John Netto: Monday Is My Favourite Day

In the 10-plus years since he started his official track record, John Netto achieved an average annual compounded return of 42% based on his notional account levels. Using notional account levels instead of the actual account levels dilutes both return and risk levels and represents a performance picture of the planned risk exposure. The maximum decline during this period was 15%. Netto’s return/risk estimates have been excellent, with an adjusted Sortino ratio of 4.7 and a monthly GPR of 4.8.

Many Market wizards have recommended eliminating emotions from trading. However, John Netto takes the provocative view that emotions are one of the most useful tools for a trader. Although it may appear as contradictory advice, there is actually no disagreement.

Netto also believes that emotions will usually have a damaging impact on trading decisions. In fact, the tendency of emotions to lead to bad trading decisions is exactly what Netto seeks to tap into as a source of the signal. 

He tries to be mindful of his own emotional extremes, which will be as deleterious to trading outcomes as anyone else’s, as warning signals calling for immediate corrective action. For example, if Netto is in a trade that moves strongly in his favour, and he further wishes to load up on this position then instead of adding on to it, he will liquidate it immediately.

Although most traders incline to either fundamental analysis or technical analysis, some of the best traders combine both. Netto provides a good example of how fundamentals and technicals can be used collectively.

Netto evaluates the dominant market picture to determine whether he will take a long position or a short one. Once this fundamental bias is ascertained, he will then overlay his technical analysis to select trade entry points. Typically, these will be reactions to support or resistance levels within the market’s prevailing directional bias.

Event trading is another essential aspect of Netto’s methodology. He trades both scheduled events, such as Federal Reserve statements and Government reports, as well as unforeseen events. Netto emphasizes that to successfully trade events, you need to have a good sense of whether any given outcome is a surprise. He will only trade event outcomes that he considers to be a surprise relative to market expectations.

Execution speed is obviously critical in such trades since the market will typically respond quickly and dynamically to surprises. Netto has solved this problem by developing his own software that can read the text related to an event, determine the trade implications and place the appropriate trade, all in a split second. 

For this program to work, Netto defines the trade implications of possible scenarios before each scheduled event. The rapid execution from this process means that if his analysis is correct, Netto will capture a considerable portion of the market move, even when the event triggers a near-immediate market response.

After losing money, it is common for traders to feel a compulsion to quickly make money back in the same market. This temptation must be resisted. In his early trading days, Netto suffered a large loss in a short S&P 500 position. However, This trade was not a mistake because it was consistent with his methods. He was just wrong on the direction call.

He was determined to get his money back from the same market and ended up being stopped four times the same day. None of these four trades complied with his methods. It was just the emotional spiral that he got stuck in. He had lost almost a year’s profit.

One more concept is that counter-to-expected market response to a news development can provide a valuable timing signal. President Bush’s ultimatum to Saddam Hussein, which whistled the close start of the Second Gulf War, was viewed as a bearish development. The equities were still near the lows of a two-year-long bear market. The market opened lower on the news as assumed but then reversed, closing sharply higher. This unexpected price action indicated the beginning of a long-term bull market.

Another example of the same principle was during the election in 2016. It was quite assumed that Donald Trump would lose the election and that it was unlikely for him to win, so the market would sell off sharply. When it was clear that Trump would be victorious, equities began to tank exactly as anticipated. However, then prices rebounded from their initial losses and moved vehemently higher throughout the night. This unexpected market response to the news marked the start of an uninterrupted fourteen-month run-up in stock prices.

Netto explains that successful traders follow a process and strive for continuous improvement. They are aware of the fact that they can lose even when they are right in everything they do. Making money is not everything. Not losing is equally important as winning in some situations. When the risk is taken according to a process, it leads to success. However, when risk is taken on impulse, it leads to regret.