Continuing the theme of learning from experienced traders, I have the pleasure of introducing Frank Hassler. Frank is a private German trader who has gone from dot-com loser to successful system designer and systematic trader.

Trader Q&A: Frank Hassler

Frank shares his ideas on his blog and has had some of his unique strategies published in magazines such as Traders’. Frank’s main focus is developing and trading a portfolio of systems to help him increase returns while hedging risk.

Q) How did you get into trading?

A) I’m a burned child of the DOT-COM times. In the mid 90s I started to invest (yes, invest) without knowing what I was doing. Then things (money) accelerated during the DOT-COM phase, and again I did not know what I was doing. After burning my hands (and money) I stayed in the market and regained a lot until 2008, the point where I decided to withdraw from the markets and my past investment style. I changed when I read a book on Technical Analysis, I read a lot at the time, but one that really stood out was one of Van Tharp’s books. Van Tharp is a trading coach focused on trading psychology and I visited two of his workshops.

During his workshop we were playing a game about position sizing. One knew the expectancy (expected profitability) of a system and had to set the position size accordingly. To make a long story short, I recognized it would be emotionally easier for me to trade when I knew the ins and outs (expectancy) of my strategy rather than following the more subjective technical analysis path.

Don’t get me wrong, subjective technical analysis might work for some people, but not for me! In myopinion trying to read chart patterns or technical indicators without thorough research is too ambiguous. That was an important “light bulb” moment, the fire got started and never went out. I decided to focus on systematic (quantitative) trading, despite my less than optimal background. I’ve been a real rookie as my background is in business administration and marketing.

Q) How do you think your personality has influenced the style of trading you currently engage in?

A) When I did freestyle investing in the dot-com era, I wasn’t really trading; it was buy and pray. I wasn’t aware of risk. However, the more I started to trade seriously, the more I thought about risk and the real impact of drawdowns on your account.

So I wouldn’t actually say it was personality that has influenced my style of trading, it’s rather the other way around. Trading and system development changed my trading personality to become more respectful of risk.

Q) What trading platform do you use and why?

A) Although I’m now beginning to hit its limitations, I use and recommend AmiBroker. When I first started I looked at Amibroker and was actually put off by how cheap it was. I thought it could never fulfil my needs at such a low price ($200-300). So I disregarded it and tried to use something more expensive for a year. Eventually I figured this expensive platform didn’t fulfil my needs such as measuring portfolio performance so I switched to AmiBroker and haven’t looked back.

Q) AmiBroker has simple system builder tools and an excellent “Easy Language” system design program for more complex systems. What advice would you give someone with no coding knowledge?

Well, my background is in product management and marketing not coding so I have learned how to do it myself. It wasn’t easy at first, but I have got there in the end. I have looked at hiring coders, but ultimately I found I was much better off learning to do it myself. It takes time, but the logic is easy to pick up. I think most people will be able to do mostof what they need to do over time. If you have used anything like Microsoft Excel, then you will have some appreciation already of being able to put simple calculations together.

A good way to start might be to buy a decent AmiBroker supported system which provides the source code. Start to trade it and work your way through the code to learn as you trade.

Q) I think my readers will be especially interested in your approach of diversifying returns across a portfolio of systems. Can you tell me a little more about this.

A) My aim is for my returns to not be reliant on a single system. If one system blows up then I have lost a good chunk of my capital, but by spreading risk across multiple systems the other systems I trade should make up for it or at least won’t be doing the same.

The important thing is that these systems are independent of each other with a low correlation of performance. So what impacts the performance of one system, won’t impact on the performance of all the others.

This is easier said than done as in today’s market it is hard to find any market that is not correlated in some way with other asset classes. You just have to look at the correlation between the euro and stock markets and you can see what I mean.

So my solution has been to find diversification in different ways, by focusing on:

1) Different time frames

2) Different trading styles

I follow a portfolio of systems including a trend following, a mean reversion and a pairs trading strategy. These systems have different time horizons from the intraday trading, to daily trades and up to weekly trades.

Of course, all these systems have some degree of correlation, but they are not as highly correlated as trading two trend following strategies on two very similar markets.

Q) How do you find managing such a portfolio of systems?

A) The biggest problem I have is in execution. When I first started developing systems I created a number of theoretically powerful systems, but they were just too hard to act on in reality. The reality is that however good a system is, I need to be able to execute it in a consistent manner. This is why the majority of my systems are actioned end of day or the open of the next day.

Trading from Germany this is relatively easy with closing trades being triggered around 10PM and opening trades triggered mid afternoon.

The main problem is currency fluctuations as I am trading US shares and ETFs from euros. I am developing a currency hedge method and forex systems to compensate for this.

Q) What has been your biggest mistake and what did you learn from it?

A) Well, in my first year I kept a trading log and looking back through it, I made just about every trading mistake possible.

I survived because I had low exposure at that stage, I was committed but not overcommitted. I think that is a very important point. You need to get your hands dirty. People keep waiting for the perfect system to come around but there is no perfect system. You need to start gaining experience, otherwise you will never progress.

Q) What advice would you give to new systematic traders?

• Have a master plan! What are the big points you want to achieve over the next year? All activities should support the achievement of your big points. By big points I mean for example: “By 2011 I want to have two trading systems with a distinct investment style. I expect each of them to return XY% per year.”. I know this isn’t rocket science, but it’s so easy to get lost in narrow-focused system optimization.

• Make it a process! Focus on getting better, day in, day out, eventually results will show up. Build a methodology of how you want to develop a system. In the past I often heard, we don’t have time for processes; we have to create products now. Know what you do before you start and don’t describe what you did after you have finished. I often fell into the trap (especially in the first year) of JUST testing an idea and hours passed away without noticing. Follow your master plan!

• Stay focused! There are only a very few different trading systems (styles) out there. In the beginning I made the mistake of having up to 10 “different” systems (all focused on equities). In reality it was one system with different set ups. I thought having a swing trading system on the German DAX was a different thing to having a swing trading system on the SPY. Of course it isn’t! But I had to learn this the hard way. Furthermore, I spent way too much time on trying to develop an intraday system. I believe creating good intraday systems is more difficult than creating solid end of day systems. In hindsight I should have focused on end of day systems right from the beginning.

• Don’t read too many books (before you start)! I should have started earlier by getting my hands dirty in system development. In my opinion there is too much money made in selling redundant trading books. System developers can learn as they test (to some extent). Of course education is important, but don’t underestimate the power of hands-on experience.

• There is no way of getting rich quickly! Only one of getting poor… Things are going to take time, at least for me. I’ve invested about 4,000 hours of system development (not counting the endless hours of reading books). I’m still not there, I feel like I’m an intermediate. I expect to need 10,000 hours in order to reach expert level. There is a great book about this topic (non trading related), it’s called Outliers: The story of success. The essence of the book: talent isn’t born, it’s a process and takes time. At least 10,000 hours.

• A system is more than an entry! Do not underestimate the power of money management. Invest time in researching about when is the right time to increase or decrease your position size. Eventually this is going to set you apart from the crowd.

Trading has to be painful (sometimes)! Trust your system. Often times I questioned the entries of my system, because it’s been too painful to execute the trade (into deeply oversold set-ups) as everybody was talking about the world coming to an end (finally). Of course that would have been the perfect time to make BIG money.

Be honest with yourself! There is only one person in the world you can’t lie to. Don’t look for the shortcut, there isn’t one. Focus on the concept and don’t spend endless hours on overoptimizing results. I know it’s tempting.

Many thanks to Frank for sharing his expertise. If you’d like more information, you can visit his blog here: