Mr. Aaron E. Schindler, a Chartered Financial Analyst, is the founder of Schindler Trading. Following is an interview with Mr. Schindler published by the trading
psychology website Innerworth.com...
Aaron Schindler is the primary trader for
Schindler Trading. A graduate of MIT, Aaron started out as a physicist
but left the Ph.D. program at UC Berkeley to take a job with Trout
His early interest in mathematics and
science seems to influence his trading style to this day. He backtests
his strategies carefully. He prefers a systematic trading approach to a
discretionary one. As with most traders, Aaron didn’t give away any of
his specific trading strategies, but we did get him to talk about how he
Aaron has been interviewed by Technical
Analysis of Stocks and Commodities, and Schindler Trading has been
covered by Futures magazine.
How did you get started in trading?
I was going to graduate school at UC Berkeley, doing research in
elementary particle physics, working in a laboratory in Illinois. Then I
took a job with Trout Trading. I dropped out of the Ph.D. program and
went to work with Monroe Trout in downtown Chicago. That’s where I first
learned about futures and how to systematically create and backtest
What is Trout Trading?
Monroe Trout is currently retired, but at that time he was a commodity
trading advisor and commodity pool operator. Monroe Trout was an excellent trader and mentor and there’s
a lengthy interview of him in The New Market Wizards by Jack
What is a commodity pool?
A commodity pool is a hedge fund that trades futures instead of equities.
Commodity pools are also called "managed futures funds". The name
"commodity pool" is a National Futures Association (NFA) term; a legal
term. The Commodity Futures Trading Commission and the NFA, as opposed to
the SEC, regulate commodity pools.
Where did you go after Trout Trading?
I was working for Trout Trading in downtown Chicago when he moved his
and my wife and I moved with him. I continued working for him for a
couple years, and then in 1995 I joined a reinsurance company that was
looking for someone with derivatives experience to help them hedge
currency risk and interest rate risk and so on.
I had a quantitative background, having gone to school in physics, I also
got involved with helping the reinsurance company model and manage
catastrophe risk from hurricanes and earthquakes. We started a small
homeowner’s insurance company in Florida. About this time, my wife and I
wanted to move back to the States, so we moved back to the Chicago area,
where I live now. I continued working on the Florida homeowner’s
insurance company. I was the chief actuary for the company.
Eventually it became clear that to grow the company I would need to move
to Florida to head up an actuarial department. But my wife and I had had
enough moving. So I left the homeowner’s company and joined an auto
insurance company in another suburb of Chicago.
as the actuary for this startup auto insurance company for a year, but
then decided I had had enough with insurance, so I left it and started
trading on my own. This was in April of 2000, just after the peak of the
NASDAQ bubble. I started trading the e-mini S&P and e-mini NASDAQ.
How much real experience had you had at that point, having been in
insurance for so long?
During my years at Trout Trading, I learned a lot about how to
systematically backtest, implement, and monitor trading strategies.
How much did you start up with and how did it work out initially?
My wife and I had been saving, and we had a good nest egg to start with.
I recommend that before anyone takes the leap to trading full time, they
have a few years of expenses covered, or else try to trade around a
regular job that can pay the bills. I traded pretty small to start
with. Mostly we were living off savings while I was working on
strategies. I traded really small to see if the strategies would work
and to build up some statistics and find out what kind of slippage I could
Trading went well and the returns were good. I subsequently formed a trading company and began managing money for outside investors.
You’re still the primary trader?
Yes. The company is called Schindler Trading; it’s a sole proprietorship. Right now we trade only
futures. I started out with the E-mini S&P and switched to the E-mini
NASDAQ, which we still trade. About April of this past year, I added the
German stock index futures, and just a few weeks ago added the ten year
Do you mostly use technical analysis for trading?
Yes, price and non-price based indicators with both trend-following and
mean-reverting components. I’d rather not go into what exact indicators I
use. And I’ll tell you why?
always quite a surprising and joyous moment when I find an indicator that
works and lives up to statistical backtesting. Once I start making money
with an indicator, one of my biggest fears is that it is going to stop
working. One possible way an indicator could stop working is if it gets
to be widely
known and other people are trading it.
trend following as an example. If everyone is doing trend following,
your first thought might be, well, it should work even better.
Everyone’s going to be buying; it’s going to go up more and more.
But futures are a
zero sum game, so for everybody that’s making money, someone else is
losing money. If the market’s turning up and I’m getting ready to buy,
and then everybody knows that people are going to be ready to buy, they’re
going to buy a little bit sooner and the market is going to jump up to
where it should be on a fundamental basis before I even get in. And my
indicator will have ceased to be profitable.
It’s like the January Effect. People started buying at the end of
December to catch the seasonal rise. Well, then because everyone was
buying at the end of December, the January Effect got moved to an
end-of-December effect and became known as the Santa Claus Rally. Now
people buy at the beginning of December because it’s historically been a
good month lately, so the actual rally gets moved back further and further
as people buy in anticipation of other people buying. Now who knows when to buy?
End of December? Early December? Before Thanksgiving, perhaps? The
January Effect has ceased to be a strong indicator. The stock market is
like a beauty contest where the object isn’t to pick the most beautiful
contestant, but to pick who the other judges are going to pick as the most
Do you trade every day?
We monitor the markets daily, but don’t trade every day.
Do you set dollar goals for yourself on a daily, weekly or monthly
No. I’ve read about daytraders who will try to take $500 out of
the market each day, and when they get their $500, they call it quits. If
we’ve got a trade on that’s going in our direction and we don’t get a
signal to exit, we’ll just let it run. The more the better.
How do you know when to get out?
Well, of course we have our exit signals, but we also use a time limit on
a trade. If a trade’s doing really well or really poorly, we tend to get
out of it sooner. But if a trade is just kind of meandering along, we’ll
give it time to mature and hopefully turn up.
When you learned to be a trader, what were some of the things you found
the most helpful?
I hear about people doing discretionary trading, and it boggles me. We’re
100% systematic, and I backtest everything. Much of my day is spent
backtesting strategies and indicators, and most of them don’t pan out.
But once in a while I hit a gold nugget, and that’s a good day. I think
that’s the most important thing: backtesting and understanding statistics
so I can make a judgment whether historical performance is a fluke or if
there’s some actual, profitable signal there.
backtesting, but it’s idealized, because it may have worked in the past
but it still may not work in the future.
Right. One way to help protect against that is to have an in-sample data
set and an out-of-sample data set. You backtest your strategies always on
your in-sample data. You backtest it, you optimize it, and then when
you’re all set and you’re ready to trade it, you test your system or
signal on your out-of-sample data set. My final go or no-go decision is
based on the out-of-sample test. If my test strategy is profitable on the
out-of-sample data with realistic slippage and commission applied, then
I’ll start trading it on a small level.
What do you mean by out-of-sample versus in-sample data?
Out-of-sample means it is data that was not used in developing and
optimizing the strategy. Say you have 9 years of S&P data and you want to
develop a strategy. You might take the middle three years to develop your
strategy. For example, if you have an idea that the S&P goes up when
bonds go down and the US Dollar is strong, then you could test that on
your three years of S&P data. Maybe that works and maybe it doesn’t. If
it looks like it works, then you can optimize it. Maybe we’ll look at the
change in the dollar over the previous year, or maybe we’ll look at a
moving average crossover, and then I look for the best parameters. Once I
have my strategy all set and I think it’s good, then I test it on the
first and last three years and see how it does on this out-of-sample
data. The whole idea is to get a realistic picture of how profitable a
strategy is without the distortion of curve fitting.
implement the trading strategy and it doesn’t work, do you use other
variables to see how well they’re doing or not doing, such as how they
react in different conditions?
Yes, once you start trading a strategy at a small level, maybe a single
contract, it might have a down period. The first thing you’ll be looking
at is, what are the chances of having a drawdown? All strategies have
drawdowns. If this is just another drawdown in a long history of
drawdowns you would’ve had, that’s fine, you just have to live through
it. That’s where having knowledge of statistics and trading
systematically will help you.
do a statistical study that says there shouldn’t be a drawdown of more
than $1,000 in any given year, and you’re in a drawdown of $500, no
problem. If you’re in a drawdown of $600 or $700, that’s to be expected.
But if your drawdown gets to be $1,000 or $1,200, then maybe something has
changed about the market. Maybe your strategy isn’t performing anymore.
In any case, you can see that the strategy isn’t performing as it did
historically. You can find out the same thing on the upside also. Say
you expect your strategy to make a 10-20% return in a year. If your
strategy makes 50% right out of the gate, count your blessings, but it
means your strategy isn’t performing how it did historically and you
should be looking for what changed. It’s good to test your strategy with
as much data as possible over as many different market conditions as
possible before you start trading it.
you give us a made-up example of a strategy, since you don’t want to
reveal a real one?
Take a moving average crossover strategy, for instance. Take your daily
chart of the E-mini S&P closes and do a three-day and twenty-day simple
moving average of those closes. If the three-day moving average is above
the twenty-day moving average, go long. If it’s below, go short. That’s
a real simple strategy. It’s trend following, and it probably makes money
too. Trend following in general is a good place to start when looking for
Would you backtest the strategy on a lot of different commodities to
see if it works better for one than another?
Yes. In fact, if you’re doing a simple trend following strategy like
that, it’s good to trade as many different commodities as possible. Trade
the Yen, trade crude oil, trade gold, trade the Australian Dollar. Trade
as many different things as possible to diversify your portfolio and get a
better risk-reward profile.
a very methodical person throughout your life?
I think I’m very linear. I can’t do multi-tasking very well. I have to
do one thing after another. I think that’s my weakness. My strength is
being very methodical and quantitative.
ever had a problem with being a little over-cautious, afraid to pull the
Sometimes it’s difficult to pull the trigger.
It’s getting easier. I had to make it a habit to trade my strategies.
When they say to make a trade, I have to make that trade. I’ve learned
that if I try to second-guess a strategy as a systematic trader,
sometimes I’ll do well, but eventually it’s going to bite me if you keep
overriding it. Maybe it’s getting close to my stop loss level and I think
to myself, "it’s got to turn around!" So I cancel my stop loss order to
stay in the trade. Well, it might turn around and go back up, but it
might just keep going down, and I’m going to wish I had gotten out and
followed the strategy. I’ve learned to always, always follow the strategy
and take the signals when they come. Losses are part of any strategy.
you handle your good and bad days?
The emotional side of trading is really a roller coaster, especially for
someone who is trading full time. I’ve got a mortgage. I’ve got two
kids. We’ve got grocery bills, and when I have a losing day, it can
hurt. I wish there was some way to smooth out the euphoria and the
nausea: the euphoria of the good days when I’m making a lot of money, and
the nausea I feel when I have a particularly bad day.
is very supportive. In fact, sometimes when I have a bad day, I’ll talk
to her about it, and she’ll help me focus on the big picture. Humans tend
to live very much in the present. Even though Schindler Trading has a
very good long-term track record, if I have a losing day, I feel bad. I
wish I could figure out how to stay focused on the long-term good
results. Losses are just part of life. We’re going to have losing
months, eventually we’ll probably have a losing year, but we’ve been
profitable so far and we expect to stay profitable. But when you’re in
that losing day or losing week or month, it just feels lousy.
you haven’t really come up with other ways to come out of that?
My solace is sticking with the strategy. I can look and say, "Okay, we’re
in this big drawdown, but I had a bigger drawdown a year ago." Or, "we’ve
had six losing trades in a row, but my statistical studies say that every
year we can expect to have a string of nine losers in a row, so having six
is not that bad." I don’t have to feel so lousy. If the strategy has proven itself over
time, it should continue to be profitable. Losses are just part of the
game. That’s how I try to comfort myself, by looking at the larger
picture and having the rigorous statistical studies to tell me that my
strategy is still within expected parameters. Or, if it’s not, it’s time
to take some action.
you think gives you an edge over other traders?
I think it’s my rigorous quantitative and systematic approach. I don’t
think the human brain is wired to be a good discretionary trader.
Granted, some people make money at it, but from the studies of behavioral
finance, people’s trading decisions tend to be overridden by fear and
greed. This is just my guess, but I think there is a gradual flow of
money from discretionary traders to systematic traders. I think that’s
where my profits are coming from.
you measure success?
Both by positive returns and growth in assets under management. My wife
and I have a lot of our own net worth invested with Schindler Trading, so
of course we want to make money on our investment, and I enjoy making
money for our investors. I hate reporting negative results and I enjoy
reporting positive results, and I think it’s a successful month when we
made money and our investors made money.
Do you view your job as a kind of service job, helping people with
With managed futures being a risky investment, I don’t want people
staking their retirements or their kid’s college fund with us. They
should only be investing risk capital they can afford to lose. But when
they do put money with Schindler Trading, maybe they’re thinking it will
help them buy a vacation home or a boat or something. I can help them
grow that money to buy an even nicer vacation home or a bigger boat. I’m
helping people afford a more luxurious lifestyle, I think. I think people
appreciate that and hopefully they’ll enjoy the fruits of my labors.
important to you to have that kind of function?
I get a lot of gratification when investors thank me and congratulate me
for good returns. I really do get a lot of satisfaction from that.
you measure success in your personal life?
My personal life isn’t all about money and returns. I’ve got two boys, a
three-year-old and a one-year-old, and I think I measure success in how
well my wife and I raise our boys. I measure success in having a good
family life, and in bringing up my boys to be strong Christians, and in
having good relationships in my extended family and community.
piece of emotional or psychological advice would you give a new trader?
Before you start trading, you should learn how to do some sort of
backtesting, so you can have confidence in your system. Whether you use
an Excel spreadsheet, Tradestation software, or code up your system in a
programming language, you need to have some historical results that you
can look at to compare to your current results in order to know whether
your strategy is behaving as it should.
Thank you, Aaron.
PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS.
FUTURES TRADING IS SPECULATIVE AND
INVOLVES A HIGH DEGREE OF RISK.
Copyright © 2018 Schindler Trading
All Rights Reserved