Derek Frey came from pursuing a career as an Olympic athlete to trading and developing his own custom Forex tools. He applies the same high standards and results-oriented approach as an elite athlete to his chosen speciality, "?Harmonic" patterns in Forex. Huzefa Hamid, DailyForex.com Senior Analyst, spoke to him about his fascinating journey into the markets.
Your journey into the markets began at a very young age with a book. What was the book and how did the journey evolve thereafter?
I picked up a very obscure out-of-print book at the time called "?How to Make the Stock Market Make Money For You" by Ted Warren. To make a long story short, it was intriguing. I was fifteen and I remember very clearly reading it on a sunny day. I literally couldn't stop reading and read the whole thing through in one sitting which was the first time I'd done that for any book. That's what got it started. That led me to futures and commodities trading because the barrier to entry was seemingly lower back then versus stocks or anything else. And it was something I understood because I understood basic crops and corn and things like that. It just started having picked up that book, being intrigued by it and wanting to learn more. It led me down every crazy path and dark alley that you could possibly take. I've even read about financial astrology which may or may not be crazy; I'm not going to comment on it but I've looked into it just for no other reason than trying to discount it. Anyway, there's lots of interesting ways of skinning the cat so to speak. I certainly haven't been exposed to all of them but I've definitely seen a lot since that beginning. Ultimately that's what got me to Harmonics now.
At that time you were training as an athlete, when you were in your teens"¦
Yes. My goal was to ski race in the Olympics. I grew up as a ski racer – slalom and giant slalom specialist. I was very much in the process of training for the Olympics at the ages of 15, 16, and 17. I was a vegetarian; I was on a strict diet, strict everything – training every day all year round, mountain biking in the summer for training – I was really in the depths of that. I knew enough about ski racing to know that even if I had become an Olympic champion I wouldn't make any money at it. Skiing was all glory and no money back then. Even today it's pretty much the same, Shaun White being about the only exception! I knew I would have to have money and I would have to do something for income. I also knew that if I was going to be a ski racer I wouldn't have a lot of time . So the markets made sense. Of course everybody wants to do it in 15 minutes a day and I was on that track thinking that I could. It definitely takes a little bit more than that or at least it has for me since then. But I was basically looking for a way to work part-time and earn full-time.
Do you think there are mental skills or aptitudes that you develop as an athlete that enhance your trading?
Yeah. The lesson of perseverance I think is the biggest one that I took from it. Using baseball statistics as the obvious example: the greatest baseball players in the world fail seventy percent of the time. Trading is often quite similar. It's not necessarily about winning all the time or anything like that. It's about winning at the end of the game. That's what guys that are batting three hundred are doing. They may lose seven out of ten times at bat but they're ultimately winning the game. That lesson – the lesson of continuing to persevere even in the face of negative feedback – is extremely important and I think has served me well. I don't think I'd be here if it wasn't for that. I think most other people would have given up at some point.
Do you remember how and when Harmonics caught your eye? Was there a specific moment when you knew Harmonics was going to be a big part of your trading?
I was introduced to the topic of Harmonics by a client. Years and years ago after I'd become a broker, he sent me this whole big book on it. None of it made any sense and I had no idea what it was trying to talk about. I thought it was almost completely crazy at the time. I told him it's great but it's not for me; if you want to do it, do it on your own. So I put it aside and continued to do the "?wondering around bumping into things" like most people do: system hopping and trying something for three trades. That's stupid in itself because it's statistically irrelevant at best. But people do that all the time – they'll do something for three or maybe ten trades and think that's a valid sample size. That doesn't mean anything. If I randomly took ten data points out of any other data series and I drew a conclusion from it I would be looked at like a fool. In trading it's different and people unfortunately don't quite ever get through that and realize it's just about finding something that fits your personality and then being repetitious, using it over and over. Was there a specific time for me for realizing Harmonics? When I was in the absolute depths of supreme frustration with the wondering around bumping into things theory that I revisited Harmonics because I had another client bring it back to me. So I looked into it again but by this time I had become a little bit more mathematically mature. The light bulb went off when I realized, "?Wait a minute. You're telling me there's a 70% edge here over a sample size going back through millions of trades on every market on everything that's ever been measured? Okay, now you have my attention." So that was the first thing because I really hadn't found anything else that didn't need to be changed here or there along the way. I never believe in these systems that only work for fifteen minutes or fifteen hours or fifteen months or even fifteen years and then stop working. There's something fundamentally wrong because the laws of math haven't changed along the way. So the main thing that got my attention was that there was so much for me to be able to further investigate with actual numbers and third-party data. I could simply take the base code and look at anything I wanted to and the math became self-evident. It kept showing up and it kept working, over and over, no matter where I went, roughly seventy some odd percent of the time with the parameters we were testing. After I did that for probably six months, just testing sometimes demo, sometimes a little bit of real, back testing, forward testing, the whole nine yards, I was finally convinced to put my own money in and start trading it. And I haven't looked back since. That was around ten years ago now.
I believe you had an injury as a professional athlete. How did you then evolve as a trader?
When I was eighteen in my senior year, I was captain of the ski team. We were in the final race that was going to get us into the state finals, basically the qualifier. Long story short, I destroyed my right knee and I had to have my knee completely rebuilt. That took me out of the rest of the season. I did end up going to college for ski racing and got recruited. But I never fully recovered from the injury; even to this day I still have issues with my knee. Afterwards, I moved to Alaska and started fishing commercially and began trading from up there, trading options.
I read in the Wall Street Journal about that period in your life where you were trading off payphones to have your orders executed.
Yes. We would go out fishing and of course this is before the days that everybody had a cellphone attached to them. We'd go out for three days or a week or whatever. But I wouldn't know exactly when we'd come back because we'd come back whenever the boat was fill of fish. We'd get into town and there was a payphone at the end of the dock by the harbormaster's office. I'd run over there and at the time my broker didn't have a toll-free number, so I'd have to get quarters from the harbormaster. I'd be like, "?We've got 2 minutes for this call; we got to do this quick!" It was a good lesson in making a decision and being removed from the ability to do anything about it once it's executed. It's not like I could second guess myself and think, "?I don't like the look of this," and be out. I wasn't looking; I couldn't look.
You then worked for a bunch of firms, Merrill Lynch I believe and some others. And then you set up your own firm. Is that correct?
That's exactly right. I worked for a number of different firms as a broker and then as the head trader. That ultimately led me to start my own firm as the head trader with the head sales guy of an old firm. We partnered up and formed Odom & Frey and ran that for about five years before selling it in 2008. Right when I was selling the company is when I got really focussed onto Forex. I'd always been a commodities trader and a commodities broker. That's about when Forex came online and started gaining acceptance. I remember when it was scoffed at completely. It was a joke if you said you were a Forex trader. It's come completely full circle now.
Today, if someone is discovering Harmonic patterns for the first time, what resources and learning materials would you point them towards?
I read everything I could online. Scott Carney has written a couple of books on the subject as had Larry Pesavento. There are a number of other people too I'm leaving out. But those are the first two guys I read. They're both good material and they're good baseline textbooks. I don't think either one is going to be all-encompassing in terms of teaching you the methodology. They're very good introductions. For me, there was a lot of nuance behind it that had to be figured out. The nuance is in figuring out your personality. It's not that the math is hard or anything like that. It's that you need to be able to find a way to devise your plan so that you're going to stick with it when it's not working. It's easy to stick with your plan when it's working. Anybody can do that; it's mindless. But where the real rubber meets the road and where you become a professional trader is when you have ten losing trades in a row and you place that eleventh trade exactly the same way as those ten that just lost. I know that sounds crazy but it's not. You have to know that you're doing the right thing mathematically even in the face of negative feedback. If you're a baseball player and you've just struck out seven times in a row, you get back up there and you swing again. You don't fundamentally switch from being left-handed to right-handed. You're just swinging like you always do. That's the same thing in trading. You have to get back up there and keep going. So figuring out your personality and knowing how much pain you can really take mentally let alone financially is the biggest part. When we mentor people now, that's what we're really teaching them. The math you learn that in the first few days. It's more about being honest with yourself and figuring out who you are. We know everything's going to go through streaks. There is no question that every trading strategy, no matter what, goes through winning streaks and losing streaks. There's always going to be clusters of lose, lose, lose, win, win, win and so on. And those lose, lose, lose times are the most critical. You have to make sure that your risk strategy isn't crushing you along the way and is going to allow you to mathematically survive it no matter what. And you can't commit to the strategy if you can't mentally survive it.
What piece of advice would you give to an individual looking to trade for the first time or make a living from it?
Definitely, do the math. It's an inconvenient truth that it takes money to make money in this business. If you want to be a full-time trader and generate a full-time income from it, you have to back-figure it. How much income do you need to generate? What capital do you need to start with? Approach it from an actual, legitimate real business point of view and plan for sound long-term success.
What would you say in a nutshell FXGroundworks offers your customers?
In a nutshell it offers them the ability to get all the Harmonic information that they want out of the markets without having to do much of the work because it's doing a lot automatically. I look at it like a bloodhound: it's out there sniffing the entire market, whatever market that is, Forex, stocks, commodities, it will run on anything. You can have it filtered and have the alerts set to exactly the parameters you want. Basically, it's searching the markets in real-time and hand-delivering the opportunities you want based on whatever parameters you're looking for within those Harmonics. There's really not much else out there that does that, if anything, that I know of. If nothing else, it's a huge time saver. I used to literally sit in front of a dozen screens and only give myself two minutes per chart because I had so many to go through so I'd want to cycle through them as fast as humanly possible to just find those few patterns that were worthy of consideration. Well, now all that's done for us. Even when I was doing it in the old days manually, it was still a mathematical thing; it's just that we hadn't automated it yet. Now with FXGroundworks, it's completely automated and it does all that for us. Plus it brings opportunities to me that I would never find or never think to look for in the first place because it's in some obscure pair that I don't normally look at. Because it's a computer it's looking at everything. I've ended up trading a lot of pairs and markets that I probably otherwise wouldn't have traded. For me, that's not a big deal because I'm not actually trading the underlying market, I'm trading the method. It doesn't really matter to me whether it's Forex or stocks or bonds or commodities. That's circumstantial. That just happens to be the symbol we're trading. The underlying thing that's actually being traded, the underlying math, the methodology and the Harmonics are all the same across the entire spectrum.
In 2013 alone, there have been some extraordinary macro-fundamental events, such as the Greek crisis, the validity of the Euro being called into question, and the Japanese political will to devalue the Yen to name a few. Do these events affect how you trade harmonics?
The things that I love the most about Harmonics is the fact that my answer is "?no". It doesn't affect me at all. All of that stuff fades into what I just call background noise. I mean I'm aware that stuff is happening. I'm also aware that stuff like that has happened in at least the twenty or so years I've been doing this. There's always been some earth shattering impending doom out there whether it's political or a war or financial Armageddon or whatever. The only constant is that there's always something there. But all of those things for me because of Harmonics fade into the background. Of course these things have an effect on the underlying trade. For example, if Japan moves interest rates, the Yen has a huge move. But en masse, when I look at a thousand trades, am I concerned about, "?Oh this one happened because of this news event" etc.? No, none of that matters anymore because trading is just a statistical endeavour. That's what I like. Current events are fun to pay attention to but I don't have to be concerned by it anymore. The only thing that I would say is that sometimes when we know there is a major event coming, such as a shift in interest rates from a central bank, we may shut everything off and go flat just to ride through the volatility because the likelihood of something bad happening is higher during those periods. So we use that to our advantage. On a side note, I've always taught that NFP while everybody believes stands for Non-Farm Payroll, I believe it actually stands for "?Not for Professionals". We call that rooky-day. I've been on the other side – I've watched how the brokers' profit count for the day, how much money they're making, goes through the roof during NFP because so many people get in and get crazy and chase the market up, down, sideways, because they're so enamoured by the fact that it's moving fast. And that is when they're giving their money away. There are more losses generated around that single hour of NFP than almost any other time in the month. So I look at it like this: if you knew there was going to be a car accident at a particular intersection at 8:30 in the morning of a Friday, would you drive your car through that intersection at 8:30 in the morning of that Friday? The sensible person would not and it's the same for me when dealing with major points of volatility like NFP. You know that the probability of something bad happening is higher there than at any other time of the month. So why would you put your neck out there?
Tell us a little about your trading schedule and office space. What kind of hours do you keep? How many screens do you utilize?
Well, it's funny; the screen thing used to be expensive and the more screens you had the more you would boast about it. It's gone the other way now. I'm still ashamed to say I have a six-pack of screens. That said, I do almost everything now through my either my phone or tablet, so I'm down to one very small screen actually. For example, right now I'm travelling and will be most of the summer. I can login to my computers and stuff remotely but for the most part I'm doing everything through my phone.
Does that mean you have some office space for your screens but that's not your trading space anymore?
Yeah. Big point for me becoming a trader was to be able to travel almost perpetually. I'm addicted to travelling so I do. I've had to become mobile because of that. I do have an office space and I have my six-pack of screens still there. It's great and I have no problem being there. But everything is automated for the most part; 99% of everything is pretty much done via computer. It's like a commercial airline pilot: they're trained as a pilot but they don't fly the plane much anymore. It's on autopilot almost all of the way. They take the thing off and they land it but other than that it flies itself. That's how trading is I think for most people nowadays who are using some sort of automation. A lot of it is piloting more than active trading. I don't sit around and think and make huge decisions and sweat it out. The computer does all that. I did all that years ago in figuring out how to code it. Now it's a much more passive and therefore peaceful endeavour.
That leads me onto my next question: what things in life has trading enabled you to do? So I'm guessing travelling is one of them.
Travelling is probably the biggest one and having a flexible schedule as well. I'm driving next week up to Washington D.C. on a road trip with a friend just because I can. We're driving up the Blue Ridge Parkway and Skyline Drive and all the way up the Appalachian Mountains. I'll trade along the way. I guess you could say I'm living the dream. I hate to say that but it is what I set out to do; that was the whole point. If you're going to bother spending all the time and effort to figure out trading then you want to get the payoff from it which is ultimately time-freedom. Especially when you start making money you realize that money itself is not really all that important. What you're really trying to buy is time and freedom. But that actually costs money.
What are some of your ambitions in the field of trading going forward?
I enjoy teaching. It's one of my biggest passions of trading. I certainly don't need to do it but I do enjoy doing it because it's fun to see the light bulb go off for other people especially people that have struggled along the way like I have. I know exactly what that struggle is like. I know what it's like to feel like the market is out to get you, to have had your last three trades get stopped out within 5 pips of the high or low and watch the market rip the other way and you would have made thousands of dollars but instead you got stopped out. I also know what it's like to get to the other side and find some of the mathematical truths that lie within. What I always thought was there from the beginning, I struggled hopelessly to find. Now it's right there in front of me and it's just a matter of consistent execution to stay there. It's great to teach people and show them that. It's also a little bit anticlimactic because it's a case of, "?Oh really, is that all there is?" People think there's this big super-secret "?only the insiders know" and it's not like that. No, there's just a bunch of statistics and you have to just stay true to them.
On a weekly or monthly basis, do you have trading goals, such as a percentage return or number of pips?
Not on a weekly or monthly basis. I have an average but I don't like to state it as a goal. Let's say I have a goal of 3% and it's the 20th of the month and there's only ten days to go. And let's say I'm still at zero. Well, time is shorter and my goal is still there. My compulsion is high to want to force trading but it is not warranted just because I'm under the gun to try to meet some artificial goal. I do have an annual number that I want to hit. That's far enough out there for it not to put an unrealistic pressure to try to make happen. That's the other reality. You can't force it. No matter how you try to coerce or sweet-talk the market into giving you what you want, it's not going to work. It's only going to give you what it's going to give when it's going to give it. And we don't know when that is. I don't have a problem with setting goals; but I've seen it enough times where people will blow themselves up just trying to reach some number that isn't reachable because conditions just aren't there. If you want to go white water rafting but you're sitting in a lake, I can't help you.
When you were developing as a trader, did you have a mentor to help you develop?
I never had a person that I could actually talk to and call and ask questions. But I definitely looked to some of the old masters. I'm a fairly big fan of Gann, and even though I don't directly use his work I love his research and respect everything he's done. I indirectly use his ideas because we're both using vibratory harmonics. But I'm not using the Gann square of nine or anything like that.
FXGroundworks is the creator of The Harmonic Autotrader Product, or HAT. It seems more sophisticated than your usual Expert Advisor, or EA. How is HAT setup differently from other EAs or Harmonic tools out there?
I would agree with you too. It's much more than just an EA. It's doing all the bloodhound work that we were talking about earlier: sniffing across whatever market you set it to look at to exactly the parameters you want. A couple of the parameters that we look for are risk to reward ratio and spread. So if the spread goes crazy it will automatically lock that pair out because it increases the cost of execution and it increases the probability of loss and therefore decreases the probability of success. So it's a no-brainer to sidestep those trades. And the software looks out for any kind of external risk factor that becomes evident in the price, such as speed of movement. So for example, if the average ATR is 5 or 8, and all of a sudden it spikes to 80, that's a huge sign that something is going on. I've realized that new traders especially are drawn to the market at times of fast movement in particular. These known spikes in volatility, that's not an invitation to play. It's quite the opposite. Getting back to the question, our software is much more than a simple EA. Besides sniffing everything out, it then goes ahead and auto-executes the trades for us. Not only does it enter into the trades but it also handles a good part of the risk management. It will never place a trade without placing a stop. And then it will also move your stops to breakeven whenever you set the parameters to do so. That's a really nice feature as well. This morning, we had trades fired off on the British Pound. It has put me in multiple positions and it's already gotten me out of 50% of the position in profit and locked in the other 50% at breakeven. And I've been sitting here with you the whole time conducting this interview.
Could you expand more on your teaching side of trading.
We've done a number of mentoring courses over the last four or five years at FXGroundworks. Just about every year we'll do a course and maybe twice in a year if there's enough people that are asking for it. We don't normally promote it, only when there are enough internal people asking about it we'll do one. The mentoring really is forcing people to go through a process of creating and writing out their trading plan. To be able to graduate, you have to hand in your final trading plan. Then your first assignment is to go out and execute a hundred trades with that plan with no deviation. It sounds simple and it is simple but it's one of those things that almost nobody does. Everybody knows they're supposed to have a written trading plan; this is not a news flash. But how many people can actually stand up right now and say, "?Here's my written trading plan. Come look at it."
What mistakes do you still make today as a trader?
I make the same mistakes that anybody else does. I'm still impatient. I'm still prone to thinking that I know better. I do have alpha on the automation, at least right now, knock on wood. [Alpha means making a profit in excess of the return achieved by the strategy. If the strategy makes 10% and you've made 12%, you've generated 2% of alpha.] I can't say that my alpha makes me a huge amount of money. It's more of an intellectual game. It's because I'm staying with trades longer or adding other trades, which I'm really not supposed to do. It goes back to the whole consistency thing. But if my augmentation is consistent then that's different. I have a certain set of parameters that my automation doesn't like that I do like.
Any parting words?
[Frey: Harmonics and FXGroundworks aren't based off one person or their ideology. If we're doing it right, it's all self-evident. The whole underlying Harmonic thing has been chosen is because it's self-evident. If someone brings me something that is better and more user-friendly and offers me flexibility, I'll switch tomorrow. I have no loyalty other than to math itself. That said, I'm not saying this is absolutely by far the best thing. I don't know. I haven't investigated every possible thing that's out there. This is the best thing that works for me. All you have to do is stick to it when it matters, because if you don't, then none of anything else matters.
Derek, that interview was a real pleasure to conduct and I'm looking forward to people reading it. Thanks so much for your time.