Banking

Unknown market wizard Peter Brandt averaged an annual compounded return of 58% over 27 years. The highly profitable trader breaks down how he finds asymmetric opportunities — and shares 2 rules to avoid ‘popcorn trades.’

  • Peter Brandt is a highly skilled trader profiled in Jack Schwager‘s book “Unknown Market Wizards.” 
  • Over the years, Brandt has grown from a technical analysis trader to a meticulous risk-taker. 
  • He breaks down how he identifies asymmetric opportunities and avoids performance-dragging trades.

Some legendary traders are born, others are made. Peter Brandt is inspired. 

Brandt, who grew up “dirt poor,” was already working at one of the largest advertising agencies in the world when he met a fellow friend — a soybean trader — for lunch at the Chicago Board of Trade. 

Immediately, the open-outcry trading pits captivated him and sparked a desire to make a career change. 

Brandt, who is profiled in Jack Schwager‘s new book “Unknown Market Wizards,” went on to have a trading career that includes a 14-year span that started in the 1970s and the current ongoing 13-year span that restarted in 2006.

Over almost three decades, he averaged an impressive annual compounded return of 58%, according to Schwager. But when he first started trading in late 1975, Brandt was getting frustrated about finding a methodology that would work for him. 

He tried point and  figure charting, seasonal patterns, and spread trading, but it was not 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 for understanding price. It gave me an idea of where to get into a market,” Brandt told Schwager. “It also gave me a way to establish where to protect myself on a trade and an idea of where the market might go.”

The so-called bible of technical analysis brought Brandt into charting. In 1979, he was well on his way to trading success. The following year, he incorporated his firm Factor Research and Trading. 

From analytical chartist to meticulous risk-taker

Chart patterns are no longer an essential part of Brandt’s trading strategy because they are subject to failure and could morph into another pattern.

As charts become “much less reliable” than they were during the 1970s and 1980s, Brandt has switched from trading one- to four-week patterns to trading eight- to 26-week patterns. He has also become more selective and would only trade patterns where the breakout is through a horizontal boundary, which allows traders to “find out much more quickly whether you are right or wrong.”

Over the years, Brandt has incorporated protective stops into his trading methodology. “Yes, the risk I take on a trade is much lower now,” he said. “Whenever I take a trade, I limit my risk to about 1/2% of my equity from the point of entry. I want to have my stops at breakeven or better within two or three days of entry.”

Brandt had his first bad year as a full-time trader in 1988, losing about 5% after being up 600% the year prior. By 1992, his trading was trailing off. He traded his own account for another two years before closing it.

“The fun of trading had left me at that point. Trading had become drudgery,” he said. “I was feeling the discrepancy between how I was performing and how I knew I could perform. That gap was emotionally difficult for me to live with.”

Asymmetric opportunities and popcorn trades 

In 2006, Brandt returned to trading after an 11-year hiatus. He was gone for so long that the world had transitioned to electronic trading, but his trading strategies and rules still applied. 

In fact, when he deviated from his trading rules in 2013 and started adding mean reversion trades, which allows traders to sell on strength and buy on weakness, Brandt suffered an 18-month drawdown of 17%.

“I had bought into the lie that I had to change because the old ways no longer worked,” he said. “I finally realized I had to get back to basics.”

After that drawdown, Brandt started looking at his equity based on closed trades only. “Also, once the profits of the trade equal 1% of my equity, I take half the position off,” he said. “Then I can give the other half much more room.”

Another rule he instituted is to raise the stop once he gets to more than 70% of his profit objective. “If I have an open profit of $1800 per contract on a trade with a target of $2,000,” he said, “why would I risk giving it all back to make the extra $200?”

By abiding by the two rules, he avoids making what he calls “popcorn trades,” which are profitable trades held for too long to the point where the entire profit is surrendered or turned into a net loss. 

Instead, Brandt looks for asymmetric trades where “the perceived upside potential significantly exceeds the required risk.” He tends to find these opportunities near an “ice line” — a price area that is difficult to get through but should provide support once it does. 

“If I can find a market with a price breakout where at least half of that day’s range is below the ice line, then that low can serve as a significant risk point,” he said. 

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