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Andre Unger Interview

Better System Trader Episode 045

Andrew: Hi, Andrea. Thanks for joining us today. Its great to have you back on the podcast.

Andrea: Hi, Andrew. Thanks for inviting me back.

Andrew: Thank you. Youve been a guest on the podcast before, on Episode 16, which is quite a while ago
now, but just a quick refresher on what we discussed in that episode for those who dont quite
remember. Theres a couple of points here. We discussed techniques to creating robust strategies. You
also discussed the role of indicators in trading and principles to strategy creation and then we finished
up a little bit with how you use optimization to understand market behaviour, which I thought was a
very interesting technique.

Now today were going to focus on something a little bit different to those ones. Were going to focus
on setups which I think is probably one of the most talked about or most popular components of a
trading strategy. Now I think the way you do setups, its got a little bit of a twist to the traditional
approach, so I think it would be great to have a chat with you about that, but can we start just by
perhaps explaining the normal path to discovering setups in the trading model.

Andrea: Of course, yes. As you mentioned, I do it a little bit different or at least I seem to do it different. I start
from entering the market, which is I find a trigger level to enter. I decide what a reasonable good
trigger could be. Then I go through routines of optimization where I look at what best combination of
chart patterns lead to better results for that kind of entry. This means that once I enter for example on
a stop order, thats not very important actually, then I go through these routines for a number of
patterns that I already coded in my software and then to see which of these it responds better. Its not
an automated process as some automated chart patterns do. This is a process where going for those
patterns, I realized what the market is telling me through those patterns, so its not just pick and go. I
look at results and afterwards I decide if they are acceptable or not, depending on the chart pattern
that they find.

Andrew: Right, okay. So I guess the traditional way is to look for a setup first and then a trigger, but youre
saying that you prefer to look at a trigger first and then look at the setup around that. Is that --

Andrea: Yes, actually. The most logical approach is you get a setup and then once you have the setup, it
means the market in your opinion is ready to go either up or down. Then you look for a trigger, which
is the best possible entry level to ride that move and then you place that order. It is a normal process,

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which leads to studying the markets and to understanding them. For example, the Commitments of
Traders Reports is a classical setup where you get that information about a certain load on the
commercials, which might push the market up or pull it down. Thats why you say, Okay, I think my
market is ready to go up or to go down. This is the setup. Now where reasonably shall I enter to go for
the up or down move, thats the trigger. You find the level.

I do it opposite. I dont go for the longer run. I normally have a short or middle term strategies, which
means intraday to five, six days so its something much closer. I look into levels to enter the market and
afterwards, I look what happened before that level, different conditions and I analyse the results. I say,
Look, if I entered after this setup, I would have gotten much better results than after this other setup.

Andrew: Okay, so just so that I am clear on what youre saying here, do you think that there are some
problems or deficiencies in using the normal approach of setup-trigger-order?

Andrea: I think that the setup-trigger-order limits the possibilities to really read the markets because if we
start from the setups, it means that we use our knowledge about the markets, our base theory, which
means if this happens, it means the market is ready. But then is it we dont have a broad variety of
possibilities to understand. If we do it the other way around, we get a number of different possibilities
and looking at these different possibilities, we might even understand how single markets normally
move. It means that you can discover, well an example is the E-mini S&P is a classical mean reverting
market. DAX Future, which is still an index future is more a trend following.

These are normally things that people know if theyre a trader, but its just an example. Doing, running
this test, doing this test, you get this info. If you dont know about it yet, going through this number of
tests, you can discover that that market is easy to trade in a mean reverting mode or this other market
easier to trade than trend following. Actually going through a number of setups if they are built
properly, I have a number of patterns that are more or less 40 patterns, basic patterns to read the
markets, you get all a number of that information so that you understand what the market normally
does. If you understand the normality of the market, then you also understand what to do on that
market because I believe that every market is different, so you have to understand every single market
to do the right thing.

Andrew: Okay, so through that, youre mentioning that youre using the setup to determine the market
conditions whether its a mean reversion or a trend following --

Andrea: Just an example, yes.

Andrew: Right, okay. Can you give some more examples of the type of setups that you might be looking for?

Andrea: Well, once I get the trigger, I can group the patterns into some classes, which are volatility or
expansion patterns, I mean patterns which analyse how volatile the market was before entering or
how high the level of indecision was in the market, so I understand how markets react after close, for
example, or a directional patterns. So patterns, which measure the expansion that took place in the
markets up or down before entering, or neutral patterns, patterns which measure classical daily setups

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such as inside bar, outside bar, so I also try to analyse that classical well-known patterns from technical
analysis. So there are some families of patterns, which read different characteristics of the markets.

Andrew: Have you found that any particular groupings are more successful or better than others?

Andrea: It depends on the conditions. It depends also on the trigger because for example if you enter on a
stop order at the breakout, obviously you are looking for something that reacts trending to a certain
condition. This trending mode might be generated from a completely different setup. While if you look
for a mean reverting entry, so a limit entry at the support or on the short side on a resistance, you look
for a reaction of a reverse in the market, lets say on sort of a pullback or things like that. Obviously this
leads to different setups before. For any kind of entry, there are different family of patterns that lead
to the best results and it also depends on the instrument as I mentioned. Just to give you an example,
if you look for an intraday trend-following strategy on the E-mini S&P 500, you will really find hard
times. You dont find I wasnt able to find decent patterns to give a decent setup. If somebody finds
it, please email it to me by email, send it to me because Im interested but --

Andrew: Yeah, so I think you mentioned earlier that you have 40 different patterns. Is that right? Forty?

Andrea: Forty is the basic number of patterns I use, then I have a number of file, with over 130 patterns, which
goes deeper into detail but consider running for these optimizations sometimes is also slow depending
on the machine you use. So its better to go for a basic setup and then if you find something
interesting, you can deepen it, going through different values of the different parameters, which are
building the pattern.

Andrew: Okay, so how do you actually come up with all these ideas for patterns? Is there a process behind
that you can share?

Andrea: Fifteen years of experience in the market. I mean build the patterns based on some basic ideas and
then slowly I added some. I added some mirror patterns, short long, long short, and so on, and today
Im satisfied with these 40 basic patterns I use. If tomorrow I find something new, I might add it. So its
something you build brick after brick more or less. Its a very slow building process, but now I think Im
sure Im asymptotic to the final level probably.

Andrew: So in the previous podcast episode, you discussed your idea behind indicators and youre very much
into trading using price action. Are these trigger or setup patterns only for price-action based trading
or can you also include indicators in there as well?

Andrea: Well, the patterns themselves are built with chart characteristics, so you can call it price action, which
is true. Its not the classical price action we have in mind where the Internet is full of websites
promoting price action approach to the markets, which is slightly different from what I do, but lets say
all the patterns I use are built on a bar or candlesticks combinations. Indicators are not in these
patterns I think, but they might be used as a filter, an additional filter to the entries we decide to use.
Another important thing -- maybe I mentioned it in the previous podcast, I dont remember this -- is
normally indicators make sense when you work with timeframes, which are at least greater than 30
minutes bars, things like that because below that, even for somebody who says the markets are fractal,
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the indicators are destroyed by the noise of the markets in my opinion, so that makes sense also after.
But I dont use them as setup builder.

Andrew: Okay, lets talk a bit about timeframes actually because early you mentioned that you use this a lot
for intraday trading, but what about for longer timeframes, perhaps daily bars and longer than that?
Can this kind of approach be applied to the patterns that way?

Andrea: Well, be careful about that. I build the patterns. They are out of intraday charts, but they mostly refer
to daily bars because how I build them looks back into the previous 1, 2, 3, 4, 5 days.

So actually I build the setup, which should be effective for the next day or 3, 4, 5 days again. Actually, I
look for a short-time trade also because I believe that the pattern loses its effectiveness if we decide to
stay the market for one month or so. How could a 2-day behaviour influence a trend for a month. This
is crazy obviously. Actually, I build them on these characteristics. If we go for longer term, I believe that
any pattern is losing importance because if you think about that, the behaviour of a day or two or a
week or two hardly influences a longer-term move because the action of all the players is diluted into
the market, lets say. So how it moves actually does not have big importance for the longer term. So
these chart patterns are mostly effective if we look for a medium-term maximum time horizon, which
means I normally five, six, seven days longer, long trades not longer than that, but hardly longer than
that.

Andrew: Okay, so have you found perhaps that made them set up this as a daily timeframe and then use a
trigger an intraday chart? Is that how you apply it in your own trading?

Andrea: Yes, some of these patterns also look into the intraday. For example if I decide to trade after 10:00
AM in the morning on a certain market, I might look into what that market has done so far, so from the
open of the session to 10:00 AM. That might be contained in a pattern I build, the high of the day so
far, the low of the day so far, the expansion so far, all these things. But at the end of the day, I dont
really trade on the minute. I trade for trends, which can last one day or more days and the intra-day
definition is just to read more in-depth what the market is doing, not just to take advantage of a higher
frequency or things like that.

Andrew: Okay, so 24-hour markets, can you use these patterns for those or is it best to use markets that have
a more defined open and closing time?

Andrea: You can use. You can use it unless you only work on gaps. Of course, gaps are hard to find in a 24-
hour market. This is clear. But if you think about the indecision patterns where the indecision is
something where you get the price moving up and down and at the end getting back to where it
started from, so this is something you also find on a 24-hour chart. And also expansion is something
you can find in 24 hours. Its easy to read how much the day moved and things like that, so there is no
problem in using the setup also on a 24-hour time.

Then it might be that out of a 24-hour or 23 depending on the markets, there are a portion of data,
which are more important, lets say the day session on the US markets or things like that. Just a period
of time during the day where the data are more important because they are the most important
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players in the market in that very moment. In this case, we might decide to use a cut session to better
analyse the behaviour inside those period. This is maybe a bit too advanced to discuss now on podcast.
Lets say my 24 hours are fine. This is my basic answer to this.

Andrew: You mentioned quite a few times you mentioned time, so is time a trigger you use when youre
testing?

Andrea: It might be with bias strategies because one of the analysis I run sometimes is to find out if during the
day, there are different behaviours in some markets, which means lets take market A. Lets see if this
market A during the first hours of the day is normally more bullish or more bearish, things like that you
know. So if I find out that a certain market behaves in a certain way during different periods of the day,
I might decide to enter on a specific time of a day just because I expect the market to be bearish or
bullish for the next couple of hours. Once I decided this, I might filter this entry based on some
patterns, which I obviously study afterwards. But this is not the only trigger.

There are triggers where time of the day as I mentioned is a field where I define a window of time
during the day where I know that the entries are more effective on many markets. Lets take the
European DAX Futures as an example, thats not a 24-hour market. It opens at 8:00 AM and closes at
10:00 PM. So from 8:00 to 10:30 or things like that in the morning, normally the entries are not very
effective because the market is a little bit randomly driven, so obviously why should I end when the
conditions are not the best. I wait until a certain moment in time and I say okay from 10:30 to for
example 1 o'clock afternoon, I can enter and then I stop again for the next couple of hours because
there is sort of a pause in there and they start again considering my entries after 3:00 PM up to 5:00,
6:00 PM. These are just examples. Theyre not strict numbers. After 6:00 PM, there is no reason to
enter for a trade, which would be closed at the end of the day, if Im working on an intraday. So time
windows but the trigger in this case might be the high of the day trading so far because I believe that
exceeding that high, we are heading for high-highs or things like that or the trigger might be the high of
yesterday or the high 5 days ago and things like that.

Andrew: Okay, so what are you using for exits when youre testing these setup and trigger patterns?

Andrea: This is also different from approach to approach. Some exits are timed exits, so I close the trade after
a certain number of bars depending on what timeframe Im using, or the classical stop-loss and end of
the day exit or again 5 days later, or sometimes stop and profit. Sometimes I also use stop-loss and
take profit of the same size just to measure how effective a move in the direction is. If I take the same
measure of stop-and-profit, I have 50 percent possibilities to get to one level or to the other. So if I get
a winning strategy, it means that with the setups I have built, there is a higher chance to go the
direction I want, and then after this information, I can start playing with the stop-and-take profit just to
get the best result.

Andrew: So when youre testing these patterns, what metrics are you looking for there? Are you just looking
for an accuracy type of improvement or are you judging it as a complete system?

Andrea: Both. Well, its very difficult to get a complete system on the first try. But if that happens, you have to
be happy with it. Normally I consider the strategy at the first attempt without filters, just with a trigger.
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It must a winning strategy because if its a losing strategy, I dont want to convert a loser into a winner
just playing around with patterns. It doesnt make sense. It would be over-fitting. Now lets say I have a
winning set up, when I look at the metrics, the first metric I look at is the average trade, so that I know
how robust the trades are if I have on the E-mini S&P 500, and Im going to trade off $10 for example. I
know that Im going nowhere. Ten dollars are not enough to trade with the market is. Its too small
because once I consider a trading cost, there are slippage, commissions, and so on, I would get below
0. If I get anything that is anyway positive, I try to improve it so I go through the patterns. If for some of
them, I actually increase that average trade, for example.

I also look at the consistency of results over time, so I dont want a strategy that makes all the money
on one month and then its breakeven for the rest of 10 years, for example. I want something that
shows an equity curve, which is heading up most of the time because that means that under different
market conditions, I still find a positive behaviour in my strategy, which is very important. Going back
to many years in my testing, obviously I go through very different periods of time where very different
conditions, bearish, bullish, hectic, anything. So many things happen in the last few years so that we
are able to go for many conditions in any case so I try to find winners throughout the time.

At the end of the day I have to have a strategy which makes money most of the time, but not too much
money. It will be a question of position sizing, but it has to make money most of the time and the
average trade must be large enough depending on the market and on my trading cost, which I know
from my broker and so on to cover the real-time problems that we always face.

Andrew: If youre testing these trigger setup patterns to identify certain behaviours in the market, can you
actually use the same approach for exits as well?

Andrea: I tried, I tried but I dont like it. If you consider this, what you mentioned should open doors to reverse
a trade actually because if my trend I am riding actually over because of a pattern, I might consider
reversing the trend from long to short or short to long for example. These are not always work the
best, so these patterns are the best to measure how effective the entry is and then I have to play with
exit on a different approach, but this is only my opinion. I dont say what you said is wrong. Simply I
didnt feel comfortable in doing so.

Andrew: Yeah, okay. Now you mentioned that you got about 40 patterns in your base group and then 100
something secondary patterns, can you share perhaps some ideas for people to start looking at these
type of patterns?

Andrea: Well, one example I always make is one of my favourite patterns is actually the so-called daily factors
more than 50 percent. I take the whole session of the day. I measure the total range of a daily bar and I
measure the size of the body, the distance between open to close of the market. If the ratio between
the body and the range is smaller than 50 percent, 0.5, normally the trend-following entries are more
effective, which is due to the fact that after indecision day because a 50 percent body compared to the
range means indecision because the market moved up and down. But at the end of the day, they didnt
move enough in comparison to the total move it made. After indecision day, we have higher possibility
to get a decision in a certain direction.

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The extreme case is Doji, so after the Doji, you have maybe a stronger move. This is one of my
favourite patterns. Obviously, this indecision pattern can also obviously be built on the weekly parts or
better said on the last 5 days, which is still a week but its a rolling week. Its not the weekly bars as we
intend them off the chart. It helps really on trend following. You can use it the other way around, say if
the body is greater than 50 percent of the range, you might consider or get better results with a
countertrade move.

Andrew: So what about if youre building long and short systems, do you prefer to have some symmetry in the
entries there while using up a set logic or is it not really something that you look for?

Andrea: I look at it depending on the markets. Just to give you an example, on index futures, I believe that the
behaviour of the market is different from long to short. We know about panic selling, but we don't
know about panic buying at least Ive never heard of it because when the market falls, it does in a
much more violent way than when it goes up on index futures. So on the index futures, I accept lack of
symmetrical patterns for my long or short entries I can accept it while for example on forex currency
players, I always look for total symmetry in the patterns because I dont see any reason why the US
dollar should go up in a different way rather than down. So if I get a pattern giving good information
about long entries, I expect the mirror pattern to give me good information about the bad.

When you talk about mirror, I dont refer to the decision patterns I mentioned before but to extension
patterns such as if yesterday the extension was greater than 0.5 or things like that. Obviously in this
case, if its an expansion to the upside, I expect to get mirror results with an expansion to the
downside. On the currency pairs, I definitely look for symmetry. On commodities, I also look for
symmetrical behaviour even for in bad case there are conditions when sometimes there are sort of
physical limits to the price, you know a commodity cannot go below its intrinsic value. But these are
more things linked to philosophy rather than to trading, so lets say also commodities is better to look
for symmetrical patterns if you want to explore the markets.

Andrew: Okay, thats interesting. Thanks, Andrea. For people who wanted to use this approach or get started
using this approach, how would you recommend they do that?

Andrea: I think that they should really try to understand what I say. I mean if they believe that what I do
makes sense, now the next step is yeah what patterns does he really mean? I mean he explained one,
explained the expansion, but how do I really build them? What are the best and so on? They should
try. Play around with the charts. Play around with the codes. Try and go certainly helps tremendously,
and its always a good way to go. But if they want to use my already available knowledge, I also offer
some education about it on different levels. Of course, I suggest that somebody who refers to this
already studied on his own anyway because going for a course without the necessary basic knowledge
sometimes is a waste of money in my opinion and its always useful to keep your money because in
trading, its of top importance.

Andrew: Sure, so lets move on to the education side of things just quickly because I know that you do have a
course which covers some of the stuff we actually talked about today, which is actually pretty cool, so
can you mention what that course is and whats covered in it?

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Andrea: I think you probably refer to my Skilled Academy course.

Andrew: Yeah, thats right.

Andrea: Its skilledacademy.com. We are offering a course, an online video course where I go through the
development of strategies, and in this course, I cover all the aspects I mentioned about the patterns. I
have plenty of examples and ready to use strategies if you want the course once the examples are
done. They have been prepared through a strategy, which was built, so that obviously somebody can
go through all this information. The advantage of that online course is that the videos are there and
once you subscribe to a course, you can have live access to these videos, so also if things are not clear
at first glance, which is most probably. Then you can look at that as many times as you want in it. This
is something which is experimental because Ive never been very active actually on the educational
side.

Also my live courses are run very seldom. Ive been asked this so many times to do this, but at the end
of the day, I decided to prepare this online course and there was help by some friends because they
compelled me to record the videos. I am always a little bit lazy and procrastinating with this thing, so
these friends really helped me, and now we are on the right path. We have prepared this first course
based on what people asked for and then we always some other courses in there in the future about
position sizing, about strategy analysis, and about portfolio build-up. Its something which is interesting
in my opinion. In any case, fully evaluate that. Theres also free webinar available recorded at this time,
but there will be something else which I will do.

In the future, I will promote the course through twice a week webinars, so people can register to the
free webinar and go through that, but there will also be an example about the strategy, so they really
understand if that approach is something suitable for them and only afterwards, they might decide to
register for a paid event.

Andrew: Yeah, okay. Ill get the links for those off you and put them on the Show Notes page so people can
find them easily.

Andrea: How fabulous!

Andrew: So that Skilled Academy course, what type of trader is that designed for? Is that for beginner, or
more advanced, or what kind?

Andrea: Well depending upon what beginners is, I might say intermediate, low intermediate, people anyway
willing to understand about automated trading. Its not for discretionary traders. It might be but its
not the purpose of the course. So lets say all people who decide to program their own trading systems
and they dont necessarily have to be really skilled. Skill is after the course. They will become skilled
and for the more advanced, I think you are aware of this. There is the trading master class in New York,
but this is a live event, which is from my point of view its more sort of reunion with friends. Im
running this with my friends Kevin Davey, Michael Cook, and Tim Rea, all previous winners of the world
cup trading championship so its a fun experience to meet with these friends. We decided to offer or
share our knowledge to willing students. That one is for more advanced students in my opinion
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because it covers things from different perspectives. We are four different traders, all successful but all
successful in different ways, so people coming to that course actually will see four different approaches
to the world of trading, and they will see how different approaches lead to a common positive result.
But its a great experience in any case. I think theyre probably unique. I don't know if well do it again
in the future. It depends on the response obviously.

Andrew: Ill actually be attending that master class in New York, and Im really looking forward to that. I think
thats --

Andrea: I didnt know you were coming. This is great news. I don't handle the registration process because its
handled by Kevin in the States, but its good.

Andrew: Yeah. Im looking forward to that. Do you know what topics you will be covering?

Andrea: Also in that case mostly well be system development of course and as each of us is developing
systems from different points of view, each of us will show his own way of developing systems, and
then each of us will cover also particular topics that lean towards system development in general. Then
there will also be group workshops because once we clear the topic by then, we put people at work in
order to assure that theyve really digested what we deliver and the people the group will be in
attendance, well be splitting groups and each group will work for some hours on a specific topic
developing a strategy. So well accompany the students throughout the development process so that
they go back having already done something and that obviously boost their capability of doing that in
the future on their own.

Andrew: Well, I also have a link for the trading master class show up on the sign-up page so people are going
to have -

Andrea: Yes for that one, I believe that there are not so many spots left so far. I think we are close to closing
the registration, so Im not pushing anybody to subscribe, but if you are thinking about that, please be
fast, ask the question you want because I know that we are close to the end of the subscriptions. Its in
April, so its actually very close

Andrew: Yeah, its not far away at all, yeah.

Andrea: Yes.

Andrew: I think its a marvellous opportunity. If anyone can make it, you should try and get yourself there. It
will be fantastic. So thanks for chatting today Andrea, and sharing a lot of information about the set up
and trigger patterns that you use. I think thats really going to help people to look at entries a little bit
of a different way, so

Andrea: I hope so. I hope so.

Andrew: Yes, thank you very much for sharing that with us today and I look forward to seeing you in New York
in the master class.
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Andrea: Well, thank you, Andrew. Im also looking forward. Now that I know that youre coming and great ciao
from me to everybody.

Andrew: Okay. Thank you very much, Andrea. Enjoy your day!

Andrea: Ciao!

Andrew: Ciao!

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