Simon Ree Interview: The Tao of Trading

Simon Ree has been an active trader and investor since 1992, racking up over 20,000 hours of experience watching and analyzing the financial markets. During his career he headed-up the Goldman Sachs markets desk in Sydney and went on to hold senior positions at Citibank in Singapore. He currently works as an options trader, a trading coach/mentor, a consultant, and a public speaker. In addition to trading and teaching others to trade, Simon has a passion for helping people reach their full human potential. He is a certified Jeet Kune Do instructor and Reiki master and lives in Singapore with his family.

Your book The Tao of Trading launched this month and has already reached #1 Amazon Best Seller status across five categories. The title of this book was inspired by The Tao of Jeet Kune Do by Bruce Lee. Can you tell us about some of the parallels between martial arts and trading?

Through practicing martial arts, you can learn to respond unemotionally to stressful situations. This is an extremely important trait for a trader – to remain unemotional when something unexpected or unwanted happens.

When a novice martial artist begins sparring, he or she can often feel emotions such as fear, anger, uncertainty and indecision as a result of being put under an uncomfortable or hostile type of stress. These emotions are likely to control your reactions if you are not aware of what is going on. And emotional reactions are nearly always suboptimal.

While the stresses trading puts you under are not physical in nature, they can certainly feel uncomfortable and hostile at times. Every trader should strive for a state of emotional neutrality. This way, our “thinking brain” remains in control as opposed to our “emotional brain” taking over. Practicing martial arts can help one maintain emotional neutrality in the face of a stressful situation.

In the book you talk about Wall Street ‘myths’ such as the concept that a return of roughly 10% a year is great. Can you talk about why you believe it is possible to consistently achieve substantially larger returns than this?

I believe it is possible because it’s what I do. Not only that, I have many students who have become profitable traders themselves.

But let me put it to you this way. The annualized return of the S&P 500 since its inception in 1957  is approximately 10.3%. Thus, achieving returns of approximately 10% pa over the long term has required essentially zero effort or expertise. However, it has required you to hold through corrections, recessions, bear markets and stock market crashes. And this is where most casual “investors” get it wrong. They sell out near the bottom of a decline when panic is overwhelming them (and everybody else) and end up missing a decent portion of the recovery. Disciplined, long term “buy and hold” investors therefore tend to be exposed to risk all of the time.

As traders, we are very selective about how and when we expose ourselves to risk. There is a popular myth on Wall St that goes something like “you can’t time the market”, but this really is just a myth. Saying “it is impossible to time the market” is like saying “it is impossible to fly a Boeing 787”. It’s only impossible for those who haven’t acquired the necessary skill set. By learning trend following trading techniques, we can identify high-probability moments in time to join a trend and exploit it for profit.

I thought it was really interesting that you talked about breathwork, meditation and EFT in your chapter on trading psychology. Which among these techniques have helped you the most in your trading?

The first thing you need to be consistently profitable as a trader is an edge: Something that puts the probabilities in your favour. But you can do much more with your edge by bringing the best version of YOU to the markets. All three of these tools are ways of tapping into that most calm, focused, conscious version of you.

I like breathwork because the positive effects are almost immediate. It requires very little effort but brings instant gratification in terms of lowering your blood pressure and inducing greater calmness.

Meditation doesn’t provide the same instant results, but the benefits that accrue over time can be significant. You can become much more aware of your emotional state, which greatly increases the chance of an appropriate response to stress, as opposed to an emotional reaction. Meditation requires more effort, but the payoff is worth it.

EFT is a little more “out there” and may not be for everyone. I think it bridges the gap between breathwork and meditation in that it can provide instant results, and it can also provide accumulated benefits with regular practice.

Human nature often guides us towards trying to pick tops and bottoms and bucking the trend in the market. Can you explain why you think an aspiring trader should learn trend following before any other trading method?

Picture the skipper of a yacht, sailing her boat with the wind at her back. How much “efforting” does she have to do to sail the boat? Sure, she may have to make the odd course correction. But really, there is not too much effort involved, especially once she has learned to read the winds and the currents.

Trend following is like sailing with the wind at our back. We are following the path of least resistance, or “going with the flow”. Trends tend to be remarkably persistent in nature because the human mind projects on to the future with the expectation that the past will be repeated (to paraphrase author Sir David R Hawkins). A stock that is rising is more likely to continue rising in the future than a stock that is falling. A trend follower will seek to buy stocks that are in an uptrend and sell stocks that are in a downtrend. So, following a trend is one of the first things we can do to stack the odds in our favour.

Picking tops and bottoms is something the ego likes to do. It makes us feel clever, it gives us “bragging rights” and it can be fun and exciting if we get it right. But it’s a much lower probability play and is best avoided if consistent profits are the goal.

Which traders in history have inspired you the most?

I’m a big fan of Jesse Livermore, and American stock trader whose heyday was in the earlier part of the 20^th century. He is the protagonist in a famous book called Reminiscences of a Stock Operator by Edwin Lefevre. There is so much wisdom in that book about investor psychology and indeed crowd psychology. I think it is a must read for any aspiring trader.

I’m also a big fan of Paul Tudor Jones, who I first came across reading Market Wizards by Jack D Schwager back in 1989. He has shared many insightful interviews and quotes on trading over the years that have influenced the way I look at markets. Tony Robbins has a great interview with Jones in his book Money, Master The Game.

You discuss moving averages in depth in your book and share useful concepts such as how their alignment can help you determine the strength of a trend. You said that the 21 EMA would be your choice if you were only allowed one indicator to use. Can you explain why the 21 EMA is so important?

Stocks (and other tradable financial instruments) have an easily observed idiosyncrasy: Their prices always mean revert. Reversion to the mean was described by the late Jon C Bogle as “the iron rule of the financial markets”.

I view the 21 EMA as an excellent proxy for the mean (or average) price of a stock. If a stock price gets too far away from – or spends a long time away from – its mean (the 21 EMA), expect it to “revert to the mean” (the 21 EMA) at some point in the future.

By following this one indicator, you gain a decent gauge on the short-term trend direction of a stock price, as well as whether the price is extended within the context of its trend.

You began your career as a futures broker and gained experience with all the different asset classes during your years at Goldman Sachs and Citibank. Can you tell us why you gravitated to equity options as your choice of market to trade?

I developed an interest in stocks as a teenager. Big business, company announcements and the dynamism of industry were things I always found stimulating. I was fascinated by the stock price tables in the newspaper from an early age. After university I worked in futures, and this piqued my interest in derivatives. I found derivatives more interesting than stocks, but I found companies more interesting than coffee, or wheat. So, equity options were the perfect financial instrument for me to focus on.

Options offer the trader so much flexibility. Not other financial instrument offers the significant benefit of asymmetric payoff…which is a fancy way of saying “unlimited upside and limited downside”. Options offer explosive upside potential when your call is right…AND they limit your risk if your call is wrong.

Options also enable us to be profitable in both rising and falling markets, another huge benefit. Properly used, options can open up a world of financial possibility to those who are prepared to study how to trade them.

Thank you for participating in this interview Simon and we hope you’ll visit us in Stockholm one day.

Visit Simon’s website at www.taooftrading.com