Daljit Dhaliwal trained to become a professional tennis player growing up, but he found a bigger passion for trading while attending university during the market turbulence from 2008 to 2010.
Despite starting later than his peers and graduating from a mid-level university, Dhaliwal sent out about 30 job applications and hustled his way into a proprietary trading firm.
After nine-plus years, Dhaliwal has grown into a macro, event-driven trader with a stunning track record – averaging an annual compounded return of 298%, according to Jack Schwager‘s new book “Unknown Market Wizards.“
But he didn’t understand why technical analysis should work nor have the confidence that this approach would continue to work in the future, so he quickly switched to headline trading, which describes his method of trading on the comments of central bankers and other officials.
Dhaliwal really started building his account during the eurozone crisis in 2011.
“That was the time when Greece began blowing up. Every day, you would see a headline referencing a comment by European officials that was either hawkish or dovish towards Greece,” he told Schwager. “I would trade these comments for short-term moves in the euro.”
Dhaliwal had to adjust his trading strategy again when algorithmic programs were developed to instantly place trades based on words and phrases in the headlines. Specifically, he started to fade these short-term price movements based on headlines, meaning that he takes the exact opposite direction after the initial price move.
Trading short-term and long-term
Around 2016, he noticed that a large portion of his profits were coming from “very few trades” and began to transition from making short-term trades to “trades that were based on a broader macroeconomic analysis.”
But his most painful trade came in December 2015 when an erroneously published Financial Times article said the European Central Bank would leave rates unchanged instead of cutting rates as the markets had expected.
Upon seeing the headline, Dhaliwal was so surprised that he started buying the euro and selling the Euro Stoxx 50 immediately. However, the story was a prematurely published pre-written piece outlining different possible moves by the ECB, which ended up cutting rates.
“The markets reversed so quickly that even though I liquidated immediately, I ended up getting out at the extreme of those moves,” he said. “I went from being up six figures to down six figures in a matter of seconds.”
Dhaliwal learned a valuable lesson from that trade – always have a protective stop in a large position.
“Trading is so much about keeping the downside small,” he said. “The psychological impact of large drawdowns is not worth the upside. You are much better off keeping an even keel.”
9 trading rules he lives by
Dhaliwal said he generally advises people against seeking a career in trading because “most people are not willing to put in the amount of effort that is needed to succeed.”
“Trading is like any other profession; it requires a long-term effort to succeed,” he said. “If you are not prepared for that type of commitment, then my advice is don’t do it at all.”
But for those who love trading and get excited by the markets, Dhaliwal shares nine trading rules which he lives by.
1. Know your edge and stick with what you do well
When Dhaliwal realized that most of his profits came from just a few trades, his strategy shifted from pursuing mentally exhausting short-term moves to trying to “be right in a big way a few times a year.”
2. Be flexible in covering part of a big position as a trades moves in your favor.
Dhaliwal learned this rule through multiple experiences of earning big profits on a trade, only to see the market reverse quickly while he was still holding the full position.
“The risk/reward on a trade is quite dynamic and can change dramatically as you hold it,” he said.
3. Have a personalized drawdown alert
Dhaliwal has noticed three things at the start of every drawdown he has experienced: “(1) a 2% or greater loss in a single day; (2) a loss of significant open profits in a trade; (3) a big size trade doesn’t pay off.”
4. Be cognizant of certain feelings that are warning signs
For Dhaliwal, those feelings tend to be fear of missing out and frustration, which he watches out for and reviews in his trading journal.
5. Seek clarity over certainty
“Trying to reach for certainty will keep you from acting,” he said.
6. Always be prepared for what could go wrong
Dhaliwal advises traders to “know what you will do if the opposite of what you think will occur happens.”
7. Always trade an opportunity for what it is, not what you want it to be
“…if I receive a partial fill on a trade, I might be tempted to run the trade further than usual to compensate for the smaller size,” he said. “Doing so would violate my process and generally lead to worse outcomes.”
8. Always make sure your stops are set at a point that disproves your market hypothesis
Dhaliwal said traders should never use a monetary stop, which refers to a stop point selected because it’s the amount of money that you are willing to lose as it is “a sure sign that your position size is too large.”
9. Don’t sweat the trades you missed that you weren’t prepared to take in the first place
“The markets provide a constant stream of opportunities,” he said. “As long as the sun rises tomorrow, there will be another day I can make money. It is not something I have to worry about.”