Love the trade: How passion gives you the edge with John Netto

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Love the trade: How passion gives you the edge with John Netto

If anyone was born to trade it's John Netto, a cross-asset class trader and author of The Global Macro Edge. In high school he provided the 'liquidity' for sports betting. In the Marines he learnt discipline. On the markets, he discovered his super power - versatility. That's why he's called the Protean trader. John talks to the Artful Trader about his complex strategies, including the famous Netto Numbers, his love of the game and his recipe for alchemy - outlining how he turns problems into profits.

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About John Netto

CMC Markets

John Netto is a world-renowned author and founder of the ground-breaking Netto Numbers.

John is an expert in developing, executing and managing proprietary algorithmic and discretionary trading strategies and his most recent book ‘The Global Macro Edge’ has received widespread acclaim.

Episode 6: Love the trade: How passion gives you the edge with John Netto

Intro: I love being a short in a falling market. It's just cool. The market's falling, it's dumping, it pays you so fast. It's cascading. All your friends are losing money. You're making money. I mean it's just almost good as sex, okay it's just incredible in terms of just what amazing exhilaration it is to catch that move on the downside and like you just feel so manly and so on top of the world.

Michael McCarthy: From CMC markets, this is The Artful Trader. Hello and welcome to The Artful Trader, I'm Michael McCarthy, the Chief Market Strategist at CMC Markets Asia Pacific. Each episode, we'll hear the highs and lows from the industry's experts and hear their journey to mastering the art of the financial markets. From high school betting to the Marines to macro trading. Today, we meet a highly versatile trader trainer, John Netto. For some the art of trading is something instilled within you from an early age, take John Netto, he took his first position at the age of 8, and set up a sports betting syndicate at high school, providing liquidity for other kids. It was clear from the outset he was destined for great things. Now John Nieto is a cross-asset class trader and author of The Global Macro Edge: Maximizing Return Per Unit of Risk. He's also the creator of the Netto number, John's special skill, his superpower, if you will, is his flexibility. He calls himself the protean trader, which means he's adaptable and he's versatile. So how does that translate into the trading world? Well, John has developed a trading strategy that manages algorithmic and high-frequency trades across a range of time zones, asset classes and markets, keeping a close eye on global trends. And he's turned this recipe into some form of Alchemy, making problems into profitable opportunities. From Las Vegas, Nevada, John Netto joins us on The Artful Trader Podcast. John, it's a privilege for our listeners to The Artful Trader podcast to have you with us today. I know amongst my own maloo of trader of traders that your book One Shot, One Kill Trading is very influential. And I know that a number of our listeners have already dived into the Global Macro Edge. John, I'd like to start at the very beginning if I may. How old were you when you placed your first bet?

John Netto: That's a great question. I was the age of eight and I was in elementary school at the time, and the idea of taking a risk or having some sort of attachment to the outcome of an event had a lot of appeal to me at a young age. And it was a San Francisco 49ers and a Dallas Cowboys game and I was a young, albeit very passionate fan of the game, and having an outcome on it just seemed really natural to me, seemed really obvious and intuitive. And when my classmate, being I lived in the San Francisco Bay area, so there was a preponderance of San Francisco 49ers fans, it'd be like if you live in Sydney and there were a lot of Melbourne fans, and you were a fan of a Melbourne team and you bet with all the Sydney fans. I was a Dallas Cowboy fan living in San Francisco. So it was an early start to a contrarian investing career.

Michael McCarthy: I was thinking exactly the same thing. And then John you went to the Marine Corp. What did you learn there?

John Netto: What didn't I learn in the Marine Corps is probably a better question, if I can say one big thing that it taught me, and it taught me a lot and for that I'm forever grateful. But the one thing that stands out about the Marine Corps is learning to live outside my comfort zone and learning to challenge myself and push myself further. I mean imagine this if you will, 18 years of age, rolling up on what's regarded by many as the most elite fighting force in the world. And it was something that came actually pretty intuitive, it was a pretty snap decision which can be a quality that can both be to your benefit and detriment as a trader. And it's sort of a quality I exhibited early that going to the Marine Corps just seemed intuitively right. I was relatively soft, emotionally and physically. So going through that training and going through the mental rigour was something that not only pushed me outside my comfort zone, but provided a framework of discipline and process that I'd been lacking up to that point in time. And it's not just discipline in the obvious ways, in terms of you're told to do something and you do it, but it's, you know, my drill instructor telling me that discipline is doing the right thing when no one is looking. The little things, the details, the subtleties. And what we find a lot in trading actually is that you've got to fight for every basis point of performance. It's the subtleties. It's not that many of us make big, transparent, obvious mistakes. It's the subtleties and the details that can often compound themselves and lead to much bigger losses. Oh, I didn't read this research report like I was supposed to, or I forgot to make sure that my stop was in place at this point, or I didn't do that little thing there. It's these little things that add up and these little things are often a by-product of either not having a crystallised process or not having the discipline to follow that process. I mean, I spent close to eight and a half years in the Marines and I learned two foreign languages. I learned to speak Japanese and Chinese. I was stationed in Japan for four years. I worked at the US embassy. And during that time, living in Japan taught me not only about the culture of the Marine Corps but the culture of Japan, different perspectives, again, stepping outside my comfort zone. So from learning to live outside my comfort zone would ultimately transcend into trading as well.

Michael McCarthy: And how did you make that journey from elite soldier to trader?

John Netto: Very carefully. I would say that being around the markets was something that predated or preceded my time in the Marine Corps, in high school, along with running a gambling operation, I was also an avid reader of the Wall Street Journal and Investor's Business Daily. I learned about options, and when I was the age of 12 saw the movie Wall Street, from Oliver Stone, and Oliver Stone wrote and produced and directed that movie to highlight the greed and nefarious that existed on Wall Street of the 1980s, just the decadence, the opulence, the greed that was on Wall Street in terms of what Wall Street came to symbolize. And paradoxically, or ironically, what he ended up doing was launching an era of people who wanted to go to finance. So I mean to follow up, to actually answer your question, you actually asked me how did I transition. I just gave you the philosophy behind the transition.

Michael McCarthy: That's a good shortcut, John. I'm very happy to hear it.

John Netto: I was in the Marines and I began trading online with an e-trade account in 1998, while still in Japan, and then was accepted to an officer commissioning program at the University of Washington. I came back in 1998 to the States after living for years overseas. And then from there, there was an application called Cyber Trader, which is ultimately bought out by Charles Schwab in I believe 2000 or 2001. And I just began trading stocks online and really developing a system and learning by taking frankly, a lot of lumps. I mean, I lost a lot of money at first, for as smart as I thought I was it wasn't producing the P&L and I was making the same mistakes that everybody was. I was letting losses run to big. The second I saw profits I would take them. I mean, the one thing that I always had though was discipline. So at least I could see that if I'm losing, I knew enough from what I had read the importance of risk management. So while I wasn't making money and I was definitely losing money, I wasn't blowing up, like I wasn't having my account get wiped out because I could at least adhere under pressure, which the Marines were great at teaching how to respond under pressure. And to this day, the ability to prevent losses from being catastrophic losses is a by-product of that ability to function under immense pressure. Creating a winning system on paper is a completely different skill set than monetising that system or monetising an opinion in the market. Analysing the market is different than monetising that perspective in the market itself. It's very much a different art because trading in and of itself is a skillset that is an art all unto itself.

Michael McCarthy: Well, you'll get a lot of agreement from our listeners on that point, John. I mean let's start with the hard part of it, what was your worst ever trade, or perhaps not the biggest loss, but the one that you felt the most. Your most painful trade?

John Netto: Like most traders I have more than one most painful trade. And I try and avoid superlatives because it's just really tough, both I think in life and the trading world to say what's the most, what's the biggest, what's the best, what's the least? So I'm going to throw a couple bones your way, because I think it's these painful trades that are so instructive and help us learn so much. It's not just one example that I did 20 years ago and oh my god I was changed forever. No, I got in this awful trade. It was awful and I got better from it, but that definitely wasn't the last time that I did something stupid or bad. That's just not how the world works, right. So for me, the trade that stands out the most, early on in my career goes back to 2003, and it was after the Persian Gulf War started and I was by this point in time an active futures trader, I had already migrated to trading futures, and futures have a very similar leverage component to Forex in terms of how much leverage they allow you to put on into a position. And this was the weekend that the market was hoping that actually a peaceful resolution would happen before the gulf war started in 2003. That peaceful resolution didn't happen, and I end up getting super aggressive short, coming in Monday morning when that resolution didn't happen. What happened was the classic gap down rip up scenario, and really even to this day, this was probably the worst tilt I've ever gone, and when I say tilt it means that it becomes purely emotional in terms of how you're trading. You're no longer employing logic, you're no longer being objective about the position. And this day I ended up losing about, 30 percent of my account value by trying to short the market, six or seven different times. The Dow was up like 400 or 500 points that day, the Nasdaq was up like 150 or 200. The S&P was up 40 or 50 points, and I literally got, and I wiped out all of my profits on the year in the first half hour, but it didn't matter to me because at that point in time the money wasn't real anymore. And that to me is why I cite it as a trade that may be the worst trade of my career because when you lose respect for what you're trading, when you no longer are following a process. And not only was I not following a process, I was using extreme amounts of leverage when I wasn't following the process, and I was doubling and tripling and quadrupling down and completely chasing. And the crazy part is I'd actually at one point cut my losses in half to where they were actually somewhat manageable and I could have just quit at that point, so okay, I can move on now. But I didn't and the market was convinced on just ripping like crazy. And so instead of cutting my losses in half, I gained aspirations that now I can actually fulfil my destiny and make all this money today. And so at every aspect of this chronology, of this trade going back to March of 2003, I broke my process, broke my process repeatedly, lost all objectivity, didn't follow any of my one shot, one kill trading techniques. Gave up all the profits I made on the year, and went on total and complete emotional tilt to where all I wanted to do was chase and get my money back. In every way that has to stand out as the worst trade ever. Now monetarily that's not the worst trade ever, I've had far worse financial trade since then. Now going back to 2015 where I gave up a third of my profits, and this is as recently as 2015, it's even part of the book. And I talk about how I was up $700,000 on the year, and in literally 11 seconds Mike, I lost $210,000 in 11 seconds. From what I'd made in the previous 10 months.

Michael McCarthy: How do you recover from a loss like that John?

John Netto: It's what friggin champions are made of baby.

Michael McCarthy: Is there a process though? Do you take a break?

John Netto: I don't take a break for the sake of taking a break. The first thing you do is stop. So yes, from just a figurative standpoint or from an emotional or from a symbolic standpoint, you need to stop because whatever process you were using. When you have an outsize last like that, there needs to be a time of recalibration and the first part of recalibration is to stop and just cease all activity so that you can assess exactly what took place. And makes sure that there's not something more systemic at hand which could interfere with what you're trying to accomplish. So let's just go more recently with the October break. Obviously I was devastated, it just happened so fast and it was so swift and it was so violent. It's almost like the five stages of death. The first thing is like denial, and then the last stage of death is acceptance. Okay, I'm actually going to die and this is it. Okay, hell of a run. All right. And so the October of 2015, because it's relatively more recently, and I talk about this in the book, you can see it from my audited track record, how I lost I want to say $200,000 in the month of October, 2015, what transpired here. And let's be brutally honest with yourself, you want to keep that impartiality while you assess these things. And for me it really came down to, okay, here's what I did right that day. I looked at how the market could go the other direction, I was playing with profits, so I was trying to press profits and catch the market for another leg higher. In my case, I thought the Fed that day would come out and attack the last sacred cow. Something that I do really well is I grade qualitative events quantitatively. So I'll take a Fed event or a Bank of England even or an ECB event or an RBA event, and I'll attach a quantitative score to it based on a very unique, bespoke, modelling perspective that aggregates aspects of the statement using technology. And then synthesise that to create a score, and then based on that score I'll trade accordingly through my impact software, which stands for market price action. It's this event trading risk management system I built over four years. That's pretty devastating to be honest with you. Both good and bad is as I've just demonstrated. So really it comes down to okay, was there something wrong with my model, all right, and for me, I can't fault myself for trying to press my winners, that's a pretty laudable thing. I'm going to press my winters and try and build more winners. But the process of doing that didn't fully take into account how I assess market positioning. That was a day that the position I wanted to put on was already overweight with a lot of people in the market already. And that's something I just simply didn't give enough weight to. There were already a lot of people looking for a more dovish Fed statement. Instead, what the Fed did was come out and say, guess what guys? We're going to hike rates, for the first time at the December meeting of 2015, for the first time in eight years. And that move, if you look back to October 28th of 2015, you'll see an enormous sell-off in treasuries, enormous sell-off in gold, an enormous rally in the dollar, an enormous selloff in Aussie dollar, Kiwi, emerging market currencies everywhere. And actually on the release that I actually went long and bought all of those. So the discipline that I learned from 15 years earlier and it evolved in my career was I cut the loss super quick. So even though I lost a third of what I had made, my process for getting out quickly, for realising that my model had scored this totally F'ing wrong, I totally blew the score on the model, that I saw that. And instead of being in shell shock about what had happened, I only lost 200,000 instead of 4 or 500,000 had I held on two minutes longer, I'd be down half a mil, you know what I mean? And that's not any good either.

Michael McCarthy: More from John Netto in a moment. This is The Artful Trader, uncovering the highs and the lows to mastering the art of the financial markets. Being a good macro trader is like being an explorer, seeking out those unknown territories before everyone else. As marijuana moved from the black market to the medical mainstream, we make James Helliwell, who dared to trade where others feed to tread. James Helliwell: So we began to get an understanding of user preferences and I think most importantly from that how attitudes were changing, in terms of tolerance or acceptance of cannabis for recreational purposes and also for medical usage. So we looked at it from that standpoint and began to get a feel for and the potential size of the industry, which according to some research could become like a $50 billion industry by 2026. That's a huge number.

Michael McCarthy: You can hear all of our previous interviews at theartfultraderpodcast.com, or wherever you get your favourite podcast. Now, back to my chat with John Netto, talking to us from Las Vegas, Nevada. Well, we've been through the pain. Let's go to the other side of the coin, John. Some trades that were memorable because they were so good.

John Netto: Yeah, and this is something that you know, in the book I thought it was really critical that we operate from a level of transparency. People who have read the Global Macro Edge, as you touched on at the top of the of the podcast can reference early on in the book where I have a CPA come in and audit my returns over six years. Where effectively I took $100,000 in cash and generated 3.1 million in P&L on that. That's counting the $200,000 plus loss that I took on that Fed event from October, 2015. And so, you know the best month during that time actually goes to July of 2013 where I made close to a quarter million dollars. And in particular there was one day in there that I actually took account statements and copied the accounts statements, and actually put them in the chapter itself, showing how I made close to a $150,000 in one day, just by, well not just by, there's a lot of work that went into it. But by understanding that Ben Bernanke and the taper tantrum that happened in May of 2013, in essence where the Fed telegraphed that they were going to be more data dependent and not based on a calendar basis. And so what that meant was that economic data was now going to be more fully priced into the market. And the market had a hard time after so many years, you know, adjusting to the fact that we are now data dependent and no longer on a calendar basis, to where okay well the Fed says, we'll hike in two years from now or we'll hike in four years from now. We'll freaking hike when the market starts to get hot boys and girls, and the market, that meant that all of a sudden economic data had real meaning again. And so understanding that and understanding the solve and the bond market, I got really short treasuries and I just kept pressing these bets. So on what was like initially really 25 or 30,000 of risk. I press it over a 48 hour period and made close to a $150,000 and a lot of that came on the release of a nonfarm payroll number on Friday, July 5th, 2013 where I popped, you know, a buck 30 of that 150 came, and the 15 minutes around that event where then was like short 80 treasuries, I had added 70 more treasury. So like on a $300,000 account I'm carrying a $15,000,000 short notional position. Just keep pressing my winners and pressing my winners. And pressed them going down. But that's, you know, that's how you're supposed to do it Mike.

Michael McCarthy: That's right. You run your winners. Cut your losses.

John Netto: Yeah, absolutely, so that's what stands out as a great day. And there's another day, very similar circumstance at the end of 2014, my wife and I were about five days from being married or seven days from being married, another big winner and that ended up being close to like 70 percent of my annual P&L. The first nine months of 2014, I think it was literally break even, which it's important that people see, dude, I took $100,000 and ran it to 3.1 million, and had multiple six to nine months stretches where I was literally breakeven, and still made that kind of P&L. And so It's critical that if you go flat for two or three or four months that you have this kind of granularity of your system that you can understand and appreciate that these swings or lulls can be very much a part of even the most robust system, which frankly mine's pretty damn robust.

Michael McCarthy: Well, speaking of your system, when did you come up with the Netto Number?

John Netto: The Netto Number actually has gone through a couple of adaptations or evolutions. The first time I coined it was back in 2003, 2004 when I used it as a way in my first book, One Shot, One Kill Trading to diagnose the robustness of a particular trade, and we incorporated things like where markets were relative to Fibonacci levels, where they were relative to moving averages, critical support. I wanted to give a base quantitative framework for the readers to begin to systematise the robustness of a trade setup. Okay, so that was the first use of the Netto Number. As time evolved and as I evolved as a trader, the Netto Number came to encapsulate something even more, and so what the Global Macro Edge does and really what the Netto Number does is it's completely recalibrated how we assess a manager, a strategy or a market on a return per unit of risk basis. So most books, most systems, most strategies simply look at things based on their returns. What I espouse and what the Netto Number teaches you to do is to look at things based on returns per unit of risk. It's great that you made $10,000 or $20,000 or $50,000, but what were you risking to make that? Okay. And the Netto Number provides a methodology, a very simple methodology to answer that question.

Michael McCarthy: So looking at your most recent book, The Global Macro Edge, why did you write it?

John Netto: Man, that's a great question. I do subscribe to the belief that to whom much is given, much is expected, and I'd probably argue that even you Mike, like why is it that you do what you do? It's not just about you like analysing the markets, you like sharing, you like teaching, you like the collaboration that comes from the markets. You like the camaraderie that comes from the markets. And so when I think about, you know, why is it we do what we do and why the contributing authors contributed what they contributed. It's as much about that sense of duty that compelled me to serve in the Marine Corps is very much a part of my and our ethos. And for me it's a call to action. What is my call to action? What is it that I can do to leverage? I'm not only myself, but leverage on the investment community out there. And my call to action is the global macro edge, my call to actions the Netto Number which teaches people how to recalibrate, how they look at an investment portfolio and incorporate a true three dimensional perspective. And not only measuring a manager based on what their returns are, and not only measuring a manager based on what their risk-adjusted returns are, but to incorporate a third dimension. And that third dimension is measuring a manager based on how much-predefined risk they had. So to have a successful portal economy you need a call to action, and then you look at Facebook or Twitter or Airbnb, they leverage tens of thousands, hundreds of thousands, millions of people from their portal. And so commercially for me, The Global Macro Edge represents a portal to bring on investment professionals, advisors, hedge fund managers, investors that can all synchronise themselves around these concepts, which quite frankly are just better ways of doing business. That's freaking powerful, and that is a catalyst and a portal to attract thousands, if not tens of thousands of people and launch a revolution in the investment industry.

Michael McCarthy: And it's that passion clearly that drove you to write the book. John, how long did it take you?

John Netto: Don't remind me Michael, you trying to rub salt in the wound on this? It was quite a journey and I'm glad it took the time that it did because it wouldn't have come out the way it did had it not gone on that respectful journey, from both a content and time perspective, and temporal perspective. And so I began writing it in March of 2011 and the last edit was made in September of 2016, and literally we had the copies in late September, 2016 when we went on our first book tour in New York City to do the prelaunch. So it was five and a half years. I spent close to 3000 hours, 200 weekends, over a dozen plane trips, probably closer to 20 plane trips all around the country. Literally the book went through six or seven different title changes. It became The Global Macro Edge because as I was recording my performance, and you can see this crescendo building, but frankly the strategies that I was using were also evolving. My traders thought was also evolving, how I understood market positioning, how I incorporated the macro narrative, and so we came up with a title, The Global Macro Edge. Because The Global Macro Edge is the ability to apply the underlying macro narrative to a number of robust trading strategies and dynamically allocate those strategies based on their probability of success. If you're in one kind of macro environment then certain strategies will work better than if you're in another macro environment. And so that global macro edge, the ability to effectively gear or lever your exposure to what strategies will work the best in those environments and we constructed the book to match those phases.

Michael McCarthy: So let's cut to it, what are the major macros that are shaping markets and opportunities at the moment?

John Netto: So I think that there's tremendous opportunities in the energy space. I think crude oil right now has a lot of opportunity just being long gamma or just being long a lot of basic option structures. I think that crude volatility on a 90-day basis is price correct. I think crude volatility on a one to two-week basis or the gamma around that 90-day optionality is significantly mispriced and so what we're seeing is a market that has transitioned from being a market that pays attention to tier one data like CPI, like a nonfarm payroll, like a Fed event. We've actually seen that on a relative basis these Fed events, The Bank of England events, the RBA events are largely telegraph and inconsequential. But what does matter and what we do have to position ourselves for is this sort of fake news environment where people are moving on innuendo, they're moving on a Chinese Yuan fix, which is actually more conducive to someone who trades on Australian hours than someone who trades on American hours. We're seeing mispricing’s in energy because energy has responded so much to these tariff announcements, or I should say more this innuendo than actual implementation of tariffs, that you have a structural mispricing in the energy space. And I've been able to take advantage of that in 2018 of that mispricing of optionality, at least short-term optionality. While long-term optionality is more appropriately priced. But understanding that difference of the Volcker, volatility curve, has presented a great opportunity. And then lastly I would say, on a bigger macro level, what kind of problems exist from this run-up in asset prices, and this is a high-quality problem, but a problem nonetheless is, hey people who own homes, at least in the US, and I know Sydney has seen record real estate appreciation as well throughout many parts of Australia. People have a disproportionate amount of their net worth tied up in their home. And you would say, well John, why does that matter? And I'd say, well it matters because you have a school teacher that makes $75,000 a year whose home is worth $1.2 million and 90 percent or 95 percent of their net worth is tied up in their house. And the real estate market, which has 80 to 100 trillion dollar global market is so dysfunctional, is so inefficient that the person can't access that wealth because of all this appreciation in the last 10 years without the burdens of taking on debt. So I'm looking to companies who have innovated in the real estate space, where even the most incremental of edges can amount to huge, can amount to billions of dollars in profits. And so for me, when I look at investments, whether it's on a tactical level like we talked about with crude, or whether it's on a macro level like we talked about with real estate, they need to have three things. One, they need to generate a return per unit of risk, like I talked about as measured by the Netto Number. So I want to know based on what I'm really risking, what kind of return I can get. Number two the investment needs to solve a problem, the more systemic the problem, the more extreme the problem, the more sustainable and the more viable the solution is. If you have a big problem Mike, that solution's not going to be solved overnight. So that investment it more durable, it's more sustainable, and it really has a chance to yield tremendous results. And then the last thing is, does the structure add value to it? So if I look at this real estate trade, does the structure of providing liquidity to homeowners allow me to participate in the upside appreciation while mitigating my downside losses. And the answer is yes to that. So every investment decision, every trading decision I make ideally meets those three things.

Michael McCarthy: But it's a key issue raised here John, that solving problems is a potential source of profit, not just in marketing but across markets. And the bigger the problem, the bigger the potential reward in solving it. Is that right?

John Netto: Absolutely right. Spot on Mike.

Michael McCarthy: We've talked a lot on this podcast series about traders overcoming or analysing their emotions, and the psychologist to traders Denise Shull wrote a chapter in your book, The Global Macro Edge, can you talk about that process?

John Netto: Denise Shull is someone who I have a tremendous amount of respect for. We've worked together on repeated occasions. We've done multiple live trading webinars together. One webinar that we reference in chapter 19, it's really cool because I'm trading live futures. She's analysing me for an hour and a half while I'm trading live, asking me questions about what I'm thinking and really trying to demonstrate to the audience the power of emotions, and really the power of intuition when channelled correctly as an additional analytical tool in terms of one's trading. And so what we do in chapter 19 is actually create, we call a fear of missing out spectrum, a FOMO spectrum where I define quantitatively my range of emotions. And on one side of it all I have is fear of losing money. And on the other side of it I have no fear whatsoever. I'm completely oblivious that I can even lose any money whatsoever. And really in the middle of the batches where I have a healthy respect for what I can lose, but I also understand the authentic opportunity that exists and how I have to act on it, and that's of the balance point. And so we provide actually some colour for people to not only begin to record their own emotions and record their own feelings and to really provide a more granular analysis of what those may look like, but also how they can incorporate that into their own process and really create a more robust qualitative framework to analyse the markets. Because what I've found is, is that at times when I put on trades where I have absolutely little or no respect for the fear side of it, a big move is coming. And most likely it will be against me. And one of the strategies I talk about is, you know, on those occasions that I actually have this feeling that oh my God the S&P is going to dump, or sell down hard. There's no way it's going to turn around. This is so amazing because I'm like most traders, I love being a short in a falling market. It's cool. The market's falling, it's dumping. It pays you so fast. It's cascading. All your friends are losing money. You're making money. I mean it's just almost as good as sex. And it's just incredible in terms of just what amazing exhilaration it is to catch that move on the downside, and you just feel so manly and so on top of the world. But that can work against you, and especially if you're caught in a 10-year bull market where that rarely happens. If that's what you're playing for it can be quite problematic. And so for me, I came to discover that when I have those feelings, as rare as they are, then it's actually a great time to be long optionality, and so by buying calls to the upside, you could still play your downside and manage it, but you definitely want to be long optionality during those times. When you get into a position and you believe that it's absolutely impossible for you to lose money. That needs to be a real warning bell. Because we deal in markets that are at least efficient enough where just the noise factor alone can shake you out. And having some type of viable exposure to the opposite side needs to be strongly considered at that point. I talk about actually in chapter 19 and show accounts statements of where I used my intuition and actually I felt this fear to add to position size. I felt this fear, but it was a healthy fear though; I should say a better word is tension. I felt this tension that said, John if you add to this, you could actually have all your profits wiped out. But it wasn't a fear, and it was my analysis combined with this tension that gave me a strong indication that I should add to it. So I was short 20 treasury contracts, than 50 treasury contracts then 70. And at that point in time, most people are like, dude, you've got enough size, and I'm like, no, I still feel this tension. I still feel this uncomfortable sense in my stomach about holding this short, and as long as you feel that sense, that uncomfortable sense, for me, normally that's a good sign that the market's going to keep moving in that direction. It's when I begin to feel comfortable and i IM my friends about how awesome I am, and look, I made this trade. Dude, you're done, dude, you are done at that point alright. You need to cover your position and get the F out of dodge, because when you feel comfortable enough to tell your friends and brag to your colleagues, that dude I just shorted treasuries and caught 12 basis points there. God, I'm awesome. No dude, you're done. You're totally done.

Michael McCarthy: Hubris kills traders.

John Netto: Hubris kills trades and P&L dude, hubris crushes P&L. Success is about understanding incremental edges, and the question you should make about every investment decision, or about every research decision before you add to your whole ecosystem should be what kind of incremental edge will this give me in terms of my application. And I think if people take that probabilistic approach and say, okay, if I purchase this thing here, or if I lease this thing or if I subscribe to this research, I can theoretically increase my edge from here to here, and then what does that do to my bottom line. Well in the example I just gave you, that could be the difference between making 14 percent in a year and 22 percent in the year. That could be the difference between trading a $100,000 account and a $300,000 account three years from now. That can be the difference from paying your bills and not being able to make a living and having to work a part-time job, to actually doing this full time. So incremental edges are the foundation for tremendous success.

Michael McCarthy: John, that was great. Thank you very much for that.

John Netto: Mike, it was an absolute pleasure to finally meet up and sync up with you.

Michael McCarthy: That was John Netto, speaking to us from Las Vegas. For more information about John, go to his website, theproteantrader.com. For previous episodes of The Artful Trader, and more information about CMC Markets head to our website theartfultraderpodcast.com where new and existing clients can also access some limited time offers. Or listen to The Artful Trader on your favourite podcast app. The Artful Trader is an original podcast series by CMC Markets, a global leader in online trading. The information in this podcast is general in nature and does not speak to your personal financial situation. I'm Michael McCarthy and thanks for listening. This is The Artful Trader.

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