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Richard Lackey has three decades of experience in the trading industry. Early in his career, he led companies which were later sold to Goldman Sachs and E*Trade. Richard has also served as the managing director for successful private funds and authored several books on market analysis. In 2015, he founded the World Food Bank, which seeks to create a sustainable solution to hunger and food security problems across the globe. He still has a hand in the markets with the Trade Oracle Group, which combines education, community, and a powerful predictive analysis tool.
Thank you very much for joining us Richard.
Could you tell us about the companies you built and sold to Goldman and E*Trade?
Sure. In 1996, after having been a swing trader and options trader for many years, I started a day trading office, a branch of Broadway Trading in central Georgia. The idea was to take advantage of the direct access to markets afforded individual traders through the growing number of ECNs and software platforms. I developed a system for new traders to build consistency. We taught technical analysis and strategies for money management to limit losses to last long enough in the market to create consistency. This office did well, so we opened another. Then the leadership of Broadway Trading asked if I would be interested in leading the recruiting and training of an office in Miami with the goal of having 100+ traders there. I began teaching classes and recruiting the best in those classes along with several former desk traders to become part of a proprietary trading team. We ended up with 128 folks on the floor doing tens of millions of shares in volume very quickly. Broadway Trading had a fantastic software, called the Watcher, which was for folks trading super-fast with hotkeys and using the Island ECN with its hidden functions, etc. I had ideas for additional functions to improve the speed of trading, so the principals of the Miami office decided to create a competitor. I helped in the functionality design, and in just a few months after completion, E*TRADE came knocking to purchase the software, and Goldman Sachs wanted to buy the trading volume.
I moved soon after to Colorado to serve as the Senior Executive for Marketwise, which focused on education but wanted to build a trading floor and complete its software platform. In a miracle of timing, we rebuilt the software, developed a trading floor of 20+ traders, and sold the company to Townsend Analytics out of Chicago just before the market crash.
Which were your favorite trading strategies while you were trading professionally?
I started trading when I was 15, buying strong companies on technical dips with a holding period of several months. When I realized I had a knack for identifying specific market patterns, I found the best patterns in commodity futures and metals. As I got into university, I wanted to trade more size with less volatility, so I began selling premium in the metals market. There is always a strategy for the times, and there are a few that have worked for decades while others were excellent for just a few years. We specialized in long-short equity and global arbitrage in the hedge fund space, which gave us a significant statistical advantage. I have always depended on the essential skills for seeing patterns across multiple time frames as my edge for my trading. Now, I use our proprietary FLOW technology to set up short vertical spreads on stocks and directional (sometimes hedged) commodity futures, F.X., and a little crypto.
Is there an advantage to being a small trader in terms of nimbleness?
Absolutely. While the largest funds in the world are just too large to move across sectors efficiently, the closer you move to be a day trader, the higher your potential returns, and if done correctly, the lower your portfolio risk. It is reasonable for an investment advisor to use sector rotation models to see double-digit returns 12-25% every year with less portfolio risk than a traditional portfolio. A swing trader might see 35-65% per year without much work, and a good day trader should see 200-300% returns per year. Some of this is due to the smaller account size, but it is also a function of how often you can make high probability trades.
What do you believe are the critical factors in building wealth as a trader?
I think there are three. First, you need education, a basic understanding of how markets work, fundamentals of the market, technical analysis, and plan your work and work your plan. Write down the markets and the profit and loss metrics that you believe are realistic along with how you will reach each one….” I will make 3-5 trades in the e-mini indexes per day with a goal of an average $100 net profit each day on my account of $25,000.” Once that goal is reached, set the next goal. In training proprietary traders, we use a four-step process (Level 1-IV). It has worked for hundreds of traders. Many of them still trade professionally today.
Second, you need to have an edge, a Tool or a Trading Strategy that gives you a mathematical advantage. Simple is good. For example, I will always trade where my FLOW software shows three consecutive time frames predicted to move in the same direction. Where the short-term direction (15 min) is different from the 240 min or Daily, I will only trade ½ of my normal lot size.
Third, it really helps to have a community where you can find mentorship and accountability. It’s valuable when you are building skills and consistency, and it’s a great way to keep up with the complexities of markets once you are consistent.
What is your view on the efficient-market hypothesis – the idea that it is impossible to “beat the market” consistently on a risk-adjusted basis?
I think it’s sad that many universities still teach EMH and Modern Portfolio Theory as the standard of practice without proper balance from practicing fund managers who have consistently outperformed the market. It’s the financial world’s version of fake news. Those who denounce market outperformance as anomalies are little more than an annoyance to the folks like Buffet and Simons who engage the markets and win regularly. Ironically, all of these folks actively disagree and have proven for decades that there are better ways to make higher returns.
While some would say markets are just a reflection of behavioral psychology, understanding markets is understanding behavioral analytics. Patterns repeat themselves in the same way people react, but not all simultaneously or in the same pattern over each time frame. Stocks can drop in price for hours or days while still in a longer-term uptrend. Those who can recognize how the patterns of one time frame fit inside another time frame find that there are multiple winds blowing at all times. As someone who made his income for years identifying inefficiencies to arbitrage, I have no patience with the many ivory tower theorists with little or no practical experience.
The world’s major financial institutions are now battling between admitting to the world the added benefits of active management and sticking to the buy, hold, and pray model of the past. It still amazes me when I see newsletter writers championing EMH and MPT alongside the benefits of their newsletter with its stock picks and quarterly portfolio rebalancing. It reeks of hypocrisy. They slowly move from the failed belief in Strong-form EMH to Semi-strong-form EMH. They have also begun to promote more active rebalancing while still admonishing those who adjust portfolios dynamically. I would go so far as to agree with Jeremy Grantham, who declared during the 2007-2008 financial crisis that (paraphrase) the crisis itself was the result of financial managers pushing people like sheep to continue investing in overpriced assets, resulting in the dangerous bubble that eventually crushed so many. It’s not just bad theory. It is hazardous to the wealth-building of millions. We are on a mission to free as many portfolios from this dangerous thinking as possible.
The idea of cycles is prevalent in various cultures and religions. For example, in the Bible, Ecclesiastes 1:9, ESV: “What has been is what will be, and what has been done is what will be done, and there is nothing new under the sun.” Do you believe that the financial markets move in predictable cycles?
Without a doubt. We can find patterns everywhere, from the naturally occurring Fibonacci sequence seen repeatedly in nature to the seasonality of commodities. I think each security has a dominant cycle and often multiple underlying cycles going at any given time. The challenge is finding the dominant time frame and which time frame is most influential as that gives us insight into how far something may move in a direction.
What is the FLOW tool available to traders at Trade Oracle Group (TOG)?
From the days of J.M. Hurst to those of W.D. Gann, there has been substantial work done in the study of cycles and the application of natural cycles to market analysis. The FLOW technology is a neural network/A.I. model we built two decades ago to find every common sequence of patterns across every time frame and predict the likely forward trend from those patterns. By looking at multiple time frames and millions of data points, we can see the dominant patterns and the level of confidence that the predicted trend is accurate. It has been our golden goose for two decades, but now that we spend most of our time working on larger global challenges like hunger and poverty, we just don’t take full advantage of FLOW anymore. So now we are offering it to a limited number of folks…private traders, and investment advisors.
Prior to working in the financial markets, you worked in emergency medicine and with relief teams in over a dozen countries. Could you tell us about your experience and how it influenced you?
I have always had an interest in puzzles and resolving inefficiencies, and there is no place you can go with more chaos than in a post-disaster environment. I worked for years after leaving medicine as a volunteer on medical missions. Spending time in places like Haiti and Latin America and even in the U.S. in the aftermath of natural disasters, I regularly witnessed people suffering from not having the clean water and nutritious food they needed for days and even weeks. It always bothered me, but it broke me when I watched a woman after typhoon Haiyan in 2013 leave one of her infant children behind in an abandoned building after hearing there was no more food in the city. I couldn’t believe that we did not have a system in place to make sure this kind of thing didn’t have to happen in our modern world. So I left the world of hedge fund management and set about building the solution, a global network of pre-stored food and water filtration.
What role does the integration of industry and political systems play in the prevention of poverty and hunger?
They are inextricably linked. Industry, especially food-related, cannot grow without a reasonable expectation of supplies at prices that are not extraordinarily volatile. I am a huge believer in governments facilitating infrastructure and national security. Otherwise, they should work to enable business, focusing on regulating adverse outcomes of business and gross power, like the monopoly and oligopoly structures we have seen emerge in recent years.
What effect does the volatility of the commodity markets have on the small farmers and consumers in the developing world?
In the U.S. for example the major commodities may average 28% volatility at one standard deviation each year between the low and high of the seasons, where in sub-Saharan Africa the volatility is often in more than 68%. This means farmers lose money every third season when prices drop below their cost, and processors and millers shut down several months every year when prices spike such that they cannot compete with more developed countries. This keeps the farmers as well as the food manufacturers from being bankable, investable, and insurable.
How does the World Food Bank differ in its approach to tackling food insecurity compared with governments and NGOs?
Rather than work programmatically, we work systematically. Where government agencies and NGOs often focus on fixing one challenging problem, we look at four essential components together: Access to Education, Access to Quality Inputs, Access to Finance, and Access to Markets. The most important is clearly education, but there have to be some distinct linkages between all four, or the ecosystem just won’t grow. For that reason, we purchased a media company in Kenya that produces farm makeover shows in much the same way we do home makeover shows here. We now have 12M viewers every week, have won 7 global awards, and studies from USAID and others have shown that our programming alone is lifting 1.6M people out of poverty every 18 months. This is a much more exciting legacy than just being a good trader.
The World Food Bank is working to have extended shelf-life food stored in strategic locations to fill the gaps in inefficient food markets. Can you tell us a bit more about this initiative?
Sure. We use giant 100 MT bags that are oxygen-free to store corn, soybeans, even dried fruits and vegetables for up to 20 years. This eliminates much of the calendar risk of holding traditional commodities. It also allows us to buy when markets are starting to crash to keep farmers afloat and then sell back into those markets during the rainy season when supply is limited, ultimately reducing market volatility while making a bit of profit in the middle.
The World Food Bank is actually a for-profit company seeking investors, such as family offices, endowments, and sovereign wealth funds. Could you explain why you chose this approach rather than being a non-profit?
As an unapologetic capitalist who has listened to thousands of people from all walks of life in developing markets worldwide, we know that countries that developed free-market systems have gone from poverty to prosperity the fastest. Countries like Japan, S. Korea, and Singapore are now global leaders in many ways, while countries that chose to follow communist models are still struggling greatly. I serve on the Board for International Food and Agriculture Development (BIFAD), the advisory board to USAID for policy and strategy. USAID has spent billions of dollars over many decades on aid and development. They have found that countries that build systems for supporting business and trade are far more resilient and sustainable. We believe we are modeling that standard by building stores of food that reduce price volatility and increase food security. That being said, we are always looking for strategic partners.
It has been great to have the chance to learn more about you, and I wish Trade Oracle Group and the World Food Bank continued success.
==> Live webinar coming up on October 28th: How to Analyse Any Market and Identify Winning Trades