- Peter Brandt is a highly skilled trader who is described in Jack Schwager’s book “Unknown Market Wizards”.
- Over the years, Brandt has grown from a technical analysis dealer to a meticulous risk taker.
- He explains how to identify asymmetrical opportunities and avoid performance-reducing trades.
Some legendary traders are born, others are made. Peter Brandt is enthusiastic.
Brandt, who grew up “dirt poor”, was already working for one of the largest advertising agencies in the world when he met a friend – a soybean dealer – for lunch on the Chicago Board of Trade.
The open trading pits immediately captivated him and made him want to change his career.
Brandt, featured in Jack Schwager’s new book “Unknown Market Wizards,” had a trading career of 14 years that began in the 1970s and the current 13-year-old that began again in 2006.
According to Schwager, it averaged an impressive 58% total annual return over nearly three decades. But when he started trading in late 1975, Brandt was frustrated with finding a methodology that would work for him.
He tried point-and-figure charts, seasonal patterns, and spread trading, but it wasn’t until he learned how to use protective stops and read Robert Edwards and John Magee’s book, Technical Analysis of Stock Trends, that things finally turned around.
“It gave me a framework to understand the price. It gave me an idea of where I can enter a market,” Brandt told Schwager. “It also gave me a way of figuring out where to protect myself on a trade and an idea of where the market could go.”
Brandt brought the so-called bible of technical analysis into charting. In 1979 he was well on the way to trading success. The following year he founded Factor Research and Trading.
From analytical chartist to meticulous risk taker
Chart patterns are no longer an essential part of Brandt’s trading strategy as they are prone to error and can transform into a different pattern.
Since charts are becoming “much less reliable” than they were in the 1970s and 1980s, Brandt has switched from trading one- to four-week samples to trading eight to 26-week samples. He has also become more selective and would only trade in patterns where the breakout is through a horizontal boundary, allowing traders to “figure out if you are right or wrong much faster”.
Over the years, Brandt has integrated protective stops into its trading methodology. “Yes, the risk I take on a trade is much less now,” he said. “Whenever I make a trade, I limit my risk from the entry point to about 1/2% of my equity. I want my stops within two or three days of entering break-even or better.”
Brandt had his first bad year as a full-time trader in 1988, losing about 5% after up 600% the previous year. By 1992 his trade had stalled. He traded his own account for two more years before closing it.
“The fun of trading had left me by then. Trading had become a drudgery,” he said. “I felt the discrepancy between my performance and my performance.
Asymmetrical odds and popcorn trades
In 2006, Brandt returned to trading after an eleven-year break. He had been gone for so long that the world had moved to electronic trading, but his trading strategies and rules still applied.
When he deviated from his trading rules in 2013 and started adding mean reversion trades that allow traders to sell on strength and buy on weakness, Brandt suffered an 18-month down of 17%.
“I bought the lie that I had to change because the old methods no longer worked,” he said. “I finally realized that I need to get back to basics.”
After this drawdown, Brandt began looking at his equity based only on closed trades. “Likewise, Once the profit on the trade is 1% of my equity, I subtract half of the position“he said.” Then I can give the other half a lot more space. “
Another rule he introduced is: Once it has reached more than 70% of its profit target, raise the stop. “If I have an open profit of $ 1,800 per contract on a trade with a target of $ 2,000,” he said, “why risk giving everything back to make the extra $ 200?”
By sticking to the two rules, he avoids what he calls “popcorn trades,” which are profitable trades that are held for too long until all of the profit is given up or converted into a net loss.
Instead, Brandt looks for asymmetrical trades in which “the perceived upside potential clearly exceeds the required risk”. He tends to take these opportunities near a “Ice line“- a price range that is difficult to penetrate but should offer support once it does.
“If I can find a market with a breakout that is at least half the daily range below the ice line, that low can serve as a significant risk point,” he said.
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