In our continued conversation with Roy Niederhoffer, we discuss risk management, drawdowns, why negative correlation is so important to Roy, and what gets him out of bed every morning (and what keeps him awake at night). Learn more about how to create a balanced and diversified portfolio or what it takes to be a manager.

Thanks for listening to the second part of our conversation with Roy Niederhoffer.

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In This Episode, You’ll Learn:

• What has changed by the fact that more and more trading decisions are made by computers instead of humans.
• The issue of model decay in Roy’s field.
  

  “The numbers suggest that we have not had any decay in our algorithms in fact we think we’ve improved it over time.” – Roy Niederhoffer (Tweet)

• Why he has constructed his trading program the way that he has.
  

  “We are trying to do a lot of different things, to have them be as different as possible, and to allow them to operate in harmony with each other.” – Roy Niederhoffer (Tweet)

• His ten-step process from idea generation to putting it into the system. The research process laid out.
• How his firm does research.
  

  “As a short term trader we are focused on our opportunity set divided by our trading cost.” – Roy Niederhoffer (Tweet)

• How position sizing plays a role in the short term space.
• How he keeps model slippage to a minimum.
• Risk management and how Roy deals with it.
• When to use discretion to reduce risk.
• What he learns from going through a drawdown.
  

  “We’ve had some drawdowns; every one of them has resulted in a far stronger program than we had before.” – Roy Niederhoffer (Tweet)

• How he keeps investors in the firm during a tough time.
• How he personally deals with drawdowns.
• How he measures the effectiveness of his research.
  

  “To think that the smart pieces of your portfolio are only the things that are going up is naive.” – Roy Niederhoffer (Tweet)

• If his risk tolerance went down once he had more money under management.
• What the biggest challenge is for Roy in the short term management space.
• What investors are not asking him during due diligence.
• What makes him go into work everyday.
• Books that Roy recommends reading for managers and investors.
• How the office environment affects how investors perceive a firm.
• About downside protection and negative correlation.

Resources & Links Mentioned in this Episode:

• Roy mentions the Extraordinary Popular Delusions and the Madness of Crowds
• He recommends Reminiscences of a Stock Operator
• Roy highly recommends Thinking, Fast and Slow
  

  “It has very little to do about trading, but a lot to do about the brain and how people think.” – Roy Niederhoffer (Tweet)

*This was originally published in Top Traders Unplugged.

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