Financier Marek Chrastina creates algorithms for trading in the US financial markets, which he himself also uses for trading. His systems are used by hundreds of almost exclusively foreign (non-Slovak) clients.
In this interview, he explains when and why he started creating his own algorithms, what this kind of trading looks like, why he chose the US markets, and whether he manages to beat the market benchmark.
When did you realise you wanted to do trading in foreign markets?
My first contact with investment came when I was about eleven. At that point, Slovakia was going through the process of voucher privatization and when my parents got their dividends, I was curious to learn more about how it worked. I found out about shares which could grow and bring yields. But when it comes to actual trading, my journey into this field was somewhat more winding. The first time I encountered trading was at university and in this case, it was futures trading. There was a group of people at our faculty who, as pioneers in Slovakia, established a trading club and organised education in the area of trading in the US stock and commodity markets. However, I only started trading myself after finishing my university studies.
Do you still remember your first trade in the financial markets?
I remember the first automated trading system that I bought sometime in 2008. I switched it on and it was making good money at first, but then it wiped out my account.
Does that mean you lost everything?
Basically yes. There wasn’t much left in my account. At that time, forex was very popular. It had very high leverage, which meant that the funds required to cover the margins for trading, and therefore the risk limitation by the broker, were minimal.
So, you speculated on exchange rate fluctuations?
Yes.
Did it teach you anything?
Definitely. And it wasn’t a cheap lesson. Such a blow caused me to analyse the situation and try to make the best of it. It was a specific type of system called a grid system. Its principle was that even though the price went in the opposite direction, it always bought the higher position. I had a relatively small account at the time, maybe a few thousand euros. I never switched on this type of system on any account again. I understood that it was not the way to go. But perhaps I needed to experience it at the time and then analyze the whole principle of how these systems work, calculate whether they are viable in the long run, and move on.
When did you start developing your own algorithms and how long did it take you?
I didn’t start developing algorithms right away. I first learnt to assess the robustness of trading strategies. I sought out capable traders around the world and evaluated their trading systems. That is, whether they were able to make money in uncertain conditions in changing markets. This was also related to a project I was doing for a small company. Next, I needed to learn how to manage risk and design portfolios. So, I took the opposite path to trading than most other people.
After a few years of experience as a risk and portfolio manager, I finally decided to start developing trading algorithms as part of my own business. I had very good foundations in what I already knew. However, I needed to gain additional know-how and master a process that, when applied to any market, would allow me to develop algorithms that were capable of performing and profiting in the long term.
When I think of trading algorithms, I imagine a system that can, for example, assess the latest US data on unemployment and execute a trade within milliseconds. This gives you a temporal advantage in comparison with the rest of the market. Do I understand it right?
Yes and no. There are players in the world who are involved in these highly complex algorithms which are more heavily based on fundamental data and on the analysis of a huge number of factors. When, for example, new data on unemployment are released, the results are already largely priced in, yet they often move the market. I am not trying to predict where the market will go. When it moves in a certain direction, the algorithms I create step into this movement, if, of course, the conditions are met. An algorithm (algorithmic trading system) is basically a set of conditions that specify when a trade should be entered or exited, as well as with what volume.
Do you program these algorithms on your own or with other people?
I don’t do it myself. In the process of development, I work with platforms that are designed for data mining through genetic algorithms and machine learning, and the output is the code of the system itself. I can understand it, read it, modify it and work with it further, but I don’t write it myself. Then, after a rigorous process of robustness testing and verification of the conditions, I send it in the form of a finished algorithm to a broker who oversees the execution (of trades). The broker then deploys the algorithm to the trading platform for a specific account.
What is your advantage in comparison with a trader who trades in the more traditional sense, i.e., by analysing the market, reading charts and deciding when to buy or sell an asset themselves?
I can think of two key differences right now. The advantage of algorithms is their accuracy and discipline, which are some of the most important things in trading. If something needs to be bought at price X and sold at price Y, that’s what the algorithm will do. On the other hand, an algorithm doesn’t see what the human eye does – all that complexity and structure of the market and what’s behind the price and the chart. In algorithmic trading, you have to make the system as simple as possible and therefore abstract away from a lot of things and focus on the essentials. Then it is generally more robust and able to work in the long run and generate profits.
However, the human eye can evaluate many more situations, not just quantitative ones, and this is where a discretionary trader has an advantage. On the contrary, they also have a disadvantage, in a way, of always involving emotions in trading, whether they want to or not. Working with emotions is the most difficult thing a trader has to do.
I suppose you haven’t experienced that much.
Oh, I have. I had to learn how to do discretionary trading and I do know how to do it; I just don’t and don’t want to. Every trader has their own trading approach that has to fit their personality. I considered discretionary trading a couple of times myself, but realised it wasn’t the right thing for me. My approach is to develop algorithms, look at things through systems and portfolios, and approach trading through numbers and risk management.
However, there are traders who need to see charts or those who are comfortable doing long-term trades, in which they analyse data and execute one trade per week or month. Then there is the fundamental approach, which is based on analysing different macro data, quarterly company results, industry forecasts, political situation, but also the weather (for example, in agri-commodities, electricity…), and doing positional trades based on that.
Certain approaches or ways of trading are about sitting in front of the computer without emotions, looking at charts and clicking a button at the right moment. And then waiting and clicking again. And doing this in a disciplined manner is terribly boring.
But we are human, which means that emotions, impatience, greed, and fear of missing out on gains or suffering a big loss come into play anyway. Not being able to abstract away from this or trading for emotions or excitement is a path that will lead to losses.
I presume even this kind of trading is not completely risk-free, that even algorithms can make mistakes.
No trading is 100% safe and losses are to be expected. At the same time, the premise is that sooner or later, any system can stop working, and we never know when that will happen. The solution is to trade through broadly constructed and well-diversified portfolios while having clear rules in advance about when to shut down a system or a portfolio. With systematic trading, the maximum risk of both the algorithm and the portfolio can be quantified and clearly defined in advance. When you are trading three systems, there is still a high probability that one of them will “disobey”, and the question is how the other two will manage to pull through. But with a broad portfolio, the likelihood of negative effects is greatly reduced.
Do you come out ahead every year?
It’s been 13 years since I started trading and aside from the bumpy beginnings and learning from my own mistakes, there were years when I was focusing on risk and portfolio management and came out ahead. There was also a period when I was primarily involved in other businesses and preparing to develop algorithms within my own company. So, I didn’t trade for a few years. I needed to gain know-how and then gradually implement it into the development of my algorithms. But to sum up the last five years, I can say that they have been positive.
What does that mean? Do you beat the market benchmark?
To put it simply, I certainly do. The type of trading I do, when used for asset management, falls into the “absolute return investment” category. By its very nature, it aims to achieve a return regardless of whether the market is rising, falling or has no clear direction. It is also the type of investment that does not correlate with standard investment assets such as bonds, indices, stocks or real estate, making it a suitable and sought-after addition to traditional investment portfolios.
Let’s take the performance of the S & P 500 index over the last 10 years as a benchmark. The average annual appreciation of this index over this period was roughly 12% per annum, with a peak decline in value of roughly 33%. In this case, therefore, the ratio of annual return to risk taken is, if rounded to the closest whole number, 1 : 3. On the other hand, in trading, the return depends on the risk taken, which can be defined in advance. If I take an average well-diversified portfolio, its average annual return against the maximum risk taken can be expected to be about 3 : 1. So yes, the ratio of return to risk, expressed in terms of a decline in the value of the asset, is better.
Of course, this is a very simplistic view, abstracting away from the other risks involved in trading on margin, but in principle, the difference can be substantial.
Why do you only trade in the US markets?
My algorithms are managed by a US broker and hedge fund that specializes in the management and execution of automated trading systems and makes sure that trades are executed correctly. I am therefore freed from having to sit at the computer and deal with the various technical situations that can and do arise. However, this broker only trades and oversees the systems during the “US trading session”.
Most of the commodities or markets I trade are traded either exclusively or predominantly during the US trading hours anyway. At least when it comes to soy, wheat, corn, indices, etc. However, there are already a number of markets and commodities that are also traded in London or Asia. It is with the development of electronic trading that slowly, the trading hours in various markets are expanding considerably and the volume traded is growing outside the original opening hours of the actual exchange.
So, your business day begins in the afternoon?
Yes, but I rarely sit at the computer. It’s better for me as well if I don’t supervise it and let the algorithms automatically do the trades while supervised by a person I can rely on. Basically, I only need to check the results in the evening, at around half past ten.
Does that mean you’re comfortably off?
I wouldn’t call it “comfortably off”. For me, the asset is the time that I have gained from it, but which I still largely devote to business because I enjoy it. Algorithm development itself is a never-ending process. It’s not like there’s a target level that, once reached, means it all stops. It’s just like any other technical development – it’s constantly moving forward.
Do you have to follow the economic results of companies and other data that affect market development as well? Or not so much?
I watch the markets if I need to, but it’s not usually necessary. I often have friends asking me, “What about this movement? What’s happened?” And, oftentimes, I do not keep track of it because I don’t need to. I’m more concerned with the development and expansion of my business.
We’re almost in holiday season and there will be fewer trades in general. What’s good to trade now?
I don’t look at it that way. My portfolio is made up of roughly 20 systems. That’s 20 different markets and if any of them move, they will be traded.
Which stock indices and currencies do you trade?
So far, I’ve only traded currencies to a very small extent. I am limited by the US trading day and currencies are traded globally and at different times. As for stock indices, my priority focus is on the US S & P 500, Dow Jones, NASDAQ 100 and Russell 2000. There is ample liquidity and volatility and therefore an environment suitable for this type of trading.
You also trade commodities. Is trading soy, corn or wheat fundamentally different?
Every market behaves differently. It also depends on the players that are trading in that market. A completely different type of player trades in the cattle market, which is also used by breeders and producers for various forms of hedging. And again, completely different players trade interest rates, bonds, precious metals and energy, different ones trade currencies and all of them do it for different purposes and with different interests.
Each of them has a different interest that they focus on. Producers want to sell as expensively as possible and buyers want to buy as cheaply as possible. Wheat traders or large agribusinesses need to insure or hedge the price of a potential future crop according to what is expected. Each, however, in the opposite direction. There are traders (traders, hedge funds) who trade price differences between individual contract months based on, for example, seasonal cycles, then there are those who speculate fundamentally strategically, taking into account various macro factors. And also, those who actively trade, i.e., speculate on a short-term increase or decrease in price.
Did the coronavirus pandemic affect your business too? Did you have to change your algorithms because the market perhaps behaved differently?
I trade directional systems and they need the markets to move in some direction; the actual direction doesn’t matter. As soon as they move, the systems have movement they can trade. The coronavirus pandemic has brought more volatility to the markets and therefore has moved the markets.
So, you did more trades than usual throughout the pandemic and perhaps even made more money?
You could say that.
Do you manage other people’s funds, too?
I currently trade for hedge funds and the systems I make are licensed through a broker connected to a hedge fund I trade with, who oversees them and monitors their performance. He’s been in business since the early 1990s and has a network of other partner brokers and hedge funds, who have their own clients. When they’re interested in a system based on its performance, they can subscribe to it. But given the strong interest, I’m considering solutions in this area for the future as well.
How many traders use your systems?
Let’s say hundreds. They’re almost exclusively foreign investors.
Do you know what volume of money is traded through your algorithms? Are you a small or a big trader?
Based on the licenses used, which are tied to the number of contracts traded, I’d say that lower to mid tens of millions of dollars are currently being traded through my systems.
Do you also build up your financial assets in another way?
The primary source – aside from my other company, a recruitment agency – is trading.
Do you consider it wise if someone starts trading based on advertising?
There is no clear answer to this. The fact is that people have to get into trading somehow and advertising is one of the tools to make that happen. But in quite a few cases it is misleading. Trading has to be seen as a craft. It takes time, you have to learn and try it somewhere and, most importantly, you have to be aware of all the pros and cons. The problem with aggressive advertising is that you are riding on a positive emotion where there are a lot of promises but no other side. No one learns to do trading in 20 minutes or 20 days. It takes two or three years to master it at the level of a craftsman. Yes, it’s risky and this must be kept in mind. The basic rule, which should be written everywhere in big letters, is don’t trade with money you can’t afford to lose. The psyche and emotion involved in making key trading decisions when losing your house is at stake is completely different than when you’re trading with an amount of money that won’t hurt you too much if you lose it.
Do you speculate on cryptocurrencies as well?
I also have something in cryptocurrencies. I don’t actively trade them though. I just buy and hold them.
Is it possible to create an algorithm for trading cryptocurrencies?
It certainly is and there are many people who are successful at algorithmic crypto trading. As for me, I’m still in the process of finding enough quality data at the moment. To develop systems the way I do, you need to have a long enough period of good quality data to ensure validity in the development and subsequent testing of the systems. But because crypto is decentralized and each exchange has differently quoted prices and different data quality, I’ve so far had a harder time making systems for it.
Original source in Slovak: https://e.dennikn.sk/2434630/vytvara-algoritmy-na-obchodovanie-vyhodou-je-presnost-a-disciplina-ludske-oko-vsak-vie-vyhodnotit-viac-situacii/?cst=664d7d21081580b788d8d4f41ad610dbc790074c