Once upon a time, when investing was a nascent industry, all you needed was one key piece of information and your trading business was taken care of. Later, it was important to know this information before the competition got to it. But the number of key factors kept growing. Analyses and, more recently, algorithms came into play. In today’s interview, we’re going to talk to a creator of such algorithms, financier and investor Marek Chrastina.
A computer is but a tool
What do modern investors or traders need to succeed?
I think that regardless of the era, the essentials remain the same. The “musts” are know-how and common sense, discipline, the ability to take sensible and meaningful risks, and a suitable diversification of your portfolio. Unlike in the past, however, the costs of entering into this business are now so low in many markets that absolutely anyone can trade or invest. However, if we want to talk about a successful business, that is something completely different. Learning how to trade and gaining experience requires a lot of time and effort.
Is it even necessary nowadays to know the basic rules of investing when the best solution will be evaluated by a computer after you give it the input data?
It certainly is. A computer should be seen as a tool that can process large amounts of data, but the things it needs to calculate and the things that are essential are still decided by humans.
What should a layperson imagine when we talk about trading algorithms?
To put it simply, you can think of a trading algorithm as a set of programmed rules for when to invest, under what conditions and in what or with how much capital, and, on the other hand, when to exit a given trade or investment. The desired outcome is, of course, long-term profitability.
What does an investor or trader need to know to make good use of such a sophisticated tool?
A famous saying comes to my mind right now – fire is a good servant but a bad master. That applies here too. If you don’t know what you’re doing, you’ll burn yourself very soon. A trading algorithm should be looked at as a tool used for a certain purpose and in a certain environment. The knowledge required varies depending on whether it is used by a trader, i.e., someone who is actively trading, or an investor – a person looking for possibilities of capital appreciation without physically doing anything themselves. However, in both cases, one certainly needs to know the environment, more specifically the market, the opportunities and the possible risks.
What you need is the right adjustment of trading risk
If someone has a trading algorithm at their disposal, is it enough for them to rely on it and do nothing? Can they stop worrying about the details? Or is the devil in the details, as they say?
Every technology, as well as its ergonomics, evolves over time. Today, there are brokers or providers through which one can connect and use a third-party trading system or portfolio for one’s own trading account. However, what every investor needs to resolve on his or her side apart from the quality and reliability of the algorithms they offer, is the adjustment of trading risk, which is one of the most common causes of large losses due to our intrinsic greed or ignorance.
There are still a great number of fraudulent or, in real market conditions, non-functional systems on the market, because creating a beautiful-looking simulated past performance is technically very easy. However, it does not guarantee the ability to perform well in the future. Of course, both of these pitfalls are solvable. There are already companies that provide risk management for investors – either by setting it up algorithmically or by having an expert set it up and then oversee it. And when selecting an algorithm, if an investor cannot expertly assess the robustness and quality of a given system, it is easiest to require “skin in the game” from the provider or the results of real trading over a certain period of time at the very least.
How many variables do you need to feed a programme to determine the most accurate strategy or solution?
There are different types of algorithms. From very simple to very complex. As for my systems, I like to say that there is beauty in simplicity. Robust strategies are usually the simplest ones. To quantify it, I’d say you need one or two input and one or two output conditions plus a minimum of optimization parameters. Since we are in the sphere of probabilities, accuracy is not a relevant parameter.
Personal experience
We’ve jumped straight into the subject, but the readers might also like to know something about your past. What was your first major experience with investing? Was it a good one or did it end in failure and therefore turned into a lesson for you?
I’m constantly trying to learn from every single experience. The crucial thing for me was that from the very beginning of my involvement in this field, I approached it from the opposite side to what is usual in the trading world. And that is from the risk management side, thinking in terms of portfolios, robustness of systems and long-term sustainability of trading performance. Usually, however, traders master the technique first, whether in the form of a technical or fundamental analysis, and gradually work their way through the psychology of trading and money management, to risk and portfolio management.
When did work in the finance industry start making sense to you and why?
If we’re talking about investing or trading, I have been interested in these things ever since I was a child. It’s natural for me and I do it in line with myself and my personality and talents. Doing something in a state of flow, when you enjoy it so much that you forget about the time, is totally different to forcing yourself into something. And this is how the things I enjoy and those that provide me with food and a roof above my head come together in one place. Trading as such has been part of my business portfolio since about 2008. As I’ve been running several companies in parallel, I can’t clearly pinpoint the time when this business started to play the primary role.
Which markets do you prefer?
Currently, I am mainly actively trading in commodity markets in the form of futures contracts. In the near future, I also want to start trading stocks and cryptos, which I have only been holding so far.
By the way, what is your relationship with cryptocurrencies?
My relationship with them is pragmatic, not emotional. I trade whatever is meaningful and technically tradable to me. So, I see them as a tradable asset.
You yourself are the best advertisement for your work. How are you doing in the markets? From a long-term perspective, are you in the black, in the red or somewhere in the middle?
Over the years that I have been developing and trading my own algorithms and portfolios, I have to say that I have been able to achieve positive results not only at the level of years, but also at the level of a significant majority of quarters. Moreover, last year, I participated in the world’s most prestigious trading competition, the Global Trading Championship, for the first time and managed to come third.
Have you ever lost money on any of your trades?
Of course. Losses are part of trading and the daily routine. Trading is about constantly executing both profitable and losing trades. Nevertheless, the point is that in the bottom line, the gains exceed the losses and at the end of the month, quarter or year, there is a positive number. The inability to accept and execute losses as part of trading and the pursuit of a 100% success rate quite often leads to an absolute loss.
Nobody can guarantee profits
Why did you start developing algorithms in the first place?
As a portfolio manager, I was responsible for hunting for traders around the world and evaluating the robustness of their trading systems. However, most traders are not profitable in the long term and separating the wheat from the chaff is often very difficult. There are also a lot of over-optimised and dysfunctional systems being marketed. Therefore, after a while, it started making more business sense to me to gather the know-how and start developing the systems under my own roof.
The role of the algorithms is to make money. Do you guarantee profits or is this too courageous a wish?
It’s utopian. The definition of trading is that it’s a “speculative business”. And this is true regardless of the form it takes. Algorithms are just tools that carry out this form of trading. No trader is realistically able to guarantee profits. It is, however, possible to trade robust systems in a disciplined manner, adapt to the current market conditions, put together a well-diversified portfolio, and be rigorous in managing risk. And with a process set up and executed in this way, long-term good performance is very likely. However, it needs to be approached with humility, because all sorts of unexpected situations can occur.
What about the success rate of algorithms? Is it like in chess, when one is playing against a computer, that although the computer may evaluate a greater number of different combinations of moves, a person also has, for example, intuition or imagination, which pretty much evens the odds?
If you want me to compare the success of humans versus algorithms in trading, I’m probably going to disappoint you. These are two different worlds and each of them has different qualities and is usable in different ways and situations. So, the question to ask is, “How can we get the best of both worlds and create synergy?”
So? How do we do that?
It seems that artificial intelligence (AI) is the answer to some extent. It has already managed to beat even the most powerful chess computer. Out of 100 games, it didn’t lose a single one, although I think it only won 28 of them. An analysis of the games showed that it used unconventional ways of solving problems. However, it is necessary to take into account that while chess is a structured game with clear rules and clear boundaries of the playing area, the market is an environment of uncertainty with virtually no boundaries. While this is a significant difference, I believe that artificial intelligence will nevertheless play a significant role in both trading and investing.
The market is always right
However, in the market, you are not only “playing” against the market itself and other traders, but also against other algorithms, all of which are trying to do the same thing – make money. But not everyone succeeds in doing this. Because just as some manage to make money, others must inevitably lose it. Do you consider such an alternative when planning your steps?
I don’t actually agree with either premise of the question. I’m certainly not “playing against the market”. The market is always right and I try to be consistent with it. I also don’t think that the players who enter into market interactions all have the same interest. I think there are many players in the market with different positions and interests. There are, of course, markets where there are just a few players and the trading looks more like a game of poker, but that’s not my case. I also don’t think that market interactions are a zero-sum game. Of course, I count with losses.
How often do you need to refresh or even reprogram and update your algorithms to respond to new, ever-changing market situations?
For some, I re-optimise the parameters regularly, but the periodicity is defined by a methodology, which can be different for each system. Some systems may require modifications every half a year and other ones every two years. However, there are also systems that don’t require any changes at all or where the necessary interventions are more or less just cosmetic.
What new things can we expect after trading through algorithms? Will it be some higher form of artificial intelligence or something completely different?
Technology is evolving exponentially and its development often takes the form of black swans that fundamentally and in leaps change the current paradigms in a positive and constructive sense. The list of possible scenarios is almost endless, but I cannot predict the future so I’m going to refrain from making any predictions.
Who is Marek Chrastina?
Marek Chrastina is a Slovak businessman, financier and investor. He is actively involved in stock trading in the form of algorithmic futures portfolios, and manages two companies, Quantum Financial and Quantum Global, which focus on the development of trading systems and analytical tools for portfolio construction. He started his business in 2004 while still at university and has since built several companies in various industries. His academic background consists of mathematics, economics and psychology. He uses the synergy of these diverse disciplines in his trading in the financial markets, which he has been actively involved in since 2008. Last year, he managed to finish third in one of the world’s most prestigious trading competitions, the Global Trading Championship 2020/2021.
Original source in Slovak: https://www.finreport.sk/lidri/marek-chrastina-pri-investovani-nikdy-nedosiahnete-100-percentnu-uspesnost-pointou-je-aby-zisky-prevysili-straty/