The man teaching the traders how to trade

Yogesh Chandarana talks with hedge fund manager and trading guru Lex van Dam about competing with computer algorithms, and what to expect from CityA.M.’s 2013 Active Trader Conference

How has the trading world changed since you spoke at last year’s Morning Wire Active Trader Conference?

Last year, the theme was risk-on risk-off. Now markets seem more fundamentally driven. This is a good thing since traders will be rewarded for making the right decisions.

But some things haven’t changed. The stability of financial institutions is still a concern – as highlighted by recent events in Cyprus – which also raises the issue of counterparty risk. Against that background, political risk still lingers too.

How should traders manage these risks?

Traders need to be aware of them, and understand how they can move asset prices. The underlying current of the market can change quickly. Sometimes it is about momentum, then the focus moves on to carry, then to risk-on risk-off, and then it can return to fundamentals.

Top traders are adaptable: they learn how to recognise these changing themes and position themselves accordingly. For example, if the value of the dollar increases, is it because of risk-off, or is it because the US economy is improving? A lot of this comes with experience, but it can also come from being taught properly about what to look for.

Part of managing risk is psychological. We can all be prone to irrationality, and go through difficult times, leading to mistakes. But you need to learn how to manage your emotions so you don’t lose your sanity. It is a mental game. So traders must be prepared to continuously develop themselves and learn. Practice makes perfect, but bad habits must be eradicated.

Is it currently better to focus on technicals or fundamentals?

Both can be profitable, and I prefer to combine them. But nothing beats having good, original trading ideas. I f you have a bad idea, no amount of analysis can save you.

You should always be on the lookout for new ideas, and for opportune moments where they may work. It comes through watching how markets react to certain events, and takes practice. In that sense, being a trader is a lot like being a striker in football. You prepare by going to training, improving fitness levels, sleeping well, along those lines. And when the moment comes in the actual match, strikers need to take the opportunity and score – it may not come again. Good idea generation helps traders to prepare for success in the same way.

What is your advice to new traders?

They need to work hard and be tenacious. They need an ability to get up again after losing money – despite theoretically doing the right thing. They also need a good sense of humour because markets can be cruel and unforgiving.

So new traders should mainly be focusing on sticking around, and not blowing up. Don’t try to do too much too quickly. It takes a long time to learn how the market works.

Most traders fail because they try to make money too quickly. They are in a rush to prove themselves, and take on too much risk. It isn’t gambling. Good money management is paramount. Build your account slowly; if you aren’t losing money, then you are doing a lot better than most retail traders.

Trading is a competitive arena. With the smartest minds in the market, making money is not easy. And now, you are also competing against computer-driven algorithms, which can have a huge impact on price movements.

How do traders compete with these computer algorithms?

You need to be aware that they are around, because they can shake the market. But most traders cannot compete with them at all. They have completely changed the structure of the market.

It means that you have to constantly look at your trading strategy. Recognise that some strategies that were relevant a couple of years ago may now be defunct. When the environment changes, you must too. I’ll be talking about these sorts of issues at the Active Trader event.

What will you be talking about at this year’s Conference?

There will be an emphasis on the foreign exchange markets. I recently produced a new course called 5-Step-Trading FX, but I will be talking about many more practical things that traders need to know. So there will be a lot that both experienced traders and novices will be able to take away from the day.

Lex van Dam is a hedge fund manager, author of the book How to Make Money Trading, and the creator of the TV series Million Dollar Traders. He is also founder of an online trading academy – www.lexvandam.com. He will be speaking at this year’s Morning Wire Active Trader conference on 21 June 2013 at The Grange Hotel, Tower Bridge, London E1 8GP. Early Bird Tickets are now available for just £45 from www.CityAMactivetrader.com

CV: Lex van Dam

Company: Hampstead Capital

Year founded: 2007

Assets under management: $500m (£326m)

Age: 44

Trading focus: Equities, currencies, and derivatives.

Born: Drachten (a small town in Friesland), The Netherlands

Studied: Econometrics and Investments at the Rijks Universiteit Groningen

Work experience: 10 years at Goldman Sachs, 2 years at GLG Partners

Favourite business book: Rich Dad, Poor Dad, by Robert Kiyosaki

Motto: “Never complain, never explain”

First ambition: To be a professional footballer

Awards: None that were important enough to decline or remember

Heroes: Those who take physical risks on behalf of others