Building Complex Trade Strategies On Simple Trade Rules | Investing With IBD
[Music]
hello and welcome to another episode of
investing with IBD podcast it’s Justin
neelson here your host and joining me
today on April 24th 2024 we’ve got one
of the stock market Wizards it’s Tom
boso he is uh he was featured in the new
stock market Wizards by Jack tagger and
he is also founder of enjoy the ride I
should also mention that I’ve got his
great book that came out the all-weather
Trader and he was actually one of our
featured guests at a recent uh seminar
that we did back in October for our
Founders club members uh I got to meet
him personally and chatted with him a
little bit and uh was eager to have him
on the show so welcome Tom it’s great to
have you with us today hey it’s great to
be here yeah so it was really good uh
getting to sit down with you a little
bit uh with your wife and and get kind
of get to know you and um I got to say
that during your talk uh I I can’t
recall the last time someone brought
calculus up and it was very interesting
that you you brought calculus up to kind
of talk about how you uh approach risk
management um and I guess it’s no big
surprise that your background you were a
chemical engineer how did you get into
from chemical engineering to trading I
got a little Board of chemical
engineering and I realized that uh I
needed to start managing this ever
increasing amount of savings I was
putting away for a rainy day because
back in the 70s if you remember the
economy 60s and 70s the we we went to
these boom and recession type economies
about every four years we seem to go
through a cycle and every time you went
through a recession they laid off
engineers and I thought you know I
better have a little rainy day money
here and then it started planing up and
I thought you know some of the guys at
the lunch table when we went down for a
lunch would talk about socks and and we
actually took Investors Business Daily
back in the day and um and uh you know
tried to understand the ranking systems
and all that and uh tried to get inside
you know Bill O’Neal’s head a little bit
and how he approach stuff so I I go back
quite a bit with IBD all the way back to
the the 70s and uh I found that finally
getting a stock portfolio together and
having some success there and then
moving into Futures Trading and
ultimately FX trading and trading
options and I traded treasury bonds and
I traded all sorts of stuff uh there
hardly anything I haven’t traded over my
lifetime I’ve been trading now for about
50 years so right’s a wide wide range of
stuff yeah so you mentioned a lot of
different instruments that you’re
trading uh did you did you start with
stocks or did you just kind of try
everything and see what stuck um what uh
what caused you to kind of Branch out to
so many different uh instruments I tell
you what did it is I came out in 70 I
came out of school actually in
1974 okay that was after the end of the
7374 50 cents on a dollar bar Market
which a lot of the young folks that are
currently listening to this probably
weren’t born then uh
and that was pretty devastating when you
got to the end of it think about this a
good day of volume on the New York Stock
Exchange was 10 million shares
traded spy trades how much a day yeah
right now couple hundred million shares
right uh well I can I can give you the
average is um yeah yeah 55 million there
you go or no that was 55 million today
yeah be great for the whole exchange
they break open champagne so you you
have a situation where people did not
want to get in the stock market they
were I’m out of the market I’m never
getting back in and of course a couple
years later you’re making new highs
again and everybody’s getting excited
about stocks all over again and so as a
young Trader it really hit me that
markets go through very strong moves up
and they also go through some strong
moves down along the way and you got to
be able to deal with both so I started
looking around and uh when we were
starting up our money management firm I
realized that we were forced by laws by
marketing by what clients expected us to
do for their pension plans to stay long
all the time if we had too much cash
then why are you charging us a fee to
manage a money market fund if you know
there’s just all sorts of psychological
pressure to be buy and and hold and or
at least fully invested all the time not
necessarily Buy and Hold but to stay
fully invested and I looked at a lot of
the statistics and if you had a 50% down
Market I don’t care what you owned
unless it maybe gold stocks or something
but you’re going to get killed you may
not go down 50% you may go down to 40
clients are going to fire you so I
started thinking what could we do that
might make money during a down stock
market and then I just looked around and
they oh here’s this thing over here
called Futures and there’s these things
like corn contracts and you know live
cattle and uh stuff like that that
doesn’t have anything to do with the
stock market I to check that out so I
just started learning and that was
probably oh around
1976 probably somewhere in there and uh
never look back just now now in 1982 I
think that’s when um the the future
started doing uh the the index futures
um
so once that became available was that
something that you were doing as well to
kind of take a direction on the market
or was it still kind of like okay I want
to be uncorrelated with the market into
these other things when the index
features came in I found it intriguing
as a potential hedging vehicle so if I
wanted to have a portfolio let’s say
of just make it simple $100,000 and you
got 10 positions 10,000 each or
something really simple well then if I
wanted to not have to sell out 10
different stocks because I either
thought or saw indicators that indicated
that a down Market was upon us all I had
to do was to sell an index future and
now I’ve got I I I do my little hands
here the portfolio makes money on the
palm of my hand going up market and if
stock market goes down I lose money
if I put in place a hedge I got the
opposite I’ve got uh make money to the
downside lose money to the upside so
essentially I got these two fighting
each each other and it I can do that one
index Futures trade with one single
trade to go into a portfolio that might
have 20 30 40 different
positions that’s a lot of work you know
and in some cases if you have some
somewhat ill liquid stocks maybe some
small caps
uh something that you discovered that
you wanted to hold as a core position
over a long period of time getting out
of it might be tough and you might not
want to get out of it you might have tax
consequences all sorts of different
things right so just having the index
features became a way of just sort of
putting on the break taking the break
off putting on The Brak taking the D and
you can do it so quick that it just made
it really easy so I could sort of time a
stock portfolio back in the day now when
you’re choosing your uh hedging you know
and and we’ll get into this a little bit
more in the next segment but uh I just
kind of want to make sure that folks
understand it right now because you have
to make sure that you’re choosing the
right instrument if you’re in All Tech
well you’re probably going to want to be
uh you know hedging with you know the
NASDAQ futures if you’re a little bit
more broader you know you’re going to be
wanting to maybe use a different
instrument so uh what what do you how do
you kind of approach that to make sure
that you’re choosing the right
instrument for your hedge yeah try to
ask yourself what kind of portfolio I do
tend to run on the long side so if you
got a bunch of small caps you might want
to look at the Russell if you want if
you got like you said TCH look at the
NASDAQ index uh if you got a broad kind
of
boring hodge podge of everything you you
know the S&P or the dowo Jones is a
little bit only 30 stocks but if you got
Industrials maybe the Dow Jones so you
can do a correlation study on a
spreadsheet for free pretty easy to do
uh they even have the core Corell
command in Excel that it’s pretty easy
and it’s got instructions on how to use
it and uh set that up and just check out
where your highest correlations are to
the various index Futures and that the
index Futures data can be had from I
think Yahoo finance barchart.com there’s
lots of different places you can get
historical data to come in and then you
just kind of match up one index against
the other index and put the spreadsheet
together and it says you know 082 or
whatever it says and you know what the
correlation coefficient is it’s pretty
easy now um one one other one other part
to that I guess is with with so many of
The Magnificent Seven stocks and the you
know there was this kind of question of
are the indexes truly representative of
the broad Market you know so for a while
there uh there was very little breath it
was very narrow so if you were if you
had let’s say a broader portfolio maybe
you were in Tech but if you weren’t in
Microsoft meta and uh and those you know
and Nvidia at the time um if you weren’t
in those then your portfolio could be
going down and your hedge going up at
the same time so you’re kind of losing
on both ends um so I guess you know my
my question is um have you found
difficulties with the indexes and how
concentrated they’ve gotten uh to to
create a good hedge for
yourself not really um it’s been pretty
because I time my long positions and I
time my hedges they
both kind of get treated like individual
Investments so one’s a short only
program and one’s a long only program
and eventually there’s always stop loss
points on everything so if the Hedge
isn’t working out
uh it takes itself out of the way sooner
or later yeah I might take a small hit
along the way but I don’t get damaged I
mean in retirement where I am these days
for the last 20 years now I get to
manage my own money and live off the
money so um you know it’s important that
I maintain and you know take care of
inflation and keep building my net net
wealth but what I find interesting is
that I don’t have
uh I don’t have the need to try to you
know do 200% a year right I don’t uh you
know inflation’s running maybe what is
it 4% or something these days uh year
over
year you know if I can come in 10:15 I’m
a happy camper I think last year I did
35 that was far more than I tried to to
do but it was just a good year a lot of
things moved I got you know just got in
sync with a lot of things and it was a
good year if if this year is only 10 I’m
happy yeah so let’s talk about that
approach because you often kind of make
sure that people understand that um not
not everyone approaches the market the
same way you know you you are in a
different you know you just mentioned
hey you know 10 to 15 perc you’re not in
that growth phase where okay I’m trying
to get to retirement you’re in
retirement so it’s more of a
preservation phase so are there certain
principles that you think everyone
should be using and what you know what
do people have to kind of personalize
for their own goals personality and so
on I think that you
definitely if I just laid out this one
example you’d see why I’m so big on
everybody making their own way in
trading if you take me I’m 20 years into
retirement multi-millions that I’m
managing I’m trading maybe at any one
time 60 different positions across
Futures markets Global macro markets of
all sorts of energies Metals you know
agricultural stuff uh I’ve got ETFs
across 30 sectors of the of the ETF
Market I’ve got uh option spreading that
I do for credit spreads uh in sideways
markets I’ve got stuff that’s down to
three days I’ve got stuff out at 50 days
in terms of parameters five different
indicators 10 different strategy IES
Lots going on right
well I can do that in less than an hour
a day a lot some of it’s automated some
of it
isn’t okay so take Joe Smith out there
listening to this podcast Joe should ask
himself do I have Tom’s knowledge of
markets risk management procedures
automation knowledge of Futures
currencies and all these other
things how
could what I’m doing ever be
transferable over to Joe Joe should
design something for Joe that he can
handle he can execute flawlessly every
day that is appropriate for the capital
that he’s trading if you’ve got I mean I
started out with a $2,000 margin account
when I got out of college and uh you
know so I appreciate the new starting
out with you know next to nothing but
you can’t do what I’m doing with $2,000
you can’t do it with 20 you can’t even
do it with a hundred probably
so I I I think everybody’s got to figure
out which markets they want to play in
and which which ones they’re going to
deal with risk management and how much
automation do they want to throw into
the puzzle and it’s a process that you
just sort of gravitate throughout life
and where I am now in life 20 years into
retirement I’ve got I I had to invent a
lot of the stuff I’m doing today for me
for my
retirement it’s not what I was doing at
Trend stat I had to create it to solve
my current challenge which is very
different from me managing 600 million
of other people’s monies at Trad uh back
in the day yeah different problem to
solve different challenges different
solution mhm
so that’s why I I encourage people to
understand now are there some
commonalities absolutely I think
everybody should have a buy cell trigger
don’t sit here and just try to I don’t
know I feel good today I think I’ll go
buy XYZ that’s not a very sound trigger
to cause action so I like to have
indicators that measure the trend when
the trend shifts to the upside I want to
buy and it shifts to the downside I want
to sell I don’t want to think about it
when we have some kind of a a trigger
like that second thing I think people do
a poor job of is uh position sizing I
know a lot of
people will uh will do some kind of risk
management they’ll say well I’ll take a
5% loss on this position so they just go
ahead and throw a 5% stop loss in there
that’s that’s not position sizing that
means you’re just buying the same old
position size that you always did and
moving the the stop around to compensate
it I think you should do the opposite of
that and I think we’ll get into it a
little bit more in when we’re talking
about order of events but to me you’ve
got to have a sound way I mean William
O’Neal and and uh you know the uh
Investors Business Daily with their
rankings you’re taking a way of taking a
universe of thousands of issues and
getting it down to ones that you might
want to be interested in that’s all got
to be part of a procedure if that’s the
what your procedure is and you need to
follow those things and you need then
you need ongoing monitoring just because
you found the great stock and you bought
it you bought the right amount with your
position sizing doesn’t mean you get to
go on vacation now you have to watch it
every day you have to move your stops
you have to check your position size
because maybe you know when you start
out maybe the stock was boring and you
got into it
and uh you know all of a sudden it
catches fire it goes crazy well now the
risk has gotten super big the volatility
has gotten super big it’s dominating
your portfolio instead of being a part
of a portfolio it is your portfolio so
you got to maybe back off of that
position a little bit and keep it part
of the portfolio take a little profit on
it keep the rest those types of thoughts
and strategies could span any Market
that you trade whether it’s corn or gold
or
stocks it’s all and and so I I just want
to kind of understand your approach and
by the way I’m just going to do a quick
um a quick point out for those of you
watching the video I I noticed this book
um myself over your over your left
shoulder that is by Van K Tharp it’s the
definitive guide to position sizing um
and uh yeah I mean he was definitely
known for uh really getting into the
weeds in terms of okay let’s let’s talk
about the math behind the stuff so
[Music]
yeah definitive is the definitive
word really yeah so so just to
understand you know you you talked about
how you were using Investors Business
Daily you know some of the rankings and
stuff like that um at the end of the day
um you know I I feel like you were
mentioning a lot of like five day 50-day
indicators are you are you strictly
technical analysis or what um what
levels of analysis are you using to make
your decisions in terms of your buys and
stops well because I have leaned more
towards uh ETFs and Global macro markets
like you know the agriculturals and the
softs and the metals and the all over
the world uh because I’ve done that I
have a portfolio of tradable items that
is
somewhat fixed not all the time there’s
new ones that come in and I just added a
couple I just added a um epha index from
the Ms Morgan Stanley Composite Index uh
from the epha index uh Futures long and
short in one of my strategies just two
days ago so stuff it’s it’s always
changing and I’m adding things and
sometimes I I’ll take something out but
I think what you’re I don’t really have
so much the need anymore for screening
stocks because if the stock risk is
anymore that you can have a stock go up
or down 10 20% on the open for
retirement purposes that’s just a little
bit too much corporate risk for me to
have to deal with now can I deal with it
sure I put together a portfolio of like
50 different things I automate it I try
to bury that one stocks risk into a
portfolio of things so that I don’t get
hit too hard or benefit too hard even
the other side of it the reward side you
know I I I don’t want my portfolio going
up and down you know 10% a day that’s
retirement yeah yeah I just don’t
so to me I can pay the ATF manager a
small amount of money and he can put
together a whole bunch of tech stocks so
rather than go by um you know some tech
stock or a portfolio of tech stocks I
could just go buy like EXL
technology X you know a SP okay right
it’s okay or something like that or if I
want an energy exposure I can go by XLE
I don’t have to go buy Exxon and shell
and all the you know Royal dut or
whatever I it’s just easier for me in
retirement yeah so again I’m solving my
problem not solving somebody else’s
problem right yeah exactly well when we
come back we’re going to talk a little
bit about how you’re viewing the markets
right now and uh a little bit more on
why you shifted to ETFs and how you play
those stay tuned we’ll be right back
welcome back to the investing with IBD
podcast it’s Justin neelson here along
with my special guest this week Tom baso
he is the founder of enjoy the
ride.or a great place for educational
content he’s also the author of The
all-weather Trader and one of the uh
featured guests on the new stock market
wizards one of Jack schwager’s books uh
a great series there to kind of get
insights into some of the best Traders
out there and of course he mentioned
briefly Trend stat which was uh that was
a fun that you ran for how many years oh
28 28 years h a phenomenal performance I
think that was probably the reason that
you got uh uh picked to be in uh the new
stock market Wizards it’s uh not
everybody that gets picked to uh be
interviewed by by schwager um so let’s
talk a little bit about the market um
I’m going to go ahead and bring up the
you know right now I have the S&P 500 up
this is actually the spiders um spy so
you know just to kind of stay with that
ETF theme of uh you know things that you
can trade and you know we we had this
phenomenal run um you know a bottom in
October um if we kind of you know
actually take it a little bit further
out and look at the weekly chart um you
know there was that bottom in October of
2003 but the ultimate bottom in OCT
October of
2022 um and again this was uh where the
NASDAQ was a little bit stronger in 2023
um and now we had this really strong
powerful rally uh where we were just
trending nicely
so what what kind of indicators do you
use I mean it was 2022 was rough I mean
this you know it’s not it wasn’t
7374 but it was you know probably the
first bare market for a lot of people
who who Maybe started during Co time s
and uh you know weren’t used to seeing
something as prolonged um you know not
that there wasn’t anything to do there I
think uh a number of us were playing
some of the Commodities uh oil had a
good run um but for the most part you
kind of wanted to stay to the sidelines
and preserve Capital so um why don’t you
give me your thoughts on kind of what
what’s been going on with the market and
how you’re viewing it uh right now what
indic you’re looking at I’ve been kind
of watching with interest as this thing
sort of seems like it’s trying to roll
over to the
downside uh again you know like trading
for 50 years which is a whole lot longer
than a lot of the people listening to
this will have been
alive uh I have seen the crash of 87 I
have dealt with the 73 7374 50% down
Market the tech bubble bursting in
200000 the 2008 real estate
Fiasco uh I’ve dealt with the covid
crash
uh and all all of these particular down
markets I have been managing money of
some sort either my own or client money
and so I never forget that I never I
never let it I never become euphoric or
just thinking that the market always
goes up uh I know better than that and
if you go all the way back you can
really throw a scar in yourself if you
look into the depression
and what happens in the stock market
then so 1929 crash yeah yeah and you
don’t want to dwell on that because
obviously if you tried to hide from risk
you’ll hide from positive risk which is
the risk of reward and you want that so
I like to try to think my game my my job
as a money manager is always to try to
get as much positive risk as I can into
the portfolio and get rid of as much
negative risk as I
can and and not get too out of whack
either away so when I look at this what
I’ve been noticing is you’ve got a lot
of just kind of slip slower tries to
make new highs kind of runs out of
steam this may be a slow working type of
uh down move or it could be you know we
could have another leg and it breaks to
new lows and some event triggers it and
then all of a sudden we’re in some kind
of a freef fall situation and we go into
a second leg down that is going to hurt
a lot of people and there’s just a lot
of people just looking at the my Twitter
feed of 53,000 followers and seeing some
of the comments uh that people are
making and at best some of them are just
saying oh well it’s time for me to go
into cash and just be patient and wait
for my setups so what that’s telling me
is they’re only thinking about the
upside they’re only going to buy long
that they aren’t even considering the
fact that we could be in a two-year bar
market and go down 50 or
60% and there’s a whole lot of reward to
be had in that type of situation if you
play it right and I think that people
need to open their minds to a lot of
ways of trading and not just get stuck
in some kind of a very um narrow alley
way of investing yeah and so what I’m
seeing happening is is worrisome to the
downside so far it it might be just to
pull back and we make new highs in a
month I make no predictions I don’t
predict anything I go with it but right
now I’m starting to get net short
because a lot of these indicators that I
use which would be things like Kelner
bands uh things like Ballinger bands
things like donon
channels those types of
indicators have a component of
volatility associated with them that
being said that to to make it
clear uh if you have a more volatile
Market what you want to do is give the
market more room to normally move if you
have a quiet Market you want to tighten
your indicators and give it less room to
move and the nice thing about those
three indicators I measured or that I
mentioned is that they all have a
component of volatility to them that
allows the bands on top and bottom of
the market to go wider or to go uh
skinnier and those are all kicking over
to the down side now so it’s
worrisome well and you know I I like
that you know when you say worrisome I
one of the things I forgot to do at the
outset which I just can’t believe I H
forgot to do is I should have mentioned
to everyone that your nickname is Mr
Serenity and uh you know so uh you you
kind of approach things with a
recognition of what could happen and
you’re aware of it but you’ve also kind
of got that approach of you know how
you’ve protected yourself
from that downside risk um you know as
much as possible so can can you kind of
explain a little bit how you got that
nickname of Mr Serenity oh that was just
Jack schwager’s perception that I just
took everything in stride and I had uh a
plan for risk management I had a plan
for how I was going to buy and sell a
plan for how to deal with my own mental
processes and that I just seem so
relaxed I mean you got to realize Jack
is a a very caffeinated New Yorker back
in the day uh and uh you know everything
is is when they talk about the New York
New York second that’s supposed to be
the fastest thing in the
world the the the time between the the
light turning red and the horn hitting
the horn and the car blowing um the what
I
find is you have to have a plan if you
have a global plan for do doing what
you’re
doing and then you execute e execute
that
flawlessly life becomes so much easier
it it seems to me when people try to
predict I think the Market’s going to go
make new highs so I’m going to buy in
here well the market right now is
trending lower and it’s on a little bit
of a rally is the rally going to carry
or it isn’t you know you’re going to try
to guess or predict and now you get your
ego tied up with that prediction maybe
you stick around a little too long
Market starts going down you say no I
think it’ll still hold it doesn’t hold
now you go into a free fall and you go
oh crap I don’t know what to do now and
you’re you’re just out you don’t have a
plan you’re putting pressure on yourself
putting yourself in situations where
you’re going to make trading mistakes
just because you don’t have a plan now
if you have a plan on the other hand
that said okay when the Kelner 21 day
goes to the downside and we break the
lower band I’m going to put in place a
S&P 500 hedge or I’m going to short the
Spy here that we have on the
screen okay you can have the stop order
sitting there I could be out playing
golf it would
execute how how stressful is that it it
isn’t at all and now you’re protected
well depends on your golf
game I wouldn’t even know that it
happened until I got back off the off
the range or off the course so I think a
a lot of Traders especially those that
got their stimulus check in covid days
and they put together a stock portfolio
and they got lucky with the other side
of the covid crash and immediately
picked up1
$200,000 a million dollars in some cases
or they got lucky with cryptos got in
into that you know they haven’t really
suffered
risk and I fear that somewhere along the
way here you’re going to be you know a
lot of lessons are going to be taught
and I just surely hope that that some
people listen to what I’m saying and
start thinking about ways of protecting
themselves because it doesn’t always go
up yeah well and you know you mentioned
kind of about the the speed you know the
New York speed kind of being different
um have you found that the speed of
markets has has increased since you
started I mean certainly as you
mentioned there’s a lot more trading
some of that
uh is no longer human there’s a lot of
algorithmic trading I mean you’ve got a
lot of automatic trading that you’re
doing um there’s you know the big the
big giants like Citadel that are doing
you know some some very big trades um
throughout the day uh you know and you
you do get these kind of one-offs you
know I mean we had the flash crash like
in in in 2010 mini flash crash in 2016
you know um do you find that the speed
sometimes has has changed and you’ve had
to adjust your strategy accordingly
well that’s kind of why I use the
indicators that I do uh but to answer
your first question has it changed yes
it has because I think the world when
ice first started was you telephone your
broker the broker writes up a ticket
goes to the teletype room it gets sent
to the floor a runnner takes it out I
mean this was clunky you were lucky to
get a conf from back from the floor for
an hour
and nowadays um I can sit here with a
platform on my home computer hit a a
market trade and I get a almost within
one second I’m I’ve got a confirm
bleeping at me making a noise in the
lower right side of my
screen so when you have the ability to
move that easy and you have that much
automation out there you’re going to get
more volume and sometimes that volume’s
going to get on one side or the other
and you’re going to get faster movement
but but big
but you still go through the same
Euphoria
depression concerns and all that it’s
just compressed TimeWise from what it
used to be so everything happens a bit
faster but it’s the same types of Cycles
it’s still good markets and bad markets
we’re not we haven’t invented a way for
the stock market to always go up MH
right and and it it’s important I think
to note that the human psychology it
look it’s human nature that’s very slow
to change you know I mean you know we
can come up with technology that changes
very quickly but human nature and you
know there’s still programming the stuff
right it’s still humans that are doing
the programming humans are doing the
programming AI was created by somebody
and it’s not by the computer didn’t
create the AI human beings did so all
the biases and fears and em emotional
responses and everything else are going
to be built into the AI software and
they’re going to learn based on that so
it’s going to be biased as well and
people just have to realize that yeah so
to kind of wrap up this uh Market
section um you know at the end of the
day a lot of times when I when I’ve
heard you speak and i’ I’ve read your
stuff there you know and maybe this is
how you got that Mr Serenity uh label
too there’s there’s kind of a Simplicity
to to it at the at the end of the day
you know so it sounds like you’ve got a
lot of complexity because you’ve got all
these instruments you’re looking at all
these indicators how do you keep it
simple in every case I keep as minimum
the minimum number of parameters on each
indicator that I possibly can and in
each situation I try to keep the
diversification up as high as I can and
I automate using data coming in and then
run the indicator and then trans MIT the
order all through some programming that
I’ve done over the years and I try to
make all that decision making just very
straightforward it’s either a long or a
short if it’s long it’s sell the long go
short sell in Reverse or something I
mean I keep it really really painfully
simple uh so that I can add more
complexity with different strategies
different time periods different markets
but within each like how I trade a gold
future for instance if you look drilled
down to that one market you’d see that
that was pretty simple it’s either black
or white long short not not that
complicated you could explain it to
everybody yeah yeah very good well when
we come back we’re going to talk about
some of the ETFs that you’re looking at
and your approach to ETFs in general why
you stick with them stay tuned we’ll be
right back welcome back to investing
with IBD podcast just neon here your
host along with my special guest Tom
boso he is the former hedge fund manager
for Trend stat Capital he is also known
as Mr Serenity uh labeled that by Mr
Jack schwager in the new stock market
Wizards uh also he has a website enjoy
the ride.or uh just a lot of great
information that he’s you know put
together over the years uh so uh really
really great to have them on the show
and we’re going to talk a little bit now
about how you kind of approach uh some
of the individual instruments that you
trade you mentioned that there’s a lot
of different ones and you use different
strategies for different markets uh you
know some things are up markets some
things for sideways markets but you
mentioned Kelner channels so maybe we
can maybe we can start there with um you
know what a Kelner channel is and and
how you use them yeah if uh if we could
switch over to my chart here I actually
pulled up on my Trader workstation
screen a just a NASDAQ index uh Futures
Contract and it’s an infinite contract
so it rolls forward and all that and I
just threw a 21-day celer and so I
painted one of the lines green you can
see on the top and I planted another one
on the bottom red reason for that red
would be to sell and green would be to
buy and so you can see that the Market’s
had a heck of a run and we haven’t
really uh broken downward at all through
the lower keler so we just try to stay
long the reason I’m concerned about what
we’re doing right now is this Arrow when
I get a Kelner coming over and I get my
stop put right where my uh my cursor is
right now I hold that stop there I don’t
move it away from where the market is
and so that line gets just held and held
and held and sooner or later on whatever
date that was about a week and a few
days ago sometime last week earlier uh
we had a sell so I put my hedges on I
went short the NASDAQ indexes and the
thing I point out about this indicator
and you can see it just visually really
easily the reason I like it is it
adjusts for volatility so when you get
in a situation where right through here
markets are a bit more boring you see
how the lines got closer to each other
right that’s vola volatility getting
quieter and the Market’s not sure
whether they want to go up or down so
they’re kind of just Heming and ha and
kind of wait and see type thing well
then your your buy and sell points are
going to start squeezing and then when
markets go crazy like we do back here
down at the bottom here we get this big
sell off and then it screams upward
again that’s going to be high volatility
and look how wide the lines are apart
it’s giving the market normal Market
move capability that’s wider because
that’s what the Market’s doing now so I
kind of like that and it helps me at
least think to myself that I’m adjusting
my indicators on the Fly for ongoing
changing conditions because all the
thing is let’s use as an example let’s
say I did this is 21 days Kelner let’s
say I did a 21-day moving
average that doesn’t adjust for anything
it’s 21 days average them up that’s the
number boom it’s always going to be that
it’ll never change this changes on the
Fly based on the average true range of
the product being traded so you’re
constantly adjusting for volatility
donon channels do that based on the
highs and lows of the range bingers uh
adjust for volatility based on the
standard deviation of prices all of them
have a component all of them are
different
all of them will give different signals
but they all kind of adjust for various
forms of volatility which is why I like
them and you can apply this to anything
I mean uh we can pull up something like
crude
oil uh just to see something completely
different uh let’s go there and the
indicator will still be there and
there’s crude oil so we’ve had a a nice
run up and we’re now right here would be
where I’d have my stop I’d be nervous if
we got too much lower than that Peak
right there where I have my
cursor and so far it’s rallied off of
that and we’re fine we’re holding along
so stay long enjoy the ride right so
talk to me a little bit about the time
frame that you use um so these are daily
daily charts that you’re looking at
right now these are daily price data I
my process that fits best for my
lifestyle and again this is indiv visual
things if you’ve got all day to sit in
front of a computer and you want to day
trade and you want to use five minute
bars go for it I I don’t have a problem
with any of that and when I’m stuck here
I sometimes day trade with five minute
bars and I tend to make money more than
more than I lose so there’s and I have
strategy that’s all developed for that
that’s all methodical it’s I have to do
it by hand I can’t do it automated but
the point I’m making
is I I look at my life and I say okay
I’m retired I like golf I like to work
out I was out planning a baby Cactus
Saro cactus in the side yard here this
morning I like to do be out in the sun
and the fresh air and all that and so I
only day trade when I’m stuck here like
writing the the all weather Trader book
last year that was that came out in
April
um so I use daily because then I can set
up my day such that somewhere
between uh in Arizona time this time of
year around 1:00 to 1:30 on through
about 245 is at the latest that’s kind
of my window where I would be running a
lot of stuff so I
typically preserve some of that time to
make sure I can go ahead and run my
processes so I’ll be running the
remaining I got about half of my work
done before this interview I’ll have the
other half after the
interview uh and but by using daily I
can get the snapshot of what happened
that day I set up the indicators as
daily indicators and I make all my
decisions set my stops up for the next
24 hours and I walk away I don’t have to
I could be fall off the earth and the
internet could go down the power could
go down I still have my orders in from
today for all the way through
tomorrow and that’s
so once you set up a a buy order for
instance if you’ve got you know okay I’m
going to buy or I’m going to go short
you know at this level do you
immediately have an automated sell order
uh that goes in to kind of protect
yourself and you know where do you where
do you set
those yeah
uh this should be the buy for crude oil
as soon as I get that execution
this would be where my cell would
be horizontal line we’ put it right
there uhhuh and then let’s see now we’
then follow it up so it’d be right about
under that line it’d be right about
there okay and then each day keep moving
it up right so each day and again that’s
just part of your daily process where
you you move it up so um maybe talk a
little bit about your order of
operations so okay in that cas you’ve
got um uh a certain a certain risk uh
looks like the entry was around
76 and your exit was about what is that
70
uh9 something
69 okay so that’s almost 10% so how do
you yeah here here’s here’s the key that
a lot of people miss and I think they do
it Opposite so this is a really
important topic if every Trader watching
this just came away with this one thing
um what I I’ve got a risk specified and
let’s imagine that this is for one
contract or if it it was a stock chart
one
share one share of stock I now know my
risk is from 75 down to 69 and
change I can calculate then how many
dollars of risk one share of that stock
has so then the question is how many
shares do I buy well that depends on a
number of factors but to me let’s say I
have 100,000 and my risk per share is
let’s round it to uh
$6 let’s make it five it’ll be even
easier in in our heads so we got $5 of
risk we got a
$100,000 uh dollars in the portfolio and
then you prejudge you say to yourself
how much am I willing to risk of my
portfolio if this thing go south and I
lose and I could say well let’s see I
don’t know I’m okay if I got a 100,000
I’ll lose a thousand on this I’m I’m
okay with it if I know I’ve got
five dollars per share how many
shares gets to $1,000 loss to
y so how many shares should I
buy 200 200 not 300 not 100 not
150 just 200 it’s really easy and by the
way if the number came out 221 the
computers don’t care back in the day you
had Odd Lot shares and you had people
trading 100 shared Lots you know round
Lots right today the computers don’t
care they match up the bid and they just
go through it in the order that they’re
there you could trade 221 shares just as
easily as you could trade 37 shares it
makes no difference so let the computer
or let your spreadsheet or let your
calculator calculate how many shares or
how many Futures contracts in the case
of crude oil that you would do and just
do it now you’re
always every single position in your
portfolio got the same risk and
volatility
profile so there all sort of like a team
contributing on the positive side to the
reward and hurting you equally on the
negative side so You’ got a you’ve got a
true portfolio you don’t have XYZ that
is 20% of your portfolio and then a
collection of other little odds and ends
that you’ve collected over the years
that you forgot to sell which I’ve seen
all too often out there yeah you know
people get lazy and by doing that by
doing that as you say you kind of refer
to it as your order of operation you
start with your portfolio risk here’s
the dollar amount okay now what’s what
is it per
share it’s just simp I mean it’s just
math right um
so learned in junior high school too
right exactly this is not calculus not
even the not even the calculus right
that you got for your chemical
engineering so um so how do you come up
with the the proper and I know this
varies you know so uh let’s just talk
about the things that go into that uh
equation of how you choose your
portfolio risk because that’s going to
differ based on um maybe the market
maybe the volatility of the instrument
uh the you know the volatility of that
time period and where you’re at in your
life right right uh I would say this
that first of all the higher percent
risk of your Equity that you’re going to
put in a position the more volatile your
portfolio will be and the more dangerous
that position will be the lower you go
the smoother it’ll be the less risk
you’ll take on the position so that’s
just a given you as the individual
Trader get to dial it in wherever you’d
like I can tell you that on say Futures
positions on uh sector allocation
positions or sector timing when I do the
the sector um ETFs I use a half of 1% so
out of every
$100,000 in my portfolio I’m risking
$500
in each position to my stoploss point
now I’m not remember I’m not setting the
stoploss point by the half a% I’m
setting the stoploss by the chart in the
indicator then I’m deciding how much I’m
going to put in that
position I also do the same thing in in
terms of volatility and I measure that
by average true range the formulas is in
investopedia.com if you want to look it
up it’s easy math again you learned it
in Junior High School uh
it measures Exel does a lot of the work
for you if you need it not to mention
all these platforms that will calculate
it for you hey you know Trader
workstation over here I can put ATR up
there if I want uh yeah all of that is
very easy to do and what you’re trying
to do with ATR you’re saying how much
volatility do I want from a position
because if all of these positions in
your portfolio and say you know in my
case I’ve got 50 60 positions if they
all move together one way
it’s going to you know affect my
portfolio uh maybe more than I want in
retirement so I use
3% of equity to set my ATR exposure in
any one position so I I calculate the
market like crude oil or Nasdaq futures
or whatever I get the ATR of that
particular market and then I say based
on that how much percent one share one
contract is is of this ATR versus that
uh that Equity that I’ve got running and
then how many then can I do to bring me
up to my limit a0 three right yeah
perfect well uh you you brought up uh
crude oil here and I know that you were
also talking about you know again you’re
looking for those things that are not
correlated necessarily with the market
right now kind of going possibly in
counter Trends and another thing that
kind of stuck out was gold uh do you
want to talk a little bit about gold and
how your analysis is working for for the
shiny metal
sure there’s the June gold chart uh and
what happened was you had a little bit
of a downtrend going on through December
23 to around March or so of
24 and right at that
point
here you got to buy it went through the
Top Line Green Line you got to buy and
you’re nowhere near a sell yeah now do
you ever look at you know when when
something is you know usually you have
most of the activity in between your
channels um I mean gold has been on such
a run it’s been kind of outside of the
channel lately do you ever look at
something and say oh this is getting
extended you know this move is maybe a
little too euphoric um do you ever kind
of do a selling into strength or do you
really wait for that weakness to tell
you that something has changed to me
there’s two different parts that are
going on mathematically in my trading
one of them is the buy sell decision
which is what you’re implying that I’m
looking at it I know that it’s
overbought so maybe I should you know
peel off some positions or something and
then to me there’s the position
sizing and I prefer to think of what I
do as position sizing and in guys like
uh uh
um uh pure Trend followers
uh what’s his name Jerry
um he’s down in Florida in Tampa I’m
forgetting his name now he’s one of the
turtles oh okay
yeah some of the the guys that are pure
Trend followers will absolutely disagree
with what I’m going to say and they have
every right to say that and I can have
every right to say what I’m going to say
and that’s that I prefer to have a
smoother Equity curve I want to have a
higher return to risk ratio I don’t like
large draw Downs so let’s face it when
you get a market like gold here where
it’s very very
overbought and you know that sooner or
later it’s going to come back and take
out that red line and I’m going to get
my sell right I’m going to keep moving
the stop up and sooner or later uh in my
lifetime probably I will get stopped out
with a nice
profit so what I I do is I look at the
risk and the volatility on an ongoing
basis along with the initial so the
initial I covered as was
0.5.3 on an ongoing basis if I’ve got a
big profit that I’ve built up I’ll risk
up to 1% of My Equity on a very
profitable position and I’ll risk up to
0.5% of volatility on a very profitable
position so I give it some room to move
I give it some room to become overbought
but to a degree and then when I reach my
pain point or my comfort level and I say
no I don’t want to have two three four
five% risk uh you I mean let’s let’s
pull up another chart
here and you’ll see the epitome of an
example right who would have thought
Coco Coco look at that chart it’s like
an F35 taking on after a Chinese spy
balloon
right yeah it’s gone
vertical it’s got the afterburners on
and you know is that overbought yeah but
is the risk look at how far the lines
have gotten from each other that is
high-risk environment so if I’ve started
with say 10 contracts of
Coco maybe now I’m down to two because
I’m just trying to keep the same EXP
exposure all the
time it’s not like I’ve sold out of my
Coco position I don’t view I I still
think I’m long Coco I don’t really I
have less
contracts but that’s that’s the way I
manage my position sizes my risk and my
volatility so that’s the mentality I
like to see Traders get into to help
protect their mental
state Jerry Parker it’s the guy’s name
uh he believes that you should you
should be stressed out you know if
you’re going to really make the most
money you should really you know grab uh
grab the bull by the horns and just hang
on I I
don’t you’re not going to be Mr Serenity
if you do
that
right very good point I protect my uh my
nickname yeah yeah so and and this is
this is a very important point I I think
this is this is important that this is
part of that um that daily routine that
you have you can make those adjustments
you know saying okay uh now this is
where my stop is and this is what it
does for that position and so the risk
has got every day you’re adjusting risk
has gotten larger volatility gotten
larger two it exceeds my alarm level I
need to sell off one contract to bring
me back down to where I need to be to
maintain my nice even killed demeanor
right and so when when you’re doing that
kind of routine you know your hour a day
is that where you just see it okay this
is this has kind of gotten extended and
you know beyond my risk level and so you
just sell right there or do you put in a
higher trailing stop no I just literally
mark it on Open the next day there you
go low out of the position and uh you
know and I reduce it it goes from five
to four or 10 to nine or whatever the
number is yeah sometimes dramatically go
so much I have to go from 10 to 8 or 10
to seven or whatever it is I don’t
really
yeah I mean to me it’s uh it’s just part
of the process and I think if everybody
could learn to strategically plan their
trading and then execute that plan
flawlessly you got it made that’s all
you got to do and that’s how you achieve
Serenity well um before we go Tom I I
really again appreciate that you came on
I’m so glad we uh got to meet in person
in October um for people that want to
kind of learn a little bit more about
your style and and your thoughts on the
market and just in general um on trading
um enjoy the
ride.or uh
is and and I have I have people that
follow me from all over the world so I
thought itd fit yeah so perfect and uh
talk talk a little bit about what you
what you provide there uh just free
education there’s a lot of there’s a few
things you can buy but there’s all the
interviews I’ve ever done with everybody
including this one eventually we’ll have
links
uh from the interviews page I’ve got
recommended reading so books that I’ve
either written or other people have
written that I like that you can help
yourself with trading uh uh little
description of how I hedge my portfolio
so including the indicators you you get
a a flavor for that and I talk through
through how I do it um gosh so many
things seminars that we hold in
frequently but if we do uh I announce
them there um things like
uh uh descriptions on useful links to I
get asked a lot like I want to become a
commodity trading adviser how do I do
that and I got links to the National
Futures Association where you have to do
your registrations and it’s just a
general site that covers a lot about
trading and if you’re trying to follow
me saying certain things on any given
day probably Twitter is the most active
I’ve got like 53,000 plus followers on
and what’s your handle there Tom it’s
boso
BSO
uncore t m Tom just that simple yeah
anybody else any other spelling is an
impostor and I have one a week yeah be
careful that’s a tough thing well hey
Tom again it was great having you on uh
thank you for sharing your serenity with
our listeners and uh enjoy the ride
thanks okay that’s going to wrap it up
for us this week uh please join us next
week we’re g to have Dan Fitzpatrick
back on the show of course he is from
stock market mentor and if you haven’t
already don’t forget to go to
investors.com podcast uh so you can
subscribe to your favorite mode of
getting your podcast uh we’d love to
have you join us along for our ride here
and uh like it and uh subscribe as much
as you can thanks a lot for watching
this week we’ll see you next time
bye-bye right now
Everyone has different backgrounds, risk tolerances and psychologies. Tom Basso, enjoytheride.world founder and author, joins Investor Business Daily’s “Investing with IBD” podcast to discuss the simple foundations traders should modify and build upon to develop their own trading style. Learn about the differences — and similarities — between traders, and why he’s focused on the uptrends in gold and oil while the indexes correct.
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