These trading engines are best for evaluating data

Hey everybody. So yesterday we were talking about trading in and out of baskets and offsetting risk at peak equity. Near term peak equity. I don’t have financial relationships with firms, so there’s no conflict of interest here. That’s one of the reasons also why I don’t have people who want to come on and talk about their good or their service. First of all, I don’t know them as people. If I have guests on, it’s usually people that I know, of course they’re going to be friends and I’ve known them all for 20 years. That’s the model that I kind of prefer to stick with. I’m not the kind of show where I’m interested in introducing new people. I’m very protective of my audience and I’m unwilling to share my audience, my humble little audience with anybody for someone else’s gain. Now, they’ll all come to you saying, I just want to help your audience.
The reality is that they want want free marketing and they’re usually not so helpful. So I’m like, go build your own channel. Don’t be lazy. If you have a good or a service, you should have your own platform anyway or go buy some traffic. So that’s probably not going to happen. If I do have guests, like I said, they will be friends and people who I trust. That’s the key thing is I got to trust them. If I don’t know somebody, I don’t care how much money they’re going to dingle at me, dangle at me. I don’t need the money, and it’s not like it’s a hit to my reputation, but I have a good reputation. I’ve made good choices. I understand the letter of the law versus the spirit of the law. So likewise, as it relates to the show, don’t expect me to have a guest where I’m like, Hey, how’s it going? So tell everybody where you’re from. That’s not the type of show I have.
So having said that, there are again what you would probably consider pro, at least Sumer on the low end to professional grade trading engines out there that you would need a data feed for too. So you really have to buy two things. One would be trading blocks. BLOX is how they spell it, and they have varying versions of it. The one that you’d want to get is at least over a thousand. And then there’s mechanica, which was kind of built and designed by the same folks who did trading recipes back in the day, and I think that one’s a couple thousand bucks. Again, the price is not really relevant because ultimately you get what you pay for. But what you do need to know is those things kind of are like, they’re not like spreadsheets proper. They’re not spreadsheets, but they do need data. Your spreadsheet is a spreadsheet, but if it doesn’t have any data, what the hell do you need a spreadsheet for? And the same thing with the trading engine. They might give you five or 10 years worth of data to work into the system so you can see the moving parts, but the data might be from 2000 to 2010

And they’ll probably have to have gotten permission because usually the exchanges are the people or the entities that actually own the data. So you’ll need to go to a place and there’s several data providers out there where you can buy the data and then connect it to the simulator so that every day automatically in the background, your database, which will be on your machine, will update. And it’s not terribly big. You’re just talking about a cr. It’s like an ASCI file. So it’s just open, high, low, close volume dates, that kind of stuff. So the data doesn’t grow. It would for video for example, where you’re looking at every minute of video such as this on 4K, you’re probably looking at 10 megabytes per minute. Audio only is probably a megabyte a minute. The data you can have years and years of data and it won’t take up that much space, but it is a database. Nonetheless, you have to tell the simulators where the data is on your machine and create what we used to call the path on Windows machines and then so it could tag in, harvest that real data and then run the model to see how it would’ve done on.
Again, I don’t have any, I know the people because I’ve been around a long time, and when you’ve been around with other entities who are several decades in the business, you all kind of know each other. The last man standing, everybody else fell by the wayside, so it becomes very, very thin at the top. At any rate, you can use those to check ’em out, see if there’s pros and cons for sure. Obviously knowing, I wouldn’t say that they’re predictive the results, but they do give you an idea of how your ideas would’ve worked over a longer period of time. And so the rules can be robust. You don’t get into things like cherry picking trades, data mining, curve fitting, all the pitfalls that you might use. You could actually see the efficacy of macd, for example, and know for sure does it actually help you it, but you can actually test it and kind of see and know for sure how the thing would’ve worked in the past, in my experience, although the models that you might create are not predictive, they typically don’t turn on a dime. In other words, it’s not like the thing could make like 20% compounded annual growth rate with 10% drawdown over 20 years and then all of a sudden stop working the next day. I guess it’s possible, but it’s highly improbable. That would be the case. So you could expect, again, especially if you have rules that aren’t with things like indicators or otherwise, and they’re super simple, those models typically work very, very well, and they work for the long haul, and they’re also easy to execute in both good times and especially in bad.

You can really take a look at that. I would recommend those as opposed to trying to back test one idea. Of course, there are pros and cons. The purchase of the trading engine or the simulator is usually a one-time purchase. The data feed is kind of cable subscription or any streaming service that you’ll have to pay a monthly subscription for. But again, it really depends what it is you’re trying to do. I’m a guy who likes to look at data. I like to evaluate the data because then I can evaluate the data and then conjugate my emotional constitution with what the data’s showing to me. It’s a very different process than trying to be a chart reader. I mean to me, if you’re a chart reader, you can very, very easily and much more easily let your emotions overcome better judgment because you might be emotionally invested in a particular thing.
Any of the cryptocurrencies, like anything in the ai, you want to see a reason to go long because fanboys typically are that way. So that’s one of the pros of the software is that it forces objectivity. So if you know that you don’t want forced objectivity, certainly don’t spend the money, but it can help you understand things and all of your hunches. How would my hunches have worked over the long haul? Sometimes you might make money, but in the short run, you don’t know if you’re lucky or just have good timing. It might not have anything to do with analysis. And so you don’t want to get into what we call resulting where you put on a trade, you make money, and you’re like, aha, I’m onto something. I’m just going to replicate that process because you could have done something very, very stupid and made money at it, and now you’ve taught yourself a bad habit that eventually is going to cost you money.
And in the future, the way it looks is you get away with doing something like trading in meme stocks, and then you start to bet bigger just in time for the collapse, and you give it all back and then you’re kind of bitter, probably have blame. But so I guess the cons could be depending on your budget, you could seem as it being expensive, which is a very subjective term, expensive to somebody, one person. It’s not expensive to the other. And then again, like we was saying before, you have to look at it. Is it like an expense or are you really looking at something that’s an investment for your future that you could better understand what you know how to do? And then how do you know how to do it emotionally, right? Because two things, even if you’re a systems trader, you still have to take into account your emotion because ultimately you could look at someone’s trading rules and find them very difficult to follow and say things like, this doesn’t make sense. Whenever I hear someone say that in the trading space, I know they understand intellectually what they’re seeing, but what they’re really saying is this would never feel good inside

My body to execute. As a trader, that’s what that means. It doesn’t make sense. So you really need to know who you’re speaking with. So again, there’s pros and there in my opinion, you’d want to look at simulators that allow you to test at the portfolio level and get what we would refer to as robustness so that you could really use those rules to make money both in good markets and in bad markets. Now, that doesn’t mean that you’ll always make money, but you can have an idea, and this is where I think one of the most underrated things about understanding your rules from a systematized standpoint is that whether you’re working on science or whether you’re working on hunches or anything in between, you can see how that would’ve done over time and take out the randomness as much as possible and say like, well, these times I had hunches, I would’ve lost here when I had hunches, I would’ve made, how did it work net? Because if net net, you’re a breakeven or loser as a losing trader, I mean your hunches aren’t serving you, so you think you’re onto something, but it doesn’t show up in your p and l.
The other thing that I can help you with is also understanding that if you’re looking at your p and l during the day, that’s probably the worst thing that you could do because it’s going to instigate you to do something that’s not in your financial best interest and talk about that maybe tomorrow or the next day as to why that happens. But as far as I’m concerned now, when again, we think about systems and backtesting software, you’re looking at forced objectivity. So it doesn’t take into account, there’s no variable to say, well, when I’m up $200, insert a variable for extreme amounts of anxiety because my account’s underfunded. I got a thousand bucks. I’m trading the Dow futures or something. It’s two bucks a tick, and I’m just happy to be there in the first place and I can’t take the pain of winning. So there’s no variable for that. In the backtesting software, it says you’ll need to know and pick and exit.
So you can say, I can backtest and say, okay, every time I put on a trade, if I’m up 200 bucks, if I’m risking 50 or 75 and I’m looking for a three to one, four to one kind of a deal, show me all the trades where I take my gains at three R, and you can just see how flat the curve might be. There’s virtually not a lot of growth there. So again, it’s eyeopening in that you can really call yourself out on your own BSS or what you think you know about trading because you’ll see the numbers, you’ll see the data, and over a 20 year period of time, that’s terribly

Robust information. No one caress about two years. So I find that stuff super valuable, especially when you think that trading, even if you’re purely systematized, you still have to deal with your emotional constitution because those feelings are still running through your body a hundred percent of the time. How does it show up? Well, you go tweak your system. You don’t like the results, you don’t like the near term results. You go back in, and so you start changing your rules. You start adjusting the rules so that your stops are below where they should have been because you’re tired of getting knocked out of trades. So no matter to me how you slice it and dice it, you can always find a way to have your emotions hijack your trading rules. Doesn’t matter whether you’re a chart reader or using a simulator to come up with your own trading rules, or if you have an idea of trading rules from a discretionary standpoint and you’re smart enough to overlay them on a chart without needing the simulator, you can do it that way too. I think I did a video on it.
I’ve been around a long time and I’ve built these things by hand before the simulators even existed. So I know all the intricate parts and the ins and outs of building systematized rules versus being a discretionary chart reader. You can’t look at the marketing language and actually believe that because most of those people are trying to sell you something, so they’re going to tell you features, features aren’t benefits. Just understand that. So make sure you know what you’re getting into, and that’s why I say, what do you want out of your trading? What do you want it to do for you? How much are you willing to invest? Not to go off on a tangent, but also know what is research. It’s not doing web searches looking at Yahoo Finance or going to Seeking Alpha or putting on the tv. That to me is all infotainment.
So how do you define research, right? One of the reasons why I look at the data, because it takes into account every jackass who’s been on tv, myself included, and distills all of that into the data, the open, the high, the low, the close, the volume, the open interest. Again, there’s no variable to say, well, when do Abby Joseph Cohen speaks, or whoever the prevailing guru is of the day, or find the stocks that Warren Buffet’s spoken about. The price and the market captures all of that and discounts it, right? It’s a discounting mechanism. It’s also a voting machine. So you get to see in a very objective sense, all of that stuff that you might emotionally think is super important. You can see the results of did it matter despite what you think is important or how important those people are, they’re not that important in the grand scheme of things. So hope that helps. Long-winded

Answer perhaps. But the thing is, I don’t know for those of you who are watching what angle you’re coming to this situation from, so I try to put out a few different answers so that any of you can kind of sink your teeth into it and go from there. There’s really no, as in life, there’s really no one answer that’s uniform that fits for everybody. So I know that there are varying levels of needs out there. There’s varying levels of capital in your trading accounts. I know I’ve got big hedge fund folks watching, and I have small timers who were just starting and everything in between. So it’s hard to segment an answer just to one particular person, but everybody that I know that’s like at a legit prop firm where they’re like paying the bills, not these brokerage arcade places where you have to use your money.
They’re all simulating on some level, and in fact, they have people in-house who write the software to help test the ideas. If they can’t use something that’s more generic, more generic is probably fine for the majority of people. It’s just that when you have billions of dollars under management, there’s an overall risk management profile for the company, right? That’s what Aaron Brown used to do at AQR. Every big firm has a chief risk officer that helps control the risk on a per trader basis, but also from the overall portfolio of the company, because even though there might be traders down the hall that you don’t even hardly know their positions, your positions, it all gets edited into what looks like a portfolio. So you have to manage the risk. Otherwise, you could have, imagine if you had a room of 50 people who didn’t know each other, they all could have the same trades on.
So it’s all one over levered position, so that puts the entity at risk. So a lot of this software goes to help that in the grand scheme of things, so in the very rich experience. Anyway, I hope that helps you understand the nature of what those things are like a lot of things in life, I think you get what you pay for, so you can’t really look at it as being expensive or not because there’s enormous amounts of value out there. Anyway, appreciate y’all being here. I’ll see you tomorrow with Ganja, and then I’ll be back Thursday and Friday. Take care.

Use this system trading rule to keep more of your profits

Hey everybody, happy Monday. Welcome back to this show. You Sexy Motherfucker. You can’t sing that on the YouTube is a foul word and it’s Prince who has been very well rest his soul. He didn’t let people really cover his stuff. So Sublime had a good comment a couple days ago on a video called How to Trade Your Equity Curve. And this is an important thing because I think many of you are doing the wrong thing, which is you’re putting on a trade and you’re watching your p and l like right away. Talk about that tomorrow. And he said he’s gotten some consonant dissonance maybe I don’t remember the way he put it, but it was too sophisticated for a simple mind like my own to understand other than I can infer that he’s having difficulty understanding what I’m saying and I can understand why, because I’m going to guess that sublime is trading one instrument at a time.
And the question came about why do you advocate puking out your whole portfolio if you advocate holding onto your winners? And so again, I’m going to guess that Sublime is trading one instrument at a time. So that is his portfolio or her portfolio. I don’t know who sublime is, but thanks always for leaving comments. Appreciate it. And that comes from my statement comes from having very, very thorough and rigorous experience in managing both portfolios but also having done backtesting at the portfolio level. And what that means is many of you might be trying to simulate trading rules, but you’re likely doing it one instrument at a time as opposed to having a set of general rules that you could apply on a universe of stocks or any number of commodity futures so that whatever your particular trading rule is, which I advocate for, you’ll get long.
If copper starts to move, then the system will trigger you for copper. If gold starts to move, it’ll trigger you for gold. Maybe you’ll get triggered for both at the same time. Now this is foreign to you if you’re a day trader looking at the indices. You don’t have to watch this video because probably none of it will resonate with you. It’s not where your head’s at. But for those of us that are a little bit more objective and aren’t trying to put several strategies on top of one instrument with by God if I keep changing the timeframe, I’m going to find something that’s going to work as opposed to being, I don’t know, much more objective perhaps, and certainly more promiscuous in your selection and certainly not forcing things when there’s no trade

There. You can find yourself in situations that you don’t want to be in just because you’re in your will and you’re like, well, all I’m going to do is trade the indices and I get it. If you have an underfunded account, the margins kind of work for you. The tick values are also very small, so it does allow you to get in the game. But the thing is is that we’re the sum total of all our habits. And so I kind of figure it doesn’t matter if you’re underfunded and you want to get in the game with the hopeful expectation that you can grow your account, you can still develop bad habits with an underfunded account and many people do because I get the emails and I have an understanding of what it is that they’re trying to do, especially when they don’t actually have a set trading plan.
They’re kind of all over the place. Then they watch their p and l again, we’re going to talk about that tomorrow. But from having back tested, let’s just say that your system is for equities and the parameters that you’ve set up for your order entry and your risk management provide for you to hold overnight over the weekend. And when things start to break out as a sector is concerned, you might find inadvertently that you’ll have several names like in the chip makers or you might have healthcare or you might have utilities. I don’t know what it might be. It could be technology. You might do it by capitalization. But over time over say the course of a week, you might see that you’ve accumulated a basket of securities in that portfolio. And when the bigger funds or the hedge funds are looking to acquire stock, they might actually go in and buy the sector or any number of disparate group of people might come in and put money to work.
At which point you’re sitting there and it’s great, you already own the names just like I advocate. You’ll wake up if the trends are right and you’re still in them, you’ll find that the wind is at your back and the bigger investors and the traders will come in with more capital and move the thing higher. They’ll be reluctant sellers. So those people will dwindle and now there’ll be a fight to acquire inventory, which can only happen when the market will go higher. Prices have to go higher for the market to clear and you’re long, so that’s good for you. Money will come in. Now from having back tested, you can also figure out, when you look at how a simulator works, you can actually go back and look at the day, the week, the month and kind of see what positions that you had during that period of time so that you could see where there would be a near term equity peak. Again, that’s going to be part of your trading style. What’s your portfolio heat, how many names you might have at a given time.
And then as that momentum can show up, it ebbs and flows into the portfolio. You can go back into the simulator and kind of see, okay, when I have X amount of names in my portfolio and the market surges, I’ve noticed that after it moves my overall account balance, I don’t know, say six, 7%. There is a natural reaction where the buying stops for the moment. There might be a small wave of profit taking volume could drop before the trend resumes. So you might find since you don’t know and you’re horrible at prediction as most people are, that it makes sense to not manage risk on a per instrument basis, but from your trading style and having seen from 20 years of history in simulation that when your equity runs six or 7% on average, that’s the best of it for that particular moment in time.
And so instead of selling just them, each instrument piecemeal with your protective stops, there is wisdom to puke out the whole thing as you are at the optimum amount of upside at that moment of time even though none of your protective stops have been hit. So that kind of comes from simulation. It can also come from years of experience, but it does infer that you’re trading many names in the portfolio, not just one particular instrument. So for those of you, like I said, who are day trading, one particular instrument, this doesn’t really pertain to you because you don’t have that potential upside. And if you’re day trading one instrument, you’ll never have it because you’re never going to have risk overnight over the weekend and you don’t have to really manage a portfolio, you just have one name. So this is a more sophisticated type of an issue, a way of booking profits, and it does come from simulation.
So you have to know the numbers, you have to have definitive rules for your entries, your position sizing, which the simulator handles all of that. And then like I said, you could go back and kind of replay the tape so to speak, and look back in and see along your equity curve, what were those percentage moves when your equity curve was at a peak, what the subject of that video was was trade your equity curve. So that’s kind of what I was getting at. I probably didn’t do a good enough job of explaining how do you trade that way. Now many at least, lemme see several instances. You can kind of create your own little basket of securities and hit a button and all of a sudden all those names can be long or short in your portfolio so that you could trade the basket so that it’s not necessarily any one particular name but a basket of securities that you have risk on and then you have risk off.
So that’s another way to do it. It might be a little bit more sophisticated for some of you, but when you get into larger account balances and really want to multiply your cash as you evolve out of day trading, you’ll see that these types of things can really work for you very handily. But again, you’ll need a simulator and you’ll need one that can test at the portfolio level. That doesn’t mean one ticker at a time over several days. It means can it have memory? And remember your positions, mark everything to the market. Take into account where your protective stops are for the existing positions. Know where your buying power is, help you calculate your stops for your order entry for the adding risk to your existing portfolio. Then managing your equity all the way through that. So it’s pretty cool to see.
The better ones are going to probably run you a thousand bucks. And then you’re going to need a data source. You need the open, high, low close. You might need open interest if you’re trading commodity futures. So again, this allows you to have a basket of securities overnight over the weekend and really see it from a portfolio management standpoint. So it’s good for both traders and people who hold longer, right? Because you’ll have that marking to the market functionality for your positions. If you trade futures, you can also program in the role and all this and that for one, don’t really splice contracts in my own simulation. So there’s a couple of them out there. Like I said, they all have commas in their price point, but again, it’s like what do you want out of your trading? What are you doing this for? Are you just kind of ham hocking it as an amateur throwing darts during the day or are you really trying to make money and think of this like a business?
That’s why I’m always asking people, what do you put into your professional development? Because that’s not, even though it might be an expense on your accounting, it’s really an investment in your future. You might have all different kind of goals. You might want to get married, buy a house, buy a diamond ring, do this and that, and upgrade your life. To me, buying a ring for somebody or otherwise, that’s not an expense. That’s an investment in your future working with me. Yes, it’s going to cost you some money, but that’s an investment in your professional development. So you can expense it against the business, but it’s an investment, right? So that’s the way I look at it. At least that’s how I looked at spending my money in those particular

Things, especially when I had to get on a plane and fly from Los Angeles to Reno Tahoe every other week to be an active member in what was then known as the Incline Village Trading Tribe. It wasn’t local. I had to get on a plane and fly rent a car. So I didn’t really look at those as expenses. I’d looked at it as an investment in my future. At any rate, sublime, thank you for writing in. I appreciate you all leaving comments. I’ve noticed in the people are saying, I want to thank the algorithm for finding the channel. So when Ganja and I say, please like and subscribe, it helps the algorithm. There is evidence that people are finding us from those very actions. So thank you for those of you who’ve done it. You just don’t know who you could be helping. It could be someone much like yourself. So keep the questions coming for sure. I see everything and where I think I can add a little bit of intelligence. I don’t have all the answers, I only have some, but I’m happy to help everybody. Again, thank you sublime for your comment and I will see you all tomorrow.

Learn this key insight on measuring volatility

Hey everybody, it’s Michael Martin. So yesterday I kind of touched on the emotional side of knowing pullbacks versus corrections. Today typically we will talk about more of the specifics. Again, I don’t want to start looking at charts because that’s a bit of a snooze. Again, your position size is typically based on the volatility that you can take within the account, and your protective stop is typically adjusted for your position size and your position size is adjusted by the volatility. So it depends how you kind of back your way into the trade. Typically, people start with there, I think the popular expression is their risk unit. How much of their capital are they willing to risk on any one particular trade? It’s a really good idea to keep that number consistent. Don’t adjust it and change it because you have strong feelings for Nvidia, because some jackass tells you how AI is going to change the world.
The price will tell you what everyone else is thinking. That’s the truth, literally and figuratively. You can’t trade on other people’s recommendations. At the end of the day, a pullback is typically something that’s within, you know how I say if there’s an uptrend, things are moving up and down but in an upward fashion. So those down moves are kind of what people would consider pullbacks within an upward moving trend. A pullback is not necessarily a reason to get out of a trade because at that point you’re kind of like the whole thing about the trees in the forest. So I would not let that psych me out. A correction is perhaps, and you can operationally define this, how you see fit, because there is no universal definition where you could be like AV top, a sharp move against you. Piece of news comes out. It corrects if your stop is placed correctly.
That type of activity will knock you out of a trade. Is it frustrating? Not for me because I know what’s going to happen. If you are watching your p and l and you watch an eight R trade go to two R and you get knocked out, that’s the way it goes. Those things are going to happen. You can’t insure against that by taking small three R gains your whole life, you need to sit in for the bigger winners and sometimes the things will also take off and it’ll be announced that someone’s acquiring the company. Someone’s acquired a big position, there’ll be a 13 F announcement. There’ll be something that motivates the crowd to do something that you did a couple of weeks ago and now they have to rush in and buy the stock and you make a bunch of money. That’s the admission ticket that I speak about because you’re already inside sitting comfortably. So get used to that. So I would look at a pullback as just a small intraday countertrend move still within the parameters of staying inside the trend line or above the trend line in an uptrend. And remember, we’re not drawing channels, so there’s no reason to connect the tops, no reason to do that.
You draw trend lines below the chart and downtrend lines. You connect the tops, but there’s no reason to connect channels to think that that’s the only way the instrument can move is inside that channel. That to me is small-minded thinking. So I’m looking at my notes here. So a correction could be, well, maybe you have a two standard deviation move or a two or three ATR move against you. It really depends instruments to instrument. It also depends on how are you using leverage because in that moment of time, because the leverage cuts both ways, your job as a speculator is to play superior defense. Obviously, like we said this week, you have to demand gigantic gains from the marketplace. But if you’re trading with leverage, when you smell smoke, you have to assume it’s a five alarm fire. That’s why you have to honor your stops.
I wouldn’t necessarily call the correction of black swan, but moves can happen for various reasons. New fundamental data comes out. It could be legislative risk is new and hasn’t been digested by the market, but oftentimes when I’ve seen corrective or what you would consider corrective activity, people sleep on it and they’re like, it’s not so bad. I’m going to come by and buy some more tomorrow. So I can’t say that universally a corrective activity is reason to get out. What I do think you should do though, regardless of how you define pullback or correction, is honor your stops
And put them in. Leave them in. You could always think with the clear head overnight come back. Worst case scenario, you buy in at higher prices. It’s not the end of the world if the trend is going to go. You can’t think that the near term high is the only high, the absolute high or the move is done. A lot of people get the mistake of looking at a chart and they see it started here and it’s over here. It’s like, oh man, it’s in the top right corner. I moved as if this is the place where you exit the pros. Look at that as a good place to enter, in fact. So you need to know your timeframes. Don’t worry about buying zones. That’s all. Again, short term, kind of small-minded thinking and back out the chart, look at the weeklies or the monthlies and see what the overall market is telling you because that data is less random despite what everyone else is thinking because it’s a voting mechanism.
If everyone’s so damn bullish on ai, why isn’t NVIDIA seven 50? Serious question. So that’s kind of how you start to calibrate the hype and keep yourself out of bad situations. But pullbacks are nothing to be afraid of because that’s what your protective stop is for. Now, pullback is a word you would use for something that’s up trending. If you’re short and the market rallies, I suppose that would be perhaps the precursor to corrective activity. Admittedly, there’s a chart called V tops and then there’s V bottoms. Those are kind of difficult to trade in terms of calculating a buy signal. You’d have to see maybe if you were looking at bigger selloffs where things where the selling became kind of cataclysmic and it became concave down, Y equals negative X square kind of a deal, inverted parabola. You can look and see sometimes those markets do get washed out and if you’re looking at some kind of channeling indicator, there might be room for something that’s a snapback.
But again, that’s a countertrend kind of like I’m going to get cute and scalp with the market. Whereas maybe you could make some money that way. Buying an oversold market long or using a call option, let the market rally back up to your strikes or to your stops. But those are all unique spots to be in. I don’t know that you could build a business on it, especially if you’re starting out because in my experience, when there is that big kind of cataclysmic selling, that’s usually the first spot. Even though there might be a wave of short-term buying, whether it’s the shorts covering or value players trying to come in and accumulate stock on a lower valuation basis. You remember valuations come from earnings, not PE ratios, and the earnings part is very difficult to predict going forward. So you can only really trade on the past pe.
So what happens when the PE goes from 30 to 20 or 30 to 18 and you’re like, man, there’s value here, but then the earnings get cut again and all of a sudden the stock is down 50%, but now the multiple is 40 and you’re like, oh my God. Now the thing is way overvalued at a lower price. What happens, and I’m not the only guy to say this, but it kind of comes from school of hot knocks. The cheaper prices don’t mean value. So what I would do for yourself though is kind of define what your risk is. If you’re risking one half or 1% and you’re using any number or multiple of standard deviation or ATR, you can use a half an ATR. You can use a full ATR, you could use two ATR with whatever that risk unit is. And then you could think, okay, well I define a pullback then as twice what my volatility measurement is.
I think of a correction maybe three or four times that you can come up with your own measurement based on what you observe because it’s all based on your personality and your temperament for risk. There’s no universal understanding. Obviously, if you have a stock that gets cut in half in one day, it’s probably safe to say that was a correction, right? The day after Kramer made that big rant about Bear Stearns or close to it, the thing went from 30 to 15 in a day. It might’ve been the same day, I don’t remember. It was a long time ago. But the thing is based on your trading strategy and how much room you normally give the thing, that’s why you have to operationally define, because if you’re in the business of giving the thing two ATR move, if there’s a two ATR move against you, well that’s what you were planning for based on what your own algorithm is for position sizing. So for you, a correction might be a five standard deviation move, right? Not in one day, but I guess that’s really what that is though. It is in shorter timeframe, but say a five ATR pullback in the move, you could be pricing for very volatile moves, especially if you’re trading for futures. That’s really up to you to figure out how you want to do it.
So that’s how we can begin the conversation. I don’t know if there’s more to say on it, but you really have to define that for yourself. A pullback to me is just part of a natural reaction that happens in a move. Move doesn’t have to be overextended. I know I’ll be doing more of that in our groups to kind of look at it and to study it, but that just requires an enormous amount more of preparation on my part, and I don’t have the time to do that for these types of videos. Maybe there’ll be a premium aspect to the channel here where we can kind of borrow some of that recorded stuff and make it available. I don’t know yet. I like doing these for free, but ultimately this is the time that I can afford to give away and help you all, which I’m willing and it’s my pleasure.
I think it’s my responsibility to do it. That’s my intention. But when it starts to becoming more time intensive, then I have to look at other, there has to be an exchange of value. This is what I’m willing to do under the charitable give back to the community way more time commitment makes it more professional, and that means compensation on some level. But we’ll have to see. I don’t have that worked out yet, but at any rate, it’s been a good week. I appreciate your comments and keep watching the show. Go back and watch the earlier episodes because there’s really chapters. I’m going to try to create two, I don’t know how I’m going to do it just yet, but I have the people to help me and start to think in terms of playlists and then organizing the themes and call the playlist by the theme so that for those of you who are in various stages of your trading, can come into the show, especially if you’re new here and look at a particular playlist and get a whole host of episodes that speak to that theme because we do have the transcripts and we can kind of search for kind of keywords and kind of bracket these things out so that you can go on a bit of a diet of a particular subject matter that we cover in the overall scope of the show, which is kind of related in that it’s all traitor psychology and emotional intelligence, but within that, there’s some specialty stuff that speaks to managing risk on entries and exits and position sizing and different things that might resonate with you at different times during your own kind of trading upbringing, if you will.
Anyway, it’s been a great week. I always appreciate you being here, and I thank you for taking the time to write. It means a lot to me. As always, if you have things that you’d like me to consider or send them over, I’ll definitely, I look at everything. I only try to comment on things that I know I can speak from experience because no one needs bullshit theory, and yes, I can give you my hunch. I appreciate you thinking that that might be valuable, but I really always try to speak from experience because I know that I’ve had to live through it, and that makes it much more real and I think also much more believable for those of you who are watching. So thanks very much for being here. I hope you have a great weekend and I’ll see you Monday. I.