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This interview features John Netto—independent trader, author of The Global Macro Edge, creator of the “Netto Number,” and a featured profile in Jack Schwager’s Unknown Market Wizards. Recorded on the Words of Wisdom podcast in Las Vegas, the conversation spotlights how Netto compounded ~42% annually for over a decade while keeping drawdowns near 15–16%, and why his event-driven, cross-asset approach still matters in today’s AI-tilted market regime. If you’re new to his work, think of him as the guy who measures returns the way pros actually manage risk—against a predefined risk budget—not just headline P&L.
In this piece, you’ll learn Netto’s core playbook: spotting market regimes (why a handful of mega-caps can turn earnings into macro events), the difference between endogenous vs. exogenous alpha, and how zero-DTE options created daily, risk-defined opportunities. We’ll also unpack the Netto Number so you can grade your strategy by returns per unit of risk, not vibes—plus how to scale bet size only when your A-setups appear, and why disciplined brakes let you “drive faster” without blowing up.
John Netto Playbook & Strategy: How He Actually Trades
Risk Budgeting and the “Netto Number”
Here’s the backbone of how he survives long enough to compound: every decision starts with risk, not predictions. He tracks return per unit of risk taken—so he can drive faster only when the brakes (risk controls) are strong.
- Define a daily risk budget in % of account (e.g., 0.5–1.0% max loss for the day). Stop trading when it’s spent.
- Pre-tag each trade with an “R” value: risk $ per trade = (entry − stop) × size; never exceed 0.25–0.5R on non-A setups.
- Aim for a minimum Netto-style efficiency: weekly P&L ≥ 1.5–2.0× weekly risk spent. If under, cut size next week by 25–50%.
- If you hit −1R on the day, reduce subsequent size by 50%; if you hit −2R, you’re done for the day.
Regime Mapping: Know the Market You’re In
He treats regimes like weather: before picking outfits (setups), check the climate (macro + flows). Volatility regimes and policy expectations decide whether momentum or mean-reversion should dominate.
- Classify the week each Sunday: “trend/expansion,” “range/mean-revert,” or “event-driven/high-vol.” Trade only setups that historically win in that regime.
- Use a simple rule: if VIX (or your FX/crypto vol proxy) is above its 20-day average, favor breakout/continuation; if below, favor fade-to-value plays.
- Anchor expectations to policy path: if rates/FX differentials are widening, give priority to directional trades aligned with that edge.
- If your regime tag changes mid-week, freeze new trades for one session and re-plan sizing and targets.
Endogenous vs. Exogenous Alpha (Pick Your Edge)
He separates edges that come from the market’s own structure (endogenous) versus outside catalysts (exogenous). That clarity keeps him from forcing trades on the wrong day.
- Endogenous setups: structure only (trend, higher-lows, value areas). Require: price > rising 20/50-DMA or above anchored VWAP from last major low.
- Exogenous setups: catalysts (CPI, earnings, FOMC, geopolitics). Require: a pre-defined trigger level and a post-event volatility band for entries.
- If the day is catalyst-heavy, ignore purely technical reversals until after the first 30–60 minutes of price discovery.
- Log each trade with a checkbox: [E] endogenous or [X] exogenous. If your last 10 wins come from one bucket, lean into that bucket next week.
A-Setup Qualification Checklist
He doesn’t treat all green lights the same. “A” setups get more size; “B/C” setups are proof-of-concept nibbles.
- “A” only if all true: regime alignment ✓, fresh catalyst or strong trend ✓, liquidity/volume expansion ✓, clean invalidation level within 0.6–1.2R ✓.
- “B” if one missing; “C” if two missing—cap at 0.25R risk.
- If an “A” setup fails twice in 48 hours, downgrade it for the next 5 trading days.
- Don’t promote an idea to “A” if target < 2R or if stop must sit inside obvious liquidity (most recent swing cluster).
Entries: AVWAP, Pullbacks, and Reclaims
He likes objective reference lines, so entries aren’t guessy. Anchored VWAP from a key date and prior swing structure does the heavy lifting.
- For trend days, buy the first pullback to 20-DMA or anchored VWAP from the catalyst candle; stop just beyond the prior swing.
- For range days, fade into the edges only when price diverges from AVWAP by >1× recent ATR(14)/10; target mid-range or AVWAP reversion.
- Use a two-try rule: if the first probe loses 0.5R, you get one more attempt at a better location; if that fails, stand down.
- If price reclaims AVWAP after a bearish event, switch bias to long only above that line until a 30-minute close back below.
Position Sizing and Scaling
He sizes like a pro: bigger when the odds and location are great, smaller when they aren’t. Scaling is planned, not improvised.
- Base size = risk budget ÷ planned R per trade. Example: risk budget 0.8% and per-trade risk 0.4% → max two concurrent trades or one “A” trade.
- Scale-in only at pre-marked levels (e.g., 0.5R better than initial). Never add if the price is between entry and stop.
- Scale-out 1/3 at +1R, move stop to breakeven; 1/3 at +2R, trail stop under last higher-low (trend) or behind AVWAP (range).
- If unrealized P&L equals your daily risk budget, auto-lock half and trail the rest with structure (no exceptions).
Options Overlay (Defined-Risk Express)
When the opportunity is explosive but uncertain, he uses options to define risk and shape payout. This lets him participate without blowing the budget.
- On catalyst days, prefer debit structures (calls/puts) with 3–10 DTE targeting 20–35 delta; risk is premium paid, position sized as 0.5R.
- For intraday extremes, consider same-day (“0DTE”) only if your stop is a hard premium cap (max 0.25R) and exit 15–30 minutes pre-close.
- If long stock/futures, hedge with a cheap same-week put/call when realized vol exceeds your plan’s threshold (e.g., RV > 1.5× 20-day).
- Never sell naked premium into events; if selling, be defined-risk (spreads) and size ≤ 0.25R.
Event Playbook: Before, During, After
He treats events like missions with a checklist—no winging it. That discipline stops revenge trades when the tape goes wild.
- Before: mark two levels above/below consensus pivot; pre-write “if/then” triggers (e.g., “If first 5-min closes above Level A, long to AVWAP + 1×ATR; else wait for reclaim.”)
- During: take the first clean break + retest only; if slippage > 0.3R on fill, cut size in half for any add-ons.
- After: if the move stalls at the second target, flatten 80% and hold a runner only if above the 15-min AVWAP.
- Post-mortem within 24h: log realized R, adherence score (0–10), and what you’d change next time.
Trade Management: Let the Brakes Make You Fast
His edge compounds because losses are small and standard. He predetermines exits so the heat never cooks the plan.
- Hard stop lives on the exchange or in your broker; never widen it. If you must intervene, exit, don’t “give it room.”
- Time-based stop: if the thesis hasn’t triggered within two ATRs of time (e.g., 90–120 minutes on intraday), scratch.
- News kill-switch: flatten if an unscheduled headline nukes your regime tag (e.g., policy surprise) and reassess after 30 minutes.
- Max heat rule: if drawdown on the day reaches 1.5× your daily risk budget, you’re done—review, reset, return tomorrow.
Scorekeeping and Journaling
He measures what matters, so the next trade inherits the lessons. Simple, repeatable metrics beat complex dashboards you’ll never update.
- Track three numbers weekly: (1) R multiple (net), (2) hit rate, (3) payoff ratio. Expectation = (hit rate × payoff) − (miss rate × loss per trade).
- Tag each trade: regime, setup type (breakout/reversion), catalyst/no catalyst, AVWAP used?, A/B/C quality. Review win/loss by tag monthly.
- Keep a 1-page “A-Setup dossier” with screenshots and stats; if stats decay (e.g., payoff < 1.5), demote or re-specify the setup.
- Record emotion flags (calm, rushed, tilted). Any trade placed during “tilt” counts half-weight toward the weekly limit.
Weekly Prep and Playbook Updates
He treats the playbook as a living document. Each week gets a clean slate and a specific bias until facts change.
- Sunday: write a 5-line weekly thesis (bias, regime, catalysts, best instruments, invalidation). Size plan derives from that page.
- Mark fresh anchors: set new AVWAPs from recent swing highs/lows and from any upcoming catalyst dates.
- Choose two primary instruments and one alternate; avoid “spray and pray.” If the primary underperforms two weeks straight, rotate.
- Archive last week’s trades with annotations; promote/demote setups based on the latest stats before Monday’s open.
Start With Risk: Size Positions Before You Chase Any Setup
John Netto opens with a simple rule that saves careers: know exactly how much you’ll lose before you think about what you might make. He treats risk like a daily budget—once it’s spent, the market can keep moving without him. That mindset forces clarity on entries, stops, and size instead of vibing your way into trades. Netto’s point is that consistency comes from controlling downside, not from predicting the next big move.
In practice, that means sizing every trade off a predefined “R” amount and refusing to upgrade risk just because a chart looks pretty. Pick your R, place the stop where the thesis is wrong, and let size solve itself—no stretching stops to fit ego. If you hit your daily risk limit, you stop; if you’re down 1R quickly, you cut size by half, not double down. Netto’s approach turns risk into the first decision, so every other decision gets easier.
Use Volatility to Allocate: Expand in Trends, Contract in Chop
John Netto emphasizes that volatility sets your throttle: when markets expand, you can press, and when they compress, you downshift. He watches realized and implied vol to decide whether breakout or mean-reversion logic deserves the capital. If volatility is rising and structure is trending, Netto scales to full “A-setup” size; if vol is flat and price is choppy, he shrinks risk and targets smaller, quicker wins. The core lesson is simple—let the tape’s energy dictate your allocation, not your hopes.
In practice, Netto ties size and targets to the regime in front of him. Trend regime? Wider stops, wider targets, fewer trades, bigger conviction. Range regime? Tighter stops, partial profits at the mid, and strict do-not-chase rules. When volatility shifts mid-session, John Netto ratchets size down first, then reassesses direction—protecting the account before protecting the thesis.
Diversify by Underlying, Strategy, and Duration—Not Just Tickers
John Netto pushes diversification that actually diversifies—not five tech names that all fall when the same factor sneezes. He spreads risk across underlyings (indices, rates, FX, commodities), playbooks (trend, mean-reversion, event-driven), and time horizons (intraday, swing, position). The idea is to reduce correlation spikes so one bad theme doesn’t wreck the week. If equities and crypto are both momentum-longs, he’ll offset with a carry or vol-harvest idea elsewhere, or an options hedge that pays when trends stall.
In practice, Netto caps exposure by bucket and by theme, not just by symbol. He’ll stagger durations—scalp around a core swing, or pair a directional futures trade with a defined-risk options spread to shape payoff and timing. Position adds only happen when a new leg reduces portfolio correlation, not when it merely increases size. That way, John Netto grows returns by layering uncorrelated edges instead of doubling down on the same bet with different tickers.
Trade Mechanics Over Predictions: Rules, Checklists, and Repeatable Triggers Win
John Netto argues that prediction is a sugar high; mechanics are the meal. He treats every trade like a preflight checklist—regime tag, trigger level, stop location, size, and exit map—all signed off before clicking buy or sell. By front-loading structure, he removes the wiggle room that lets bias creep in mid-trade. When the tape conflicts with the checklist, the checklist wins, and the trade gets scrapped.
In practice, John Netto waits for repeatable triggers: reclaim of anchored VWAP after a catalyst, first pullback to the 20/50-DMA in trend, or a failed breakout that retests and rejects. Each trigger lives next to a non-negotiable invalidation, so one print can end the idea without debate. He journals adherence as ruthlessly as P&L, because following the mechanics is the leading indicator of future returns. The result is a process that works on quiet Tuesdays and wild CPI Thursdays—because the rules don’t care about your hunch.
Prefer Defined Risk: Pre-Set Stops, Planned Adds, Automatic Exits
John Netto treats undefined risk like a leak in the boat—you might sail fast for a minute, but you’re sinking the whole time. He defines the max loss before entry, places a hard stop where the thesis is objectively wrong, and refuses to widen it. That simple discipline makes outcomes consistent and lets him compare setups apples-to-apples. Netto’s view: if the stop can’t live in a clean structure, the trade doesn’t deserve your capital.
On the execution side, John Netto pre-plans adds only at a better location, never between entry and stop. He staggers exits automatically—partial at +1R to reduce variance, another at +2R to bank the win, then trails behind structure so winners can stretch. If slippage or volatility turns the stop into a coin flip, he shifts to defined-risk options so the premium is the entire loss. The message is clear: you don’t need hero calls when your downside is fenced in and your upside is given room to run.
John Netto’s playbook boils down to one non-negotiable: protect the downside so the upside can compound. He runs every decision through a risk budget first, measures efficiency with a returns-per-risk lens, and sizes based on “R” so outcomes stay comparable across trades. From there, he maps regimes—trend, range, event-driven—and only deploys the setups that historically work in that climate. Netto separates endogenous edges (pure market structure) from exogenous edges (catalysts), and he won’t let a technical hunch override a calendar that’s about to move the tape. His A-setup checklist is brutally simple: regime alignment, clean invalidation, expanding liquidity, and at least 2R on the table; miss one box and size drops, miss two and it’s a nibble, not a swing.
Execution is mechanics over magic. Netto favors clear triggers like AVWAP reclaims and first pullbacks to rising moving averages, with stops tucked beyond objective structure, and adds only at a better location. On explosive but uncertain days, he shifts to defined-risk options to cap loss and shape payoff, never selling naked premium into events. Events get a before-during-after script: pre-marked levels and if/then triggers, disciplined fills, and fast post-mortems. Trade management is equally codified—time stops if the thesis doesn’t fire, auto-scale at +1R and +2R, and a hard daily drawdown cap that ends the session without debate. Finally, he scorekeeps like a pro: tagging trades by regime and setup, tracking hit rate and payoff, and promoting or demoting plays based on fresh stats. Put together, John Netto’s lesson is clear: when your brakes are strong—risk, rules, review—you earn the right to drive fast.
