The Indie Trader’s Cheat Meal

Cosplaying Paul Tudor Jones

Here’s a thing that will help keep you sane as a systematic indie trader: keeping a small speculation account separate from your main book.

This isn’t just about fun (though it is fun). It’s about not derailing your actual trading because you got an itch you couldn’t scratch.

Know Your Edge

Nearly all my trading is systematic (I’m not smart enough to do it any other way).

My positions make sense based on edges I can articulate, and whose footprints show up clearly in the data.

Risk premia. Providing liquidity to price-insensitive trading. Stat arb. The usual suspects.

But like anyone who’s obsessed with the markets, I like to cosplay the clever macro trader from time to time.

I’ve also been known to come home drunk and punt silver futures because “an idea came to me in the Uber”.

Of course, I know bugger all about macro trading. My edge is in doing useful things the market values and getting paid to do them well. I have precisely zero edge in predicting interest rates or housing bubbles or anything else that requires being smarter than the aggregate market.

But like every market obsessive, I’m going to get the occasional itch that’s just got to be scratched.

Systematic trading is about grinding out noisy edges over time. The worst thing you can do is express some macro view you have zero edge in with size - you can literally derail months of hard work.

So instead, I keep what my mate Euan calls a “cheat meal account.” It’s a tiny fraction of my total capital. And I can do whatever I want with it.

The Cheat Meal

Euan put this perfectly when we were talking about it recently.

“It’s the same way bodybuilders have a cheat meal. You can’t have a perfect diet all the time because eventually you crave chicken wings so much that you go on a bender and eat 50 of them. But if you let yourself have five chicken wings a week, that keeps you on track.”

That’s exactly it.

(Except five chicken wings ain’t cutting it for me… not even close).

If you’re sitting in front of screens all day, or even if you’re just really interested in markets, you’re going to have ideas. You’re going to see patterns - real or imagined. You’re going to think, “Oh, this looks interesting.”

And if you’re determined to never act on them, you’re not being disciplined. You’re being a coiled spring. Eventually, something’s going to give, and you’ll do something big and stupid.

At least, I know I would.

I’m not the trading police. I don’t have a boss who will slap me on the wrist or cancel my bonus if I do something out of line. I’m allowed to have a little fun.

What I Eat for Cheat Meals

My speculation account is where I put on trades that don’t follow from my process. Essentially, anything that doesn’t lend itself to being disproven through data analysis.

Maybe it’s a macro idea. Maybe it’s something I saw on Twitter that seemed interesting. Maybe it’s something I read in a newsletter. Maybe it’s just a feeling about something. Or maybe I just had too much to drink.

I definitely don’t want my trading results to depend on my ability to out-predict other people. I know that’s a terrible bet for me. But with tiny size? Yeah, I’ll have a punt. And I’ll really enjoy it.

I scratched the itch, lost a bit of money, moved on. No harm done. Maybe even learned something.

This Isn’t Just About Fun

The act of systematic trading is a grind. It’s boring. You turn up every day, run your processes, and reconcile your positions.

(For me, the fun stuff is the detective work that sometimes leads to a new strategy, the decision-making under uncertainty, the weighing of competing evidence. YMMV).

If you’re going to stick with this for the long haul, you need to actually enjoy it. And part of enjoying it, for me at least, is getting to occasionally take a punt on something interesting without it mattering if I’m wrong.

As an indie trader, you’ve got to indulge yourself a bit. You can’t just have your nose to the grindstone every day. That’s not sustainable.

And when you’re constantly in front of the markets, you’re going to act on things at some point. Unless you're Jocko Willink, perhaps.

And when you do, it’s not systematic. It doesn’t fit your process. You don’t have proper sizing for it because it’s not part of your framework. You don’t have clear rules for managing it.

That’s when bad things happen.

Much better to quarantine that stuff. Keep it separate. Keep it small. Let yourself be human without letting it wreck your hard work.

How Much?

It’s not fixed, but mine would only be a couple of per cent of total capital, maximum. Small enough that if I lost the whole thing, it wouldn’t materially affect my life or even my portfolio.

The exact number doesn’t matter. What matters is it’s small enough that losing it all wouldn’t hurt, but large enough that winning feels satisfying.

Some people might want 10%. Some might want 2%. Just don’t make it 30% or you’ve defeated the whole purpose.

What This Isn’t

This isn’t an excuse to trade like a muppet with a meaningful portion of your capital and call it “speculation.”

This isn’t a way to justify putting on positions you know are rubbish because “oh well, it’s just the spec account.”

And this definitely isn’t something to brag about when you get lucky on a coin-flip trade. (Trust me, you’ll have an urge to do this. Resist it.)

It’s just a pressure release valve. That’s it.

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If you’re trading systematically, or trying to, consider keeping a small speculation account. Not because you need it to make money. You don’t. But because you’re human, and humans get ideas, and it’s better to act on those ideas in a contained way than let them infect your real trading.

I’m always doing some dumb stuff in mine. Some commodities idea, or sector trade, or whatever. And on the off chance it works, I’ve found a reason to treat my wife to a night out. And if not? I scratched the itch.

Five chicken wings a week, yeah?