Interview with Andrea Unger: Four-Time Winner of the World Cup Trading Championships®

Andrea Unger is the only Four-Time winner of the World Cup Trading Championships® (2008, 2009, 2010, and 2012) and is a full time professional trader and published author. Unger has been part of the scientific committee of the Italian Society of Technical Analysis and frequently speaks at conferences around the world. Known for his success in the World Cup Trading Championships®, Unger is the creator of UngerAcademy, designed to teach traders how to build automated systems and focus their trading mindset. View his popular trading blog here and check out if automated trading is for you here.

Kurt Molina: Take us back to how you first got into trading and what that experience was like.

Andrea Unger: I started a long time ago, about 1995 or 1997, when I was working for a traditional company. Some colleagues and I started buying stocks based on rumors — it’s going up, it’s going down and so on– and we made money, which was astonishing. We thought we were very good at what we were doing. Then, sooner or later we realized it was not that easy and the first losses came, and then more losses and more losses.

We believed we were doing things properly, we believed we knew things, but at the end of the day we realized that was not the case. I did not want to quit because I believed that there should be a way to make money in the markets, so I started studying. I started studying harder and harder and slowly I started figuring out there was a hidden order, per say, in the markets.

I had good luck because in the early 2000’s, there were some instruments called cover warrants, sort of like options. The software was not the best, and quotes from the market makers were delayed by a few seconds. If you were good at math you could see there were opportunities for arbitrage. So I started making money playing a sort of game with these. I was well aware this would not last forever because obviously the market makers were not giving out money for free. I knew they would improve their software so I had to find an alternative to make money in the market. Being an engineer with a mathematical background I thought about trading systems, and I realized that I would not be a very good discretionary trader. That’s when I started with my quantitative approach to the markets.

KM: What is your opinion on technical analysis and how retail traders are using it in the markets today?

UA: I’ve been in the scientific committee of SIAT (the Italian Society of Technical Analysis), so I do believe in technical analysis, but I believe that there are misconceptions about technical analysis in today’s markets. I was recently a speaker at the IFTA conferences where the main topics were quantitative trading, machine learning and cryptocurrencies, and some people at the conference were disappointed because they did not find a typical chart—you know, support/resistance, trend lines and so on. I must admit that the belief that technical analysis is strongly (or is only) related to lines on the chart is completely wrong.

I think technical analysis is much more. If we include technical analysis as it should be, with all the quantitative research behind trading systems, we are opening a new world. With this perspective I believe there is incredible value because there are incredible minds out there, and their contribution to quant trading is enormous. In that zone there is so much to discover, so never limit technical analysis to just indicators, support and resistance, and charts. Quantitative trading is also technical analysis and that is incredibly important.

I must admit that the belief that technical analysis is strongly (or is only) related to lines on the chart is completely wrong.

 KM: You have quite a bit of trading experience as we can see from your multiple World Championships, could you give us some details about those trading systems?

AU: Well I have plenty of strategies, but in the championships I had to keep the number of strategies small. The starting capital in the contest is always kept as small as possible because it’s the percentage gain that matters and obviously you get a higher percentage gain on a smaller amount of money. In my first victory in 2008 I was trading four strategies. There was an attempt to diversify because two of them were trend-following intraday strategies on DAX futures and on the Italian index futures, so they were closing positions at the end of the day. Then I had an intraday counter-trend strategy on the mini S&P 500. I made this choice because, for me, the S&P is typically a mean-reverting market so obviously counter-trend strategies on a mean-reverting markets tend to work the best. I also traded another trend-following strategy on Euro FX futures.

Then in 2009, these four strategies were no longer profitable way they needed to be. Those strategies were leading nowhere just because the markets got so crazy near the end of 2008, and at the end of the day they were losing their identity, so I had to react. I added different kinds of strategies during the second half of 2009 because I believed that I had to dramatically change my approach, and doing so lead me to the second victory.

I understood diversification from every point of view was key, not only markets but models and timeframes and so on, so I diversified even more. In 2010 I added new markets such as crude oil, metals and futures. I also changed my systems in order to be as diversified as possible. As a matter of fact, I was trading mostly trend-following strategies because my starting point has always been intraday. When I develop intraday trend-following strategies, I normally develop them on a five-minute chart, however this does not mean I am high-frequency trading. Simply, on the five-minute chart you have a pretty nice definition of the move of the market because you see how the moves develop, and this is an enormous help in getting the right signal to enter the market at the right time. So normally I was breaking out the high or the low after a certain number of hours from the start of a session and then riding the market to the end of the session unless I was hit by a stop loss, which is always in place. I do believe in stop losses. Stop losses have to be there, they don’t have to be too tight, but you need a stop because hope is always an enemy in trading.

I want to add something I often mention when I speak about trading. Sometimes you read blogs suggesting no stop is better, and that your stop loss is triggering your losses, so you should trade with no stops to get better performance. This is misinterpreted. We have to go back to the 1980s and we take the Donchian Channel breakout strategies, the ones the Turtle traders were trading, and we analyze these strategies which were essentially breakouts. We test them and then we test the same trend-following strategy inserting the stop loss. Normally we see the strategies with no stop loss lead to higher profits, so from this analysis we could assume no stop is better. But we forget that in those strategies there is a built-in stop, because the trade was simply reverting when you were wrong. So essentially you are closing the wrong position, you’re not sitting there hoping to see it reverse– you’re closing the losing position and opening a trade in the right direction. So you do in fact have a stop loss.  All these strategies that don’t have a fixed dollar-amount stop all have a plan to close the trade. ‘Wait and hope’ is the real killer. You should always have a plan to close the trade if it goes wrong.

KM: Could you discuss the position sizing strategy you use during competitions?

AU: Competition position sizing is different. Obviously you want to achieve the maximum you can in a contest so you risk a lot. I normally use an approach with which I have basic statistics on how much a single contract can lose. I want to limit my loss to a certain percentage of my account size. Based on that, I can decide how many contracts to open.

That said, in my normal trading I limit the impact of a losing trade to 1.25% of my balance. In the championship the risk was taken to levels above 20% so you can imagine the huge difference. The performance of what you see in the championship is marvelous but there is also an extremely high level of risk, so you have to be aware that you can lose a lot in the worst case scenario. When I analyze strategies I can calculate the optimal F which is the optimal level of risk to achieve the maximum return for that strategy, which is pure theory. In theory that level demonstrates the level of maximum return and after that level, performance starts to drop.

KM: So I know you wrote a book called Money Management, what inspired this book?

AU: I’m proud to say that this is the first book about this topic written in Italian. It has also been translated into Chinese. Before I published the book, I was browsing the internet like crazy trying to find all the possible answers to my questions about position size and money management and I never found anything in Italian. I decided to write the book I wished I could have read, so that anybody coming after me looking for the same kind of information could find it in my book.

GQ: What has been the biggest take away from the World Cup Championship?

AU: The championships taught me to always be aware of what’s going on and always be ready to find solutions to problems. So today when I trade my main account and I’m in trouble (because I’m often in trouble, every trader is) I am much more open minded to find solutions because I was pushed to the limit during the championship. And also I learned to always be ready to react when adversity comes from the markets. I think that was the biggest thing I learned.

Always be ready to react when adversity comes from the markets. I think that was the biggest thing I learned.

 GQ: What were some of the biggest challenges that you had to face in the competition?

AU: Every competition has challenges, but the main challenge was the competitors. There are other people taking part, and they want to win. The competition is against the market, against yourself, and against competitors. That being said, after I won the first time I decided to try to win three years in a row, which I did. The project was a longer term project with more time and the main adversity was to be in the middle of changing and evolving markets. The markets were really changing quickly year after year so I was always facing new scenarios and different problems. Diversification helped a lot but also created to a lot of work to be done. The markets were hectic, especially after 2008, so as you can imagine the index futures were really crazy. In 2010 commodity futures were very active and so on, so the challenge was to be able to keep all the balls in the air and be able to make profits.

GQ: How do you go about generating ideas for your trading systems?

AU: I started with classical breakouts. And then when they did not work the way they used to I was trying to look for something which was the opposite of that– those were my first steps. I am always very curious, so I play around with entries, exit and ideas. I start running tests and see what the results look like, and when there is something promising I go ahead in that direction and try to build something around that idea. The ideas I have cultivated grow, sometimes just by playing with the numbers I get from performance reports of simple trading ideas. I read a lot of blogs and whenever I see an idea presented I take a look at that idea to ensure that I digest it properly and maybe find something new and something interesting. Curiosity and diligence are the most useful things to generate ideas in my trading.

Curiosity and diligence are the most useful things to generate ideas in my trading.

 KM: Are there any interesting blogs that you would recommend for people to check out for trading ideas?

AU: There is plenty of stuff on the Internet, of course. I would suggest if you are interested as an automated trader you should first try to get in touch with some particular leaders, specifically Larry Williams, Howard Bandy, Perry Kaufman, because these are people who have written tons of important books about automated trading and having the right mindset about trading. And life experience, which is always something that has to be there because you can have all the theory in the world in your head but you should talk to real traders as well, because they have experienced the pain that comes with losing trades.

KM: Can you give us a rough outline of creating and validating a trading system?

AU: You can start from a very simple approach. You take an intraday dataset on a 5 or 15 minute chart, then after 2-3 hours of a session you’re going to see the high and the low of that session so far. Then you can decide to trade entering during the breakout of this high or low in the next three/four/five hours and take the trade to the end of the day with a stop loss applied, which should be 60-70% of the average range or daily range. Here you have a classical breakout system, which obviously will not be the money maker you were looking for. But at this point in time you can try to see what happens by entering the trades you have and observing the chart patterns that appear the day before, and you will notice that this kind of strategy takes advantage of volatility contractions the day of a breakout, which means when there was a quiet market you can expect a storm. You’re looking for a trend so if you find some pattern which tells you there had been a volatility contraction or indecision on the day or the days before activity you would find tremendous benefit in trading only when contraction or indecision is there.

KM:  Are there particular strategies or time frames you believe work best when it comes to trading FX?

AU: I have the same approach I just mentioned on FX. First you have to decide which session to trade. I notice that with FX you have many ways to trade which make money and the time frame sometimes can be increased a bit (you can work off of hourly bars or even more). I notice that in the currency markets you have a better edge taking trades that last a bit longer.

Also, you have to pay attention because not all currency pairs behave the same way. While EURUSD, GBPUSD, GBPJPY are all trending, there are other pairs which display typical mean reverting behavior, for example GBPCAD. So obviously on this kind of pair you have to change your approach and look for something which is a countertrend strategy, for example.

You have to build a portfolio of different strategies and different pairs and focus on trying to diversify. When you build strategies be careful to ensure they are not all related to a specific currency or currency pair. For example, if you use all pairs against the U.S. dollar and the current trend is related to the dollar move, you are probably correlated in all your strategies. This is not good. If you take a mix of different pairs then you have a much higher probability of profit due to diversification.

KM: I know you’ve referenced in the past that you optimize to study how the market reacts to certain conditions. Could you go a little deeper into this?

AU: I never optimize to find the optimum. I run the optimization of the software to see how my trades change depending on the parameters of the particular trade. For example, say I wait for three hours for markets to develop and I get the high and low, then I place trades for the next four to five hours. It could be interesting to optimize for the different times in the day when I start placing my trades and seeing how the end result of trades change depending on what time of the day I start trading.

KM: What do you think most systematic traders struggle with?

 I think that in the industry there is a lot of confusion about what a trading system is. People think about trading and they think a system fits everything– every time frame, every market, but this is basically all wrong. Trading systems vary greatly and there is much to be developed on every single market. Quant trading is also confused with high-frequency trading, which is a different world, nothing to do with what we do. This confusion creates barriers to entry because people think they are not good enough to fight against technological monsters out there, which is not necessarily true. I believe that there should be basic information about what trading systems are, what they represent, what benefits they can offer to a trader, and also what you can expect from becoming an algo trader. I mean obviously I won the championships and you’re talking to me also because of that, but the performances that you see on the leaderboard are something you shouldn’t to rely on when you first start trading.

To give context, if you are a good you trader would systematically trade with good diversification and a good risk approach, you can aim to be happy with a 30% return a year. I know many people would not be satisfied with that but if you go and try for 100% it’s a waste of time. You must be realistic and sometimes people are not realistic and go for a dream and then the dream becomes a nightmare when we face losses because of too much risk. Reality is different and often people hope to become big overnight starting with $1000 but it’s more low profile than that.

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