Trading Depth Interview #14: Matt Davio — Hitting Moneyball Before It Was Cool


    Hello traders. Today we had a pleasure to talk with Matt Davio, 20+ years full-time Futures Trader. Michigan-born and living in Oregon, he is a music fan, sporting enthusiast and, most importantly, has a Market Profile trading academy through which he shares a plenty of experience with a trading community.

    Indeed, Matt has a word in a trading world and we hope you grab some wisdom from our chat.


Matt, could you give our audience a little bit of perspective? What are your background and experience?

    I’ve had an interest in algebra and math in general. I started trading around twenty years ago, in 1995-1996. I was a technical trader back then and only later pursued the market profile technique. When I was a teenager, I was working hard labor jobs and delivering papers and thought of a better way to save my money. I was into baseball too. I played this sport. I was betting on it before there was Moneyball.

    I had that inquisitive in nature, to begin with. I liked to understand why things work and how they work, and how momentum works. So you put all these things together and trading the greatest game on Earth.


Interesting. And fast forward: what was your intention behind sharing the experience with others, via videos and articles?

    Well, a lot of it was the fact there was nothing out there when I started trading. I’ve been trading for 12-13 years already before making videos. In those days it was a way to connect to people and share what I knew, as well as learn what others people knew. You could be short oil and I could be long oil, and by the end of the day we both could make money.



    It just depends on the risk, the timeframe, and how we behave. I really enjoy those stories when reaching out to people like myself and I’ve been doing it for a long time. There are a lot of people smarter than me. What people don’t realize is that no matter how you trade, if you do it well, it’s pretty boring.


*Laughing* It’s not that exciting in the beginning, right? By the way, did you have any illusions before you were into the trading game?

    Well, I think what happens—and does not matter what we do in life—is that a human brain tends to think in black and white, night or day, right or wrong. But trading is not a binary event.


    It really is much like life. Can you be comfortable for a long time before you actually make money? I think this is a part that most people struggle with. I often advise that it’s not a business for all people. The human nature and such inbuilt instincts like fight-of-flight can be beneficial as well as hinder, too. Therefore, traders can be impatient, they react too quickly.


    This leads you to understand the masses because masses are going to be wrong in a long run. It is generally uncomfortable to be against the masses but that’s the way it is. If you can define risk, you can make money. If you can sit through the uncomfortable position of having a trade going against you but it’s still within the constraints of your rules, you can make money.


    It’s a hard business. Today I made $100. But, you know, every day I wanna make $36,000! An hour a day, the whole year. In reality, that’s not so easy. It’s not a linear business. It comes and goes. You make money, you lose money. But if you wait for the right moment and trade less, you are going to be a better performer overall. To answer your question: with an expectation to make a $1000 a day is a fool’s game because the market will do what it’s gonna do regardless of whatever your plans are. It’s not that type of business when you expect to collect a paycheck daily.


Matt with his son. Family time is important


On your website devoted to the Market Profile, you mentioned the three characteristics of a professional trader. One must be patient, cut the loss, and have a game plan. Did you learn it through experience and over the years or did you know this at the very beginning?

    I was fortunate to have good mentors, people that did not work on Wall Street but who did work in Chicago for hedge funds while I was learning on my own with my own money. For anybody who thinks about it or has been in this business, if you take care of the risk before you even trade—where am I wrong?—it becomes much easier. If you think this way versus “where are my profits?”, it makes me pause before I even put on my trade. This is a message I wanted to get across. Define your risk. Preserve your capital and prepare it to be used.


Have you ever panicked?

Yeah. You know, if you would have traded during the Russian ruble crisis like I did, or the long-term capital management, Y2K bubble, 2008 crisis… I’ve seen extremes. Honestly, as a professional now, those are my favorite times because that’s when the panic happens. And when the herd is panicking, you can make a lot of money very quickly. It’s a lot easier for a professional to trade in that environment.


    Did I panic? Absolutely. Anybody who tells you they haven’t felt like throwing up at some point in their career, they are lying. But it doesn’t mean that it prevented me from going forward. It’s almost like you have to live through it before you can go on.


Being able to take a loss, what was your biggest loss? (If you feel comfortable to talk about it).

    Sure, I am comfortable to talk about. I think it’s the best thing to talk about. I can’t remember my big wins because I am more consistent with them. They are not necessarily big, but I try to consistently make money. But my losses were definitely bigger when I was younger. The guys “I am smarter than the market” is really where it comes from. I can remember the summer of 2001: my partner and I had a significant position in Krispy Kreme (KKD) that was started up long. We were buying calls, starting the stills, and we had a short stock position that was small. As the stock went up, we started to sell more stock against the options. So even though we had a net long position, we were building into a short position.


    Over about 6 months, until June of 2001, we ended watching the position from hedged to completely unhedged, and we were short. We’ve got to the point where we were a little bit bigger than we should have been for our risk portfolio and that has been up for about six weeks in that manner. Until finally, and I remember today, it was about this time of the year, in the middle of July 2001, I got a call from my risk manager at the fund we were trading and said: “Hey guys, do you understand where you are in the position? What are your thoughts?” And that’s interesting because usually when you get that call, it’s good. But we were so mentally exhausted from carrying that position that it was affecting other 15 positions we had. It was hurting our overall performance because of the obsession with shorting Krispy Kreme.


    So I remember that day, we got the call, I talked to my partner Jeff, and we just agreed that we needed to puke out some positions and book the loss. So we did and ended up being with three million dollars. Two weeks later the stock collapsed significantly and just by waiting two weeks we would have had a 17 or 18 million-dollar gain. It was an OK lesson. However, the real lesson was that we should have lightened the position. Let’s say, half the size or a quarter of the size. That’s all we needed to do to satisfy our risk. Do you have the stamina to stay in a position for that long? What can you do to sustain that idea? Some of the options are: get out of the position, do nothing, get further short, or cut the position. In a lot of ways it hurt but in a lot of ways it taught us that if you stay within the rules that you set, you’ll survive, it won’t kill you.


Here’s a controversial question: let’s assume that a person has a strong desire to make a lot of money and, thus, is ready to adapt, to learn. But the main objective is to make money. Do you think that he or she could not be successful just because of this attitude?

    Yes. Just because you want to make money does not mean you will make money. You can make a lot of money with a little money, you can make zero money or lose all your money. It does not matter how much money you have. If you are a billionaire, it does not mean you are going to make another billion. You can lose your billion if you are not smart enough.


    I think the desire to make money should not be the reason you get into trades. You have to be intrigued, you need to strive to understand the market. Today we had a good example: Google (GOOG) announced their earnings yesterday (we recorded the interview on July 24, 2018 — Bookmap) after the close on Monday and  futures had been up all day; the Google earnings came out after the market and the futures shut up again. They continued in Asia and then in Europe, and then today they continued up in the US, but just for an hour. One of my trades was to sell the opening hour high (it happened to be $74.90). It then dropped 4 cents. Why was it so? The news is great. But the news was 14 hours ago, it already played out.


So something like “buy the rumor, sell the news”?

    Yes. It often does, good or bad. However, it doesn’t work all the time…


As a professional trader, what would you advise novice traders?

    I would advise not to go into trading just because you want to get rich. You have to have a desire to always be learning since the market is always evolving. Today’s market is not like last year’s or ten years ago. There are definitely similarities and differences sometimes, but it won’t work that way every time. You really need to study markets to understand what are the patterns. It can go up, it can go down, it can go nowhere. Most of the time it’s the latter.


Thanks, Matt, for the enlightening conversation. It will serve the trading community well.


Video with Matt “Why Market Profile?”


Primary Facts about the Market Profile:

  • The Market Profile forces traders to understand the market dynamics
  • Market Profile identifies where the value is in the market
  • Market Profile works in all Market Conditions
  • Market Profile is effective for both swing and day trading
  • Market Profiling is effective for trading futures, stocks, options, and forex


Where to follow Matt Davio:

Market Profile trading academy




Key takeaways:

  1. Trading is not a binary event
  2. If you wait for the right moment and trade less, you are going to be a better performer overall
  3. Define your risk. Preserve your capital and prepare it to be used
  4. When the herd is panicking, you can make a lot of money very quickly
  5. If you stay within the rules that you set, you’ll survive
  6. The desire to make money should not be the reason you get into trades. You have to be intrigued, you need to strive to understand the market
  7. The news is relevant only the first hour. Then it becomes obsolete


This is part of the Trading Depth project, a series of inspiring interviews with successful traders. For more interviews with traders follow our Twitter and Facebook


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