the futures markets.

Matt Zimberg: [00:03:58]

Understood. The funny thing is that the same pamphlet 20 years ago to it was all mail. I think that person were talking about every person in the United States. So, you know right. Everybody was at the time we know we are talking about and those who received it at the time know who we’re talking about that as well. But I understand that it was pure promotional hyping futures and commodities and you could have made this, and you could have made that. Again, like you said without talking about the risks and the drawdowns and the leverage. You know it’s just it’s all on hindsight. Having said that so at some point after you’re trading it I understand you started taking interest more automation. So, tell me why did you switch to automation from discretionary trading? Because I believe you started as a discretionary trader, right?

Kevin Davey: [00:04:57]

Right. I mean I was trying a lot of things way back then. So, I would. Look at chart patterns and see if that worked. OK. That didn’t work and then I would just try going by feel or intuition and you know a lot of people out there chart their feelings and “Oh I you know I feel good that the market’s going to go up today, so I’ll buy into anything” and I went through that and lost of money. There were up probably ten or different ways that I tried that lost money and the one thing that kind of stuck with me though was whatever I did I should really be testing it first. And making sure that it worked. You know I realized that just because it used to work five 10 years ago and even up to the current day doesn’t mean you keep going forward. But all things being equal I kind of like my chances with that that hey I’ll come up with rules I’ll test the rules see if they aren’t. And if they did there’s a reasonably good chance I felt that things would work going forward. And so that’s kind of how my trading evolved to this kind of algo trading. But way back then it was more called system trading or mechanical trading. I’ve heard it called Rule baiting but the whole premise is you get rules you test them and then going forward with it you trade to those rules. And that kind of lends itself to the whole automation part of it where once you have those rules defined and you know in computer code relatively easy with most trading software to click a few buttons and then all of a sudden it will execute orders for you without you having to do really anything you know except for probably like rollovers of futures contract and that kind of thing. So, it’s automation becomes a nice way to take that final step with the system or rules that you developed and programmed and tested. So, it all kind of ties together which I found very attractive.

Matt Zimberg: [00:07:13]

So that, you know I’m listening to you. That leads me to my next question which I hear from a lot of people and they see comments on blogs and forums and a lot of people say if my system was automated I would have been a been a trader. So, if someone is not doing that well in discretionary trading does automation always help them?

Kevin Davey: [00:07:38]

No! I would say a lot of times probably automation might actually hurt them if they’re discretionary trading isn’t going good. It really comes down to figuring out why being is not going good. And what I see with a lot of discretionary traders that I talked to is that they’ve never really tested their method. They have an inkling or some kind of feeling that it works but they’ve never really tested their method. So, a lot of discretionary traders like trading quote unquote “price action”. And you know if you talk to them I’ll say well I trade price action I look at a chart and you know I look for failed high, failed lows and you know they look for certain things. But when you try to get them to put that into rule any variables that they can never put it down to concrete rules. Oh well I wouldn’t have gone long here even though the last eight times that happened I would have done it. That’s what they say, “you know I wouldn’t have done it here. And oh, of that trade turned out to be a loser”. You know I see that a lot. So the discretionary traders that can make good use of automation I think are the ones that have rules that can be defined and then it’s just a matter of programming those rules and then letting the computer execute the buy and sell signals a lot of discretionary traders just can’t do that or don’t want to do that because they’re afraid of the computer overriding some of their judgment. You know I used to see my own trading where sometimes the best trades that some of my system seemed to be the ones I feel most insecure you know the most unsure of. Those tend to be some of the best trades which is completely against what discretionary traders think.

Matt Zimberg: [00:09:41]

Right. That’s actually a very good point because a lot of people rely on this thing that I stopped believing long time ago you know which is intuition. There’s a lot of psychological issues you know whether it’s you know confirmation bias, short periods of time of testing you know, seeing what you want to see the results and when it comes to automation you know my next question is do you have to take every signal in automation and what are the pitfalls of being selective? Because and again basing it on your intuition is very interesting what you said because you know what the trades are the least sure of can work better than the ones you’re sure of in discretionary trading. So, in automation, how do you apply it? Do you take every single trade? And if you don’t take it how do you base it outside of intuition and being selective?

Kevin Davey: [00:10:37]

Well I might be different in the way I do it. So, my philosophy is you trade live what you’ve historically tested. So, if you’ve tested where you’re always taking trades and relying on intuition then that’s definitely the way you should trade live because you have this presumably it’s profitable. Why would you think you can overrule it? You know to me get to defeats the test the purpose of testing. You know why test it if you’re just going to overrule it that being said I said I’m kind of unique. I’ve talked to other algo traders and some of them do turn systems off. Now they don’t necessarily turn them off because of intuition but they might turn them off because there’s a specific news event coming up and they just want to be out of the market to give you an example the Brexit years ago. I know people who just turn their systems off before because it was so much market uncertainty and they were happy with the result. Personally, I kept going and I got creamed. I got nailed over Brexit right after Brexit. I lost pretty big but then I kept everything going and in the next week or, so I had actually made all that money back. So that was a good situation where I just trade the systems and whatever happens. It’s hard to do to not want to overrule it and kind of use your intuition. And it’s not to say you can’t have this version of algo trading where you don’t do it, but most people I think it’s not a good idea. And for those of you who may be thinking of doing that the one thing I would do is record everything be pretty rigid trading if you’re going to do that of “hey here’s all the trades I took that I overruled because of intuition and you know here’s my results. If I would’ve just followed my system and done nothing and here’s my results with my intuition” and I think what most people will see that their intuition over the long run hurts their results. They might not remember it that way because you know psychologically you tend to remember your losers and forget about your winners. At least I do. But a one way you could use intuition. But for most people it’s better just to trade exactly and not try to second guess or try to do better than it. That seems to work the way I would tell most algo traders to do things.

Matt Zimberg: [00:13:26]

I agree with you. I think one of the problems that traders go through whether the discretionary traders or algo traders and that’s when the emotions kick in. It’s during drawdown periods you’re very unique because you program your own programs. You do it all yourself. But people come up with ideas that might program them but they don’t pay enough attention to the drawdowns and when they occur every system goes through a drawdown. There’s no thing of a straight-line teachers at least not one that I’ve seen in even riskier strategies in action writing that would have severe drawdowns. But essentially, they don’t take that into consideration when they trade systems and that’s what I mean. They override it sometimes with intuition which they think is good. So, they have a few failing trades you see drawdowns you know they shut it off and then they think they can turn off in the better period and this mix of back and forth you know basically this could potentially lead to a good method and a good system not leading to good results. So, having said that in your opinion. OK, this is I want to give my listeners a little bit of a new perspective. So, what specific discipline is required in automation that does not take place in discretionary trading? Is there some something unique to an automated trader that in a discretionary trade it does not go through.

Kevin Davey: [00:14:59]

Well there’s probably at least a couple of things. I mean the biggest thing is if you want to automate your trades and you want to go that route be able to program them in whatever trading platform you’re using. So, you have to be able to define your rules so that a computer can analyze it and say buy or sell without you having to interpret charts, interpret volume levels you know in order Matrix or something. You know the order flow type thing you don’t want to have any input to it. Your input comes beforehand, and you have to be able to do that. You have to be able to program and if you can’t probe somebody to program it for you. You’re in a lot of trouble. So that’s like probably the biggest part with doing automation and the second part is having the psychological makeup to be able to let go like that. And you know I hear it over and over and I could give you a bunch of stories if we had the time of people who had what are seemingly good systems that they’ve programmed in. So, they’ve got the programming part done and they’ve created a back test that that looks good and it’s reasonable and they followed all the proper steps to execute the system and turn on that automation. They can’t help themselves by turning it off and you know kind of like what we talked earlier. They just they don’t have that psychological makeup to just let go and trust their system. There’s that lack of trust so those are just things for anyone who’s more of a discretionary trader of why they fail. The funny thing is a lot of people, I’ve heard this a lot where people will say “I’m going to automate my trading because then I’ll trade without emotions”. And every time I see it that I kind of laugh because it’s the money that brings the emotions as long as you have money on the table you’re going to have emotions whether you trade discretionary trade automated or some other hybrid way of doing it. There’s going to be emotions involved. Emotions don’t disappear because it’s automated. It’s different than a discretionary trader. You know what. Look at a trading. Ooh. Should I take this trade or were you know it looks like a good pattern. You want to have that question, but you’ll have a question like. Should I take this, you know I turn this system off because the last four trades at last and you know maybe the system now is broken. Oh, you know it drives you crazy. It can drive you crazy. So, the emotions definitely are still there just a little bit different when you automate. But the big thing as long as money is involved and even of those few people where the money doesn’t matter. My response would be why are you even trading in the first place. You know if money truly doesn’t matter. I wouldn’t think you’d be trading. Ultimately, we all like to say the money is a byproduct of doing things right. And that’s true but the money is absolutely important and that’s why we do it. So those are the big things with automation versus discretionary approach.

Matt Zimberg: [00:18:28]

I see. I agree with you. I mean I’ve seen it happen many times too. It’s a lot of people. You know there’s people out there that had the net worth and I don’t think it would have affected them even more so in their system. It did use to raise capital and they still have the same issues of turning it on and off the trading methods on and off instead of trading them consistently. I guess it’s a think you know from just my observation over the years I see people change methods over time. And they don’t give one method enough time whether it’s discretionary or automation. They have this idea that a system or some sort of a discretionary trading generates a certain level of income per month per week. They don’t understand equity curves are the same they don’t understand some of them fully understand and read it. And yet when it happens in their account it’s hard for them to digest it. It’s hard to digest the fluctuations. They have this they have this image of their months you know certain level of income coming in when it goes flatline or goes to a losing streak. That’s where all of a sudden, they start thinking with their emotions and they override them with their decision making. So, I agree with you. You know I see that in both of them at the end of the day it’s a different discipline that has to be applied. You turn it on and off and then in discretionary you have the trader not the trade. So, it’s interesting. So, let’s assume that you have a system that you want to automate but most people don’t have programming skills. So how do you go how do you go about it? Now my understanding is that you do program your systems, right? You do know coding.

Kevin Davey: [00:20:16]

Yes. There’s a couple of ways to go. If you want to program you know obviously you’ve got to get the rules into the computer so you can either program yourself or you can hire somebody to do that now really a lot of the trading software that’s out there the programming of it isn’t so hard that it’s impossible to do. I mean there are some platforms that are based on some pretty detailed computer languages that take a little while to mask. There’s also some platforms that are pretty simple as far as the route you know the programming language. Anyone who’s ever programmed say even going back to like Basic which is an old language but if you have some experience doing something like that chances are you could program in a lot of the software languages that are out there. It is difficult as a lot of people make it out to be. But at the same time, it’s something you do in 10 minutes and then all of a sudden create your rules and then be done. So, it does take a little to figure out which language you want to use and that depends on the platform you’re going to use because every trading platform has a different language. The one trick that might help everybody is if you get a copy a recent copy of the magazine Technical Analysis Commodity’s, well-known trading magazine. Usually what they do every issue is they’ll have one either indicator or system that they make an example out of and have it programmed in 10 to 15 or so, I don’t remember the exact number, different platforms where you can either get it from the magazine or you go to the magazine’s Web site and you can type it. You know you can download it and you can look at the different code. And what I always tell people is well take a look at whatever system it is the system doesn’t matter. What matters is how the programming looks to you and if it looks like foreign language written by aliens and you can’t follow it and can’t understand it at all that might not be a language for you. But if you see one where you follow along and sort of understand what they’re doing that might be a language of language and then therefore a platform that could fit you and you might be able to kind of click with and follow. So that’s something I recommend for people wanting to do it themselves. The other neat trick with programming is depending on the platform in a Google search will help you determine this. You can find tons of example code out there or different systems you know like moving average across, typical stuff but there is a lot out there and I know people who actually taken just what’s out there and then they just start modifying it a little bit at a time you know.

Kevin Davey: [00:23:35]

So, they don’t have to program them something from scratch because that’s intimidating. Nobody really wants to do that. A lot of people will just take what existing out there and just modify it and then test it and kind of go from there. So that’s a pretty easy way to learn the language without really having to program from a dead stop all the time. So that’s the preferred way to go with program now I think you want to be able to program use your ideas and your ideas yourself. The other thing you can do is you can hire a programmer and for some complicated things that might be a route to go with the problem you run into then is you’re going to spend a lot of time just helping the programmer program your strategy and that comes at a cost too because any time you want a little change you send it to the programmer and now it takes him a week to turn it around. And then he’s going to charge you more for it. And then what happens if that idea tests and it’s off. Well now you’ve got a program something else and send it to your program or you could end up filling a programmer’s dreams file. Honestly because you could just give him stuff every day and pay him to program, basically systems for you to test that turn out to be junk. So I would kind of keep programmers in your back pocket. If you can figure it out how to program something and you can’t get help from the trading software help people, there’s a lot of support forums out there then maybe what you want to do is get a programmer to do the really tough stuff. You know the other thing I found which is kind of related to that. If you’re programming something, it’s so difficult that you need a programmer. Chances are it is too complicated to actually work in real time. I’ve seen people with, one maid 30,000 line load in their strat trading strategy and they it works great in back tests it produces a smooth equity curve, but it never works in real time. Simple things usually work much better in real time but of what you said Matt before systems that have drawdown immediately when people back test they see those drawdowns and they I can’t have that. I need to add some rules and so they complicate the system. And you know by programming it themselves and that’s not necessarily the way to go either.

Matt Zimberg: [00:26:30]

I agree with you. You know I find again this is just from talking to our customers and programmers at the same time. So, they both give me input. You know how they approach things. So, from the programmers you know a lot of them tell me that people come to them with half the variables that they need to build the program. So, they need to sit there interpret the missing part the part for example of risk management. Like they’ll tell them I have the signal you know that I need to be programmed in the program go. He says okay I’ll program it but that’s not a system you know and then they come back to the programmer and they say I want my money because it would make the money the problem that it’s my job right. Right. My job is just to give you the signal or they say you know look you I have all the components for a system you’ve got an entry exit you know risk management all those things. So that’s from their side. And in a lot of people like you said they have to define the rules specific rules. Right? And you’re a hundred percent are so right that when they back test it in those systems there’s these drawdowns they start adding all kinds of variables. If somebody approaches a programmer with only he let’s say you know two thirds of what needs to be in the system he opens himself up to the interpretation of the programmer of the missing part and a lot of the programmers are not traders meaning that there are just programmers and I’m not belittling their skills but I’m just saying sometimes they have theoretical ideas that now they have to turn into practical ideas. And the person you know says OK let’s do it. But that’s not his method that’s not his risk tolerance. That’s what he wanted from the place. So, you know I find that people when it comes to they didn’t approach that working with the program the right way either. It’s just from what you know is my perspective right that.

Kevin Davey: [00:28:31]

I fully agree.

Matt Zimberg: [00:28:32]

And I’m sure some people came to you and they said “I have a magical moving average, right. Can you program it for me”?

Kevin Davey: [00:28:40]

I get that every once in a while.

Matt Zimberg: [00:28:41]

I’m sure you do.

Kevin Davey: [00:28:44]

Yeah, it’s a lot of it. You’re right it is it’s kind of a half-baked idea and it might be very good.

Matt Zimberg: [00:28:51]

Agreed. Let’s move to the you know to do a little bit more of a general trading world right now. Tell me do you feel that HFT’s and Algos affect traders today? In what way do they affect them? Meaning that there are people out there who do believe that because of the way HFT’s and Algos operate it prevents them from being profitable. I wanted to know your specific perspective of how you deal you know as an individual trader in the world that is dominated by Algos and Hft’s.

Kevin Davey: [00:29:36]

Well you know a lot of the things that are out there you know the bigger firms the results they publish say they’re making money. They usually say they’re making money almost every day or whatever. And you know in the futures world just any market by itself it’s as though which means every dollar that’s made by someone is lost by somebody else. So, all these H.F. teams are making money. You know that money is coming from somewhere. So, I do think that easing the algos the high speed algos that are out there do affect every trader. I think where you’ve really seen this is a lot of the traders who like to scalp for a tick here tick there and you know. That’s what they’re happy with. They get hurt more because now they’re doing more transactions than a swing trader and these algos might be jumping in front of them and pushing the price up a little bit so now all of a sudden what used to take maybe a one or two tick movement for these retail people to be profitable as a two or three tech movement. So, you know it just makes life harder for them. And so, what I usually tell people is yeah, the algos are out there. The HFT’s are out there. They’ve got all this infrastructure to do things high speed you know you’re not going to beat them at that trader. You just can’t. You don’t have the resources. They spend millions and millions of dollars making sure all their set up you know their computer they’re link to the exchange and all that is running faster and anything, so they can get in. So, we can’t really compete as retail traders in that particular realm. But what you can do is go where they’re less prevalent and lot of for example a lot of the trading I do is more swing trading a system maybe 50 times a year. So maybe one trade a week and if you think well OK the overall effect of high frequency trading is maybe a cost you a tick or two more per trade. Okay we do 50 trades a year. That’s not a huge amount to pay but if you’re doing 50 trades a day and every time you’re getting penalized in extra tick or so by these high speed algos that adds up and that’s hard to overcome. So, the answer you know I know there are market player and so they are pushing things so that they can make a profit and a lot of times that profit might come at the expense of smaller traders or just you know the whole rest of the trading world. But that doesn’t mean all hope was lost and you know we have hope as retail traders of making money and then we still can. It’s just you know the game might be a little tougher.

Matt Zimberg: [00:32:52]

I agree with you. I think you know the markets like over the last 100 years institutions always had an advantage over retail. HFT is just one of them. Sometimes they had more knowledge. Sometimes they had speed of information. A lot of back when I started there was research that’s available only to brokers and now it’s available to retail. But I think retail came very along long way. You know in terms of speed and execution platforms the ability to program your automation all those things, so I always remind retail traders to look at the advantages that they have and like you said no go not to go head to head with HFT. Like you said scalping strategies and things like that at least they should know that you know what they’re up against. A lot of people in the retail world sometimes, I get e-mails and say, “I trade high frequency system” and they don’t realize that HFT relates to time frequencies time. So, it’s speed of execution not the frequency of trading that they actually do. So, I tell them you’re a scalper. You might trade frequently but you’re not HFT yet. So, we talked with each of these you know in the last year we actually just a few days ago we had major corrections I think the Dow corrected 1600 points. At one point in today’s unfortunate event the February 5th where we had market I think it fell a thousand points right after the close on the Dow. Do you think that those market corrections are larger because of algorithmic trading? So, we see bigger corrections today in the market and people should really focus a lot more on risk management because of that component of computerized trading.

Kevin Davey: [00:34:40]

Yeah, I mean that’s a great point. I’m sure that it’s due to that cause those corrections to be a little more severe or quicker than they used to be. They certainly it seems like the markets and not just the stock market but also the futures markets that they just have these rapid moves that could be due to algos that could be due to just different players than in years past. But the reality is you know it’s there. And whatever the cause you have to keep an eye on risk management a little bit more just to make sure that if there are these kind of rapid quick actions and quick upswings because I’ve seen it go to the upside to where things just take off that you have to be aware of it you know. And you know some of it too could be related to news cycles where you know now as soon as something happens you’re hearing about Twitter. So, there’s not a delay like when a news event would happen it would take the market, a little bit to digest and you know make its move. It happens instantaneously now there is a there are a lot of algos out there that go off news that just read a news report and make trades which happened that couldn’t have happened 20 years ago. The technology just didn’t exist. That part and I think the other thing that algos might be causing too is just most markets. If you look at the prices over the past few years a lot of market volatility has actually gone down. So, somebody listening might say well wait a minute you just said they’re sharper corrections. That would imply there’s more volatility. Now you’re saying there’s less of what’s going on and it actually is both where the upswings and downswings can be much more dramatic. But at the same time over time the volatility just isn’t as high. You know if you look at just a lot of people use like Average True Range kind of as a proxy for it. If you look at some markets out I’d say like soybeans or something you know the volatility the daily movement and soybeans 10 years ago was a lot more than what you’re seeing today, it’s just about half of it. There used to be a lot more movement now is that due to algos because everything is just happening more quickly but, in the end, I think the big takeaway is regardless of algos causing it or whatever, but the markets are constantly changing, and I think that’s the big thing. So, you know we talked about want to have a back test that’s historically tested at the same time you also have to realize that the history might be different. A good example I add in my first book that I wrote back in 2000 I wrote it in 2013 it came out in 2014 and in it I had a couple strategies for the euro. And wouldn’t you know about six months after the book came out those systems they didn’t fail but they just kind of went to sort of a breakeven that where before they were profitable. And when I went and looked at what was going on. The one thing that had happened in that period of time was the euro volatility went to like historic lows. So, this was something I never tested for in any of those systems. So that’s one of the key takeaways that people were looking to do algo systems and build those kind of things is you always get to keep in mind that the markets might change a whole lot and that could impact your results too. Not just building systems correctly but just the way the markets change over time.

Matt Zimberg: [00:38:59]

I agree. One thing I wanted to add to what you said on top of the algorithmic trading, the financial community as a whole in events financial products all the time there’s always new products for example you are talking about volatility that you know this has gone down in the last two years. It’s reflected a lot of measures. But I agree with you it has come down. So, they created for example one of the events that happened on February 5th it had something called XIV which is a fund the trading day that was trading the opposite of you know it had an inverse relationship to the VIX is as the VIX went down. You know those the value of the fund has gone up. I think at the time, if I’m not mistaken, was about 2 billion there. So, the minute that by the way the prospectus of the fund it actually said that it could go to zero in one day. I don’t know why anybody would invest in something like that but that’s a different story. It’s a little print but essentially you know it was going up for many years. So, when this thing collapsed you know the VIX spiked 150 percent debt affected obviously the value of the options which the VIX measures that led to the decline of the future. So, I think today you have so many, it’s not so much that you know algorithmic trading firms are affecting the market per se, but I think it’s all the algorithmic products that were created across the board that just affected one another and it’s like a domino effect and I don’t think we’ve seen that before. We haven’t seen that many you know funds and since so many institutions that give you an example in Florida. So, there’s a thing called Disaster bonds. Right. So, there’s disaster bonds pay a very high yield unless there’s a disaster that occurs and then the principal gets wiped out and then everybody goes to cash. So, endowment funds, mutual funds, like hedge funds you know they carry those kind of instruments and when the disaster hits the turn everything into cash. And that even if their equities futures are anything they go flat. Right. And that thing kind of affects. We always hear the news all they have to attach some sort of a variable. But they have to attach a reason to say something is happening. But it’s not always something that is really known. It might come out months later. What caused it or anything like that. This is huge variety of financial instrument that’s difficult to solve and you manage your risk and you have to know that you’ve got to be able to go in and get yourself out as soon as possible. In case you see something that you haven’t seen before and not try to figure out why things like that. But then again that’s mismanagement. My next question to you is what is the next gen of trading? Is it artificial intelligence? How do you see trading evolves from here let’s say? A I know it’s a very hard question, but just from assumption based and involvement in algorithmic trading, where you think you know the retail is going or institutions are just trading in general what do we see the next advances in technology.

Kevin Davey: [00:42:19]

Yeah, I mean that is a tough question. Tell you a lot of people seem to think that soon enough all trading will be done via computers with no human intervention. And so, a lot of people are looking at artificial intelligence and you know people talk about big data and machine learning. They get a lot more questions about machine learning now than I did or five years ago. And I suspect that will only increase. And there’s also a ton more people involved in trading than it was maybe five years ago even. But certainly, compared to 20 years ago when very few you know there was only one or two software platforms that could even do it. Now there’s tons of different software platforms there’s a bunch of companies out there really encourage people to develop systems and they work with them. So, there’s a lot more. I think there’s a lot more competition because everybody’s thinking they can do it. So, the future of all this is probably I don’t know which way it’s going to go technology wise. You know I’ve looked at some machine learning type things and you know they kind of scare me because I see people doing a lot of things with machine learning that just doesn’t seem to apply to trading. It’s one thing to use machine learning to look at causes of cancer or cancer treatments for example where you can study cancer. You know cancer isn’t necessarily going to respond to how people are analyzing it, compared to the markets where the markets the way people are analyzing it because it involves all these people making all these decisions so it’s a whole different thing. So, where machine learning might work for diseases and stuff. I don’t necessarily know if it will work right or finance. Maybe it will. But what I see is a lot of people doing things incorrectly and they’re still making the same mistakes whether they’re using standard programming or artificial intelligence or genetic algorithms machine learning all this stuff. They’re still developing systems incorrectly and there’s still overfitting you know trying to make this perfect data and perfect equity curves and no drawdowns and that kind of thing. And that’s I think as long as humans are involved in the decision-making part of it I think you’re still going to have that. And on the flipside let’s say that artificial intelligence takes off and most of the trading becomes artificial intelligence driven just by computer there still might be some little pieces that retail traders can take advantage of that are going to be just too smart for some of these big hedge funds are doing all this research. They just can’t deal with certain markets or certain conditions. So, you know a lot of times they have to build up these huge positions where you and I can maybe go in with one contract five contracts and not have to take over the. As far as the position. So, I think there always be some room for retail traders but at the end of the day I do think things are tough today and I think tough tomorrow or tougher and they’ll be tough five years from now. You know I I’ve been time about just over 10 years and I can tell you it’s I don’t feel like it’s that much easier today then it was 10 years ago. It’s a constant struggle. You know it’s almost like if you’re a professional athlete and you’re on a team. If you were good last it year doesn’t mean you’re going to be good this year because there’s are you even get to a position because there’s always new people coming up, you and things are a little different training different. And they’re there to take your job. And you know in the case of Algo traders those people are there to take the money that you were trying to take. So, the competition always going to be there. Maybe it will get tougher with the next generation. Maybe it won’t. It’s hard to say.

Matt Zimberg: [00:46:56]

I agree with you. I think you hit the nail under the keyboard is evolving right. So just like the industry evolves. Traders have to evolve as well. You know I hear sometimes people say you know when I’m invested in my indicators sometimes it’s indicators from a third party you know they’ve been looking at them for five years and they said I’m invested in them. That’s the one thing that just never sits right with me to say things like that. I understand with the coming from within the same time. I always say when you say things like that that’s exactly the opposite of what a trader should say the traders should always be flexible always look at the environment. Not necessarily saying you always have to change your method inside and out but always think about in the context of the market what you can do to improve things and keep on going your way. And you know the interesting thing is that I have books that are trading in my house from the 20s, 30s, 40s and I also have recent ones that did you know that I try to read that came out recently. I’ve got to tell you pick up a chapter of discipline from the 40s in a chapter about you know discipline was something that was written last year. I challenge anybody to tell me which year it was but which one was written in the past until now very hard to tell the always talk about the same thing. So, the fundamentals really didn’t you know didn’t change as far as discipline evolving as a trader. Back testing it you know, and this is honestly this is why I want to bring in somebody who applies it in an automated manner which is always very interesting. That is, it. Kevin, I don’t have any more questions. Any final words to our traders out there.

Kevin Davey: [00:48:37]

Really if you’re interested in an algo trading, I mentioned my book earlier which is that’s the second book I wrote which is: Intro to Algo Trading which if you don’t know anything about algo trading just wanting to get some real basics that might be a good book. It’s an hour or two it’s real short but I tried to make it because so many people would ask me “Well how do we what is it? How do I get into it?” And this is a real simple book and it’s kind of funny because there’s a couple of one-star reviews on Amazon in this one-star review said well this is a good book as an intro. Which is exactly what it is so I’m like “Well I think I did my job.” So that’s a good place to start. I also wrote a book back in 2014 which I mentioned earlier it’s called: Building Winning Algorithmic Trading Systems. And that’s for the more intermediate to advanced trader. You know it kind of goes through the process I use. It also gives you more my trading story and so that’s something for people to look at it, so you know that’s one thing I would say, and the other thing too is for people out there looking for either education or brokers or something. Be skeptical and try to establish some trust with whoever you’re dealing with. So, for example you and Matt, have been talking on and off for I don’t know how many years six, seven years at least. And the thing now is that trust me about you is you are a truthful and you’re down to earth and you know you say something and you follow through and so many people out there don’t do that. You’re just a number to them and you know they don’t care and if you need help well too bad. You know once you deposit your check you know that that’s the last you hear of her and that’s huge for people who do need some help which especially in the beginning just about everybody. And that is what I’m telling your listeners is look for people that you can trust and you’re not going to be able to see that from a Web site or an e-mail that you get from somebody but over time it becomes apparent from talking to somebody whether it’s in person or via e-mail or looking at their blog of who is just putting BS in this industry and who is really looking out for you and you know just as an example Matt put you in the category of hey you’re looking out for people you’re not in it to make a quick buck and you know I have people drain their accounts and give you a lot of commissions and that’s huge because trading is really hard. And anyone who tells you the I think it’s a line and they’re lying for a reason. They want some I want your money. And you know the people like you are truthful and say hey it’s kind of difficult. You’ve got to listen to me. That’s the big thing I’d want your listeners to understand.

Matt Zimberg: [00:51:48]

You know thank you. I feel the same way about you. I think during our years of communication I think you always pointed out to the challenges that there are in training. So, you know I say every vendor you know attracts the type of customers or the type of people that think along the way that he or does. So, for example you know my approach has never been euphoric trading you tell people about the challenges which strives to be perfect. We’re not perfect but we strive sometimes you know I fall behind. But I try to catch up on things that I promise. But my approach is always to tell people how the reality of trading because I find that those people will think the same way as I do I think they will trade for many years to come. And they think you’re doing the same thing for your customers you’re talking to them the challenges of trading and sorry I’m still laughing about that one star review you got and it says this is an intro and the title of the book: Intro to Algo Trading. OK. But I think you’re putting very good content out there as well. That will help people in the longer term it makes them think. I think most people you know it’s interesting you said how you started back in the day from a pamphlet you picked it up. You were interested in commodities and a guy was obviously hyping it and hype is an understatement to the product and then you said OK hold on let me move look at the variables. You know this is not easy, but we’ll see how it’s done right. And I think you just have to guide people in the right direction you guide them in the right direction. I think they can. They’ll be able to make intelligent decisions. I always say the customer is always right if it’s given the right input. So, we don’t make decisions for customers, but we definitely want to give them all the right input. So, to everybody out there please go to Amazon and to Google Kevin Davey, Intro to Algo Trading, find his books out there. Definitely highly recommend it. I wanted to thank you for your time and I hope you’ll join us again in the future.

Kevin Davey: [00:53:54]

All right. Thanks Matt. Enjoyed talking to you as I always do. You’re a good guy.

Matt Zimberg: [00:54:01]

Thank you. I fell the same way. Thank you and to our listeners thank you very much. You can check out our site at and I look forward to hearing from your and earning business. Thank you, Kevin. Thank you, Jake, as well for helping us with the recording. That’s it for now. Thanks.


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