An Interview With Raymond Barros on Becoming a Profitable Trader after Failure, Elliott Waves, Chart Patterns and Market Profile

The following interview is extracted from my book, Breakthrough Strategies of Wall Street Traders. Similar to Market Wizards, within it I interview 17 remarkable traders and investors for their investing stories and unlike other investing books, get them to actually reveal the trading-investing rules and techniques they use as well as what they tried that didn't work. If you want to learn trading and investing, start with these systems.

Raymond Barros – successful trader, professional fund manager, author and trading educator – initially failed miserably at the beginning of his trading career by losing his entire trading account several times in a row. He suffered through seven consecutive years of gut wrenching losses before he finally made the breakthrough in learning how to become a successful trader. When he finally turned the corner, he went into the fund management field where he achieved a 20+% CAGR track record in returns.

After finally hanging up his fund management shoes, Ray became a professional trading coach in Asia who teaches the tools and thinking skills that help traders improve their returns and avoid the most common trading mistakes. In this interview you will find new and refreshing ideas on how to develop a winning attitude, rules for money management, and how to wait for a trend to confirm itself in order to achieve lower risk entries. A particular highlight is Ray’s statistical method for determining when he should raise or lower his position size.

Ray is widely recognized for having developed a new and unique theory of market structure that simplifies Elliott Waves and provides a clearer road map of how a market structure is likely to unfold. He uses his simplified “Ray Wave” and “Barros Swing” to trade the markets along with Peter Steidlmayer’s Market Profile zones that we will introduce in detail during a later interview.
In his early unprofitable days Ray was searching for the Holy Grail or perfect trading system that would never err, but he now teaches that the best or most profitable strategy is to think of the market in terms of probabilities. Rather than assuming certainty, he emphasizes that you should organize your trading to recognize the forces of probability that govern the markets. In other words, you should wait for confirmations rather than proactively trading in anticipation of what you think the market will do. Furthermore, he seconded the opinion of Mike Ser and Andy Man that you should adopt a trading system and style which matches your personality in order to maximize your chances of winning in the markets. This is an interview with many takeaways on what to study to become a more profitable trader.

Ray, you started as a lawyer. Can you give us your background on how this turned into a career in trading?


Well, I probably started trading about a year or two before I sold my legal practice. No, that's actually not true. Going back a little bit here, it was in the first year of University that I got involved in trading. In those days we had a mining boom in Australia and there was a stock called Peerless. That thing was about a 4¢ or 5¢ stock and it rallied up to $2 or $3. We had bought it quite near the lows and I'd love to say we held on to it and then sold it at the highs, but we actually saw it go all the way up and go all the way down and ended up losing money on the bloody thing. That was my first experience with trading. I wiped out my account in that little thing called Peerless.

I started my first year of University, which would have been in 1966, and I remember that that was my first trade. Later in 1980, which was a year or two before I sold my legal practice, I was going to Hong Kong from Sydney where I was living at the time. My wife's parents were in Hong Kong and my father-in-law said, “Do you do trade?” I said, “What's trading?” He was trading the Hong Kong gold market and I said, “That looks easy” because it was just trading a sideways range. I was watching him trade and he was buying the highs and selling the lows. He was looking for a breakout and I thought, “Oh, just sell the highs and buy the lows. How hard can that be, right?” 

We started with one contract and traded that way for about a month. I made enough money to buy my wife a beautiful fur coat, kept whatever I had left and kept on trading when I came back to Australia where I subsequently succeeded in losing all that I had. If I hadn't bought her the fur coat then I would have lost it all, but I didn't tell her that. Sometime later - six or nine months later - I said I wanted to give up the law. I was thinking that I’m such a great trader but I sort of dismissed the fact that I had blown my trading account. I started trading anyway and that's how I got into it.

Then eventually you just quit your law business, your law practice?

Yes, I basically sold the law practice in order to become a full-time trader. I gave my wife a fur coat but I put aside the fact, I denied the fact that I actually had lost money. Had I not sold the fur coat I probably would have lost my shirt, but I just put that to the side and I sold the legal practice.
In about eighteen months after selling the legal practice I had lost every single penny that I had gotten from the legal, which was quite substantial in those days, and then my wife Chrisy basically supported me for the next seven years. A couple of million dollars in today's language went down the chute and my first successful trading year was finally in 1987.

What happened that finally turned you around? What had you studied that didn't work and what did you come up with that finally worked for you?

You have to remember in those days - this is in Australia - what we had were mainly get rich quick schemes. Now for trading I read everything I could - Gann, Elliott, Wyckoff. Whatever you had I read it, but it just didn't click for me. I was looking for this idea that somehow I was going to find a magic system that would not be wrong. I tried putting in stops and they would get knocked off and if I didn't put in a stop I would lose a ton of money.

I remembered there was some sort of congestion system - I think the Nofri Phase Congestion system - where basically if you had the market going two days in one direction then you would enter a position in the opposite direction. Let's say your market went up two days in a row on a closing basis. You would short sell on the second day’s close and you would look to get out at the first pullback. If you went up another day then you sold again and you would exit it on the first pullback.

They would claim a 90% win rate with this system. Well they would probably be right provided that you only looked at the last trade that you did! What about all the days where you entered the short sell lower down, if you know what I mean? It was that sort of thing that I was trying to play with at the time looking for a way of not losing. Of course there is no such thing. It just didn't work. 

So what finally clicked?

You know I'm often asked that question. My wife Christine (Chrisy) was supporting me and she hates me telling the story, but I owe so much to her. I had blown the account umpteen times. I had blown it again and again. Basically I went to her one night and said, “Look, darling please, please, please just give me another chance and just give me some more money. I only need to have twenty-five grand and it'll be fine.” I don't know where she got it from, but she gave it to me on a Friday morning. She gave it to me and I was day trading in those days. I was trading the S&P. Those days the S&P was $500 a big point. It had about a four-point range that night and I bought every high and I sold every low and by the time that night was over I had blundered $25,000 in one night.

I remember sobbing. It was deep wrenching sobs. I was trading in my office. We had a two-bedroom apartment and many years later she said she heard me sobbing and she didn't know whether to comfort me, because she knew what had happened, or come and take my head off because I had blown it again.

That was the last time I ever blew an account. That started the bounce in about '85. Then I went and did a course by Pete Steidlmayer on the Market Profile. We were really running very tight on money and I said to her I really have to go because I think this is it. It was announced in a little ad in Futures magazine and I said I have to give this a go.

That started at least putting me on the right track in realizing that the market was a probability game. At least that's what I got from Peter's lectures. I kept going back and about two years later I had my first win. To be honest I think I was just lucky that year. I happened to get short the Friday before Black Monday and that sustained me for the year, but it gave me the confidence or belief that I actually could make money.

I think '88 was more or less a scratch year, '89 I made real good money and then in '90 I remember my broker suggested that I become a fund manager.

I didn't like the way that we had to basically sell ourselves in those days. If you didn’t have a sustained track record you had to go on all these shows. I didn't like that. Chrisy comes from a fairly wealthy family and through her we put a bunch of people together. We managed to start with 20 million Aussie dollars in 1990 and that was it. I never looked back after that. We closed that in 2010. We ended up with AUD 943 million, so that was a good result.

What was the rate of return?

About 23% compounded. I had a peculiar way of doing things. I didn't charge a management fee because I didn't know any better in those days about management fees. I basically charged a fairly high incentive fee and I would only charge it at the end of the period. They were locked in for three years unless I lost 30%.

Basically I kept the same people except for losing one guy when I had a very bad run for two years where I didn't make any money. It was in ‘99 or ‘95 … something like that. I can't remember exactly unless I look at the track record. There was a slab of period where I just didn't make any money and luckily these guys had become friends so even at the end of the period they stayed with me except for one guy. Then in 2007 I lost two people because they asked to be pulled out because of the crash. They lost money elsewhere and they needed the money so I let them out of it. So I only lost three people. We started with twenty and we lost three, but I managed to retain the others.

I never realized until much later how much of a rarity that is in the fund management game because most people pull out fairly quickly. They don't stay with you. The whole fund structure was very different and I was just lucky with the people that I chose.

From my experience of that time period usually you would lose at least 10% of your clients per year just because of divorces, taxes, itchy fingers and so on, but you did better than that with your client retention rate.

I am so grateful now - looking back and knowing more about the industry - and I was lucky that I had just found the right people and we clicked. We became really good friends and they just stuck with me even through that bad period. I couldn't imagine that happening if I hadn't been so lucky.

What has your personal track record been since then? How are you usually doing in your trading?

I have my ups and downs so let’s have a look. The best year ever was 2010. On the top of my head I think I made 137%. I've never ever had that sort of return in my entire period. At that point I resigned. I said to Chrisy that if she didn't mind then I was giving it up because one of the things I have seen over the years is that people take the highest rate of return and treat that as the norm. I always promised myself I was going to get out at the top.

I remember reading about the basketball player who used to play for the Bulls, Michael Jordan. He retired at the top and then he couldn’t help himself. He had to come back into the game and it just wasn't the same. I promised myself that I would quit at the top, which was just as well because in 2011 I just didn't realize that QE had caused the markets to lose diversification and so I got hurt badly in the early part of 2011. It took me a whole year to recover. It was a scratch year and it was very hard to recover. As to 2012 and 2013 they had been reasonably good, but this 2015 I think is going to be my best year.

One of the things that I always have trouble with is that I make a lot of money and then I … well, let me put it this way. I firmly believe that as far as methodologies are concerned there is an ebb and a flow. There are times when everything you do will be right and you have to push that and take advantage of it. There will also be times that everything you do is wrong and totally confused. At that time my advice is to pull back and reduce the amount of trading you do and wait for that to depart. Otherwise you’ll give a lot back.

From 2013 to 2014 my performance was quite similar to what happened in 2014-15. I had a good run until January and then February and March. In April of 2014 I lost 15%, and it took me all that time to recover until about August of 2014. January 2014 was a good month. Then February, March, and April were really bad months because I lost 15%. This is 2014 going to the end of August before I recovered what I had lost, and then September, October, November, and December were really good months. January this year was fantastic at almost a 60% return, and then I started going into what I call “ebb phase.”

I was giving a talk about this in Shanghai or Sydney about how you have to be careful about ebb phases and I was talking about my personal problems. One of the guys in the audience said, “Well have you ever thought about just exiting more quickly rather than holding on and waiting to be stopped out?”

What happens when I trade is that I will exit my first third, which means I will take profits at twice my stop so that after that I can't lose money. What happens when I'm in ebb phase is that the market price doesn't get there. It just doesn't get to that first third so I take the full 2% losses and I won't make any money. This guy said, “Why don't you just get out more quickly” and I thought, “Well, I never thought of that.” This guy had been telling me that he had just lost an arm and a leg in the market but offered me this great idea.

I started applying it this year when I noticed I was getting into ebb state. I was always able to recognize that state, at least in the recent past, but I just haven’t been able to do anything about it so I did that. In 2014 I did maybe twenty trades during February, March, and April. This year I've done forty-seven trades but my end result is that I'm still in ebb state yet I'm up about 1%. I've done forty-seven trades with equal profits and losses and a 50-50 win rate, but I’m exiting very quickly. If the market doesn't do what I want it to do, and I'm very clear about what I want it to do, I'm out.

Every now and then you learn something new. I've just turned seventy. I've been in the market over thirty years and I've learned something new. One of the reasons I love to teach is because somebody will say something like that and you think, “Yeah, I never thought of that. Let's give it a go.”

Can you explain the ebb state in more detail?

Okay, ebb and flow. I see that there are three states of trading: flow, normal and ebb.
Ebb is when everything you do is wrong. Everything. You choose your best quality setups - your things that work for you - and they just don't even get to that first third.

Usually when I get into a trade it will do something. It will move a little bit in my direction as a general rule. It doesn’t normally stop me out, but I just would hang in there because I was looking for that first third and it wouldn’t get there so then I would take 2% losses. I would save a lot of the situations because I reduce the amount of trading I would do.

As I said, if you look at February, March and April of 2014 I only did twenty trades as compared to forty-seven trades for the same period this year. The difference is that I'm not letting the market stop me out. I'm just saying, “Well, it’s not behaving so I'm out.” So you win a bit, you lose a bit and it's been a great difference for my results. My view is that if I go into flow state at some point or even normal state then I don't have to chase my ass.

So “ebb state” is when everything is going wrong and “flow state” is when everything is going right?

That's right.

And “normal” is what?

If I could put it this way, in flow state I did ten trades in January this year and when I made that 60% every one was a winner. Last February, March, and April of 2014 we did twenty-seven trades and every single one of those trades was a loser except one because that actually got to its first target. It didn’t make any money, but it got to its first target so it stopped out. It didn't cost me anything, but twenty-six out of twenty-seven trades lost money. That's the ebb state.

Right, but average or normal is …

There is a normal win rate. For my normal state I'll make money around 47% to 53% of the time. That is my normal state. Even if I get stopped out on those trades then because of that half my trades at least go to the first target so I can't lose. I don't lose on them.

I understand what you are doing now. The problem for most people is that they don't know when they are in ebb state because they keep thinking the next trade will turn it around, and they don’t know when they are in normal rather than in flow.

It's always that way. It's always going to be a step behind so what I've done is calculate the statistics so I know what my expectancy of return ought to be when I'm in a normal state. I put a lower and upper limit around my average trading results and when it gets above that I’m in flow and below that is ebb. Around the average is normal.

If I'm trading I keep an eye on it using my monthly results. Since I'm trading a lot now I'm looking at it on a weekly basis. If my results are showing an expectancy return that falls outside the norm then I'm in either ebb or flow state. It's just hindsight trading knowledge, but at least it's an objective way of looking at where you are.

After a while you get a feeling, you get that confidence to say, “Okay, I know what this market is going to do” and the market actually does it, but when you're in an ebb state and think you know what the market is going to do it then it does the exact opposite.

Are you looking at the profits or are you looking at the win rate for this statistical calculation that tells you whether you are in ebb, flow or normal state?

I'm actually looking at the expectancy of return. My expectancy of return formula is my average dollar win multiplied by the win rate minus average total loss multiplied by the loss rate. I subtract those two numbers to get a dollar figure and that allows me to say, “Okay, my return is falling within the normal parameters so I'm in normal state” or, “Oops, my return has fallen two standard deviations (or more than one standard deviation) below the normal rate. I'm now in ebb state.” It's always going to be slightly behind but that's okay.

Are you doing that monthly?

I used to do that on a month-to-month basis. Nowadays, because I'm doing a lot more trading I'm doing it on a fortnightly basis every two weeks. The trades I use in the calculation are the ones since I last did it. If I don't have enough trades I will take the whole period but generally now because I'm doing forty-seven trades - which is double the normal size - I'll just take whatever the full blast of fortnightly trades was. If I'm doing it today then I'll include the number of trades I did since a fortnight ago. Now I've got about fifteen trades, for example, that's enough for me to get a general feeling.

This is really good. Most traders don't have any objective rule that tells them when to increase or decrease their trading position size and this can help them a lot. This is a mechanical rule that tells you when to increase or decrease your bet size or even trading frequency.

If you want to get a little bit technical, Pete Steidlmayer and I like the following much better than the excel spreadsheet but it involves a little bit more work. There is a firm called Market Delta in the States (MarketDelta.com) which makes available on their website what’s called a calculation of the “value area.” Pete didn't use the mean in this trading result evaluation. Instead he used the mode as the mean of the first and second standard deviation ranges. He did this because trading results are skewed as you are probably aware. It's not a bell curve normally, especially over the short term, so if you use Pete's approach to calculate the value area with this idea then it works very, very well.

For the rest of the interview, pick up a copy of Breakthrough Strategies of Wall Street Traders (an average interview includes 20+ pages of techniques) on amazon.com.

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