EP 023: The transition from discretionary to quantitative trading & how to optimise your strategy w/ David Bush of @Alphatative

Aaron Fifield Podcast 15 Comments

Now, I had a very interesting discussion this week…

I was fortunate enough to speak with David Bush, an extraordinary, seasoned trader with 20 years experience in financial markets.

David comes from a non-traditional background, and what I mean by this; he has no formal education in the field of finance. In fact, he is a music graduate and performed as a professional musician for many years.

But as you’re about to hear, David changed paths during his twenties to become a trader. After overcoming the initial challenges that all new market participants endure, David did well for himself as a discretionary trader for many years.

But with an urge to optimise his trading approach he gradually transitioned into a quantitative trader and went searching for new ways to exploit opportunities within the market. From there David has gone on to take out the number one spot of BattleFin’s ‘Sharpe Ratio Shootout’ (an international quantitative finance tournament), with over 3000 competitors.

During our interview David brings a really insightful take to topics such as the transition from discretionary to quantitative trading, how to eliminate a single point of failure by trading multiple systems, and how the Monte Carlo tool can teach you a lot about how robust your strategy really is.

And I must give a special mention to Zach Hurwitz (EP 011) for making the intro – thanks Zach!

“The DOLLAR is in the details.”

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“A robust system should work across most equities of the class (i.e. mega-caps).”

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“Once you get thrown down a staircase or two, you realise this risk part is pretty important!”

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Lessons learnt in this interview:

  • The driving push that moved David form a discretionary approach to quantitative trading. And he explains his first steps to making the change.
  • How quantitative trading can bypass some of the challenges many encounter with hand trading, such as; geometric position sizing, efficiently managing capital, and having an approach that is less time intensive.
  • The process David implemented to determine optimal exits for his trading approach, and the discovery of shorter holding times providing superior results (when compared to original assumptions).
  • Using multiple systems to eliminate a single point of failure – overseeing trades/systems, and worrying less about individual trades.
  • An overview of the Monte Carlo tool, and how you will learn a lot about your strategy by viewing the results of many theoretical equity curves. David also mentions how this tool can be beneficial for discretionary traders who have a fair amount of trade history.
  • How to determine if a strategy is robust, why less rules generally perform better, some great pointers on where to backtest and avoiding survivorship bias.
  • Does it pass the Steve Jobs test? Ask this simple question to prevent yourself from cutting corners.
  • The relevance of fractal patterns in price action. And David explains the clever concept of the eagle, the donkey, and the mouse.
  • The many advantages of coming from a discretionary background when entering the quantification process.

Links and resources mentioned:

  • Fortunes Forumla – The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street by William Pundstone. One of the books David recommends as a solid read. He mentioned this was the book that pushed him to quantify his trading.
  • Trend Following – Learn to Make Millions in Up or Down Markets by Michael Covel. Another recommended read by David, he pointed out the many great anecdotes from traders who were behind the Turtle system makes this really interesting.
  • The Physics of Wall Street – A Brief History of Predicting the Unpredictable by James Weatherall. The third book David mentioned, this one covers the evolution of quantification and different players who have come into the field of quant trading.
  • Quant Forum Interview – The Making of a Quant is a short 16 minute video interview with David Bush, following his success at BattleFin.
  • Alphatative.com – To learn more about David, visit his website.
  • @Alphatative – Also be sure to follow David on Twitter.

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