Hey folks. Happy Friday, last show of the week. I hope you have had a good week and you have fun plans for the weekend and you don’t do anything related to the markets, and you go live your life and be happy. So as we speak about designing a system, when you’re just starting out, I think I should have highlighted yesterday, I really believe one of the most important things that you need to understand is how much you’re willing to lose on a per trade basis. Because a lot of people don’t want to lose money, and so what ends up happening is that they never find their way to put on any trades because they want to keep making sure and double checking, and it’s like ready, aim, aim, aim, aim, aim, amen. They don’t shit or get off the pot. Then the thing moves against them and then they have regrets because they didn’t get into the trade that they had seen happening unfold right before their eyes.
So my whole take on these things is this, is that you need to have a clear vision of where you want to be and then understand that as you’re, you have an account that’s funded, do two things. Don’t take off a winning trade just because it’s at the end of the day, you don’t necessarily have to develop into a day trader. If that’s the way God wants it for you, then by all means do it. But I wouldn’t come to the market and say, that’s what I want to be, because until you’ve tested all those models, you really don’t know what one is best for you. You see what I’m saying? So let the nature of how the markets work, figure help you figure it out for yourself. Two, there is a lot of talk about the ever-changing amount of money that you risk on a per trade basis. Back in when I started, people were risking between two and 5% of their account balances on, and these were pros. Mind you, these weren’t people with 5K where you’re way underfunded where you have to, don’t have to, but you almost invariably have to take bigger bed sizes because you don’t have enough money and there aren’t enough instruments out there for you to trade. Now, you could trade micro contracts for sure, only if that’s appropriate for you. I’m, I’m not making any recommendations for that.
But then as the markets maybe got more crowded, I’m not sure why it happened. Maybe it was the nature of what the investors or the clients wanted in terms of lower volatility on their account balances. Bet sizes like commissions have been compressed. So whereas back in the late eighties, early nineties, position sizes, like I said, were two to 500 basis points. Now they’re like one 10th of 1%. Right now they’re 10 basis points, 25 basis points, one fourth of 1%. So you want to understand that that number may be what you evolve
To once that your system has positive expected value and you have what we call a trading edge because you can discover a trading edge and figure out that you can create alpha by risking $10. You could trade one share of Amazon, and you have to remember that’s your kind of scrimmage, right? It’s a game, but it’s a game that doesn’t count and be comfortable being in that spot early on because to me it’s better than paper trading. Paper trading is okay if you want to learn how to work a trading platform, right? Because they typically are tied into an actual live trading environment so you can learn how to enter particular orders, your stops, your limits, your market orders, how to set prices and do this and that. Good for the day, good to cancel. And that’s all important to learn because you learn the hard way.
Oftentimes that errors cost you money, but you want to learn your craft with live ammo, right? Because mistakes will happen and you want to know what the burn feels like. You want to know what it’s like to be in a name and have a big earning surprise happen the next day. You want to experience all that because it’s the experience of that that’s going to help you better understand who you are as a person. And you can’t get that in a paper trading environment. You can’t get that if you are always offsetting your winning trades at the end of the day, right by the closing bell. So I would forget whatever that risk unit is that you hear everybody talking about, what do you risk portrayed? Oh, I risk a half a percent and I have a 50 50 win ratio and I have a three to one asymmetric reward to win to risk ratio.
That’s all down the road for you. You’re not going to get that anytime soon. So give yourself, love yourself enough to know that you’re going to have to figure that part out through experimentation and then of your trading capital and your grubstake, determine how many trades can you get wrong? Losing whatever it is, 10 to 20 to 50 bucks a trade. It doesn’t matter to me what the number is in order for you to kind of learn your craft, right? Because it doesn’t speak anything to you as a human being. You’re not an idiot because you’re losing money. And if you’re a guy, women tend to be better. In my experience and the women that I’ve worked with than coach, they tend to be much more emotionally mature about that. They realize it’s part of the process and they’re much more willing to feel their feelings. Guys are built differently. They feel emasculated, which is that feeling of reluctance to fail and whatever has probably killed more people than anything because they weren’t really, they talk a good game about being David Goggins and being inspired by all that stuff, but they never really get around to doing it, right? That’s got to be a
Vietnam your brain that I don’t even want any part of, right? Because it’s one thing to pontificate it and to retweet it and to like it on Instagram and be like, yeah, motherfucker. But at the end of the day, it’s a whole other practice to do it. So can you put yourself in Bud’s training? Because that’s effectively what this is going to be in, not necessarily physically, but emotionally. What are you willing to put up of your money to learn your craft, knowing that you’re going to make errors and you’re going to make mistakes? An error is when you put in the wrong trade, you want it to buy Ms f T, but you put in M Ms F T or whatever it is, you switched the letters M F S T, M S F T, right? I’ve seen that happen. I had a branch manager actually do that, and he was like, wow, did the stock split because he put in the wrong ticker, he put in, it was a trading error.
Then there’s going to be mistakes and tactics. Tactics that you don’t know what you’re trying to do. If you want to have some context. I have friends from back home who run the New York City Marathon. They run the whole thing, but they don’t just put the shoes on that day and go run the damn thing. They’re training throughout the year and building up to it. So the goal is to complete, they’re not really trying to, they’re looking maybe to be the personal best cause they run it every year, but in trading, it’s a marathon. It’s not necessarily a sprint, and you have to prepare for that. You have to prepare your brain for the daily grind of it as well, right? That’s why I’m on a diet of the mind. I don’t let all this other bullshit come into my day because I know I need laser focus on what it is that I know how to do.
So the phone doesn’t ring. I don’t let people call me. I don’t have the TV on. I’m not interested in any of that stuff. You see, there’s a time and a place for all of that, but my brain power is sacred and I don’t give it to anybody. When I’m working on the things that are most important to me, and that can be when I paint. It could be if I’m playing guitar or obviously I take time out for martial arts, but at the end of the day, I have very clear boundaries on whose time it is and it’s mine, you see? So you need to figure out if this is a marathon, how much time are you going to train? Are you going to give yourself three or six months to figure it out where you’re actually taking real risk, losing, like I said, risk, 10 bucks trade? I think there’s a firm out there that kind of starts people doing that too, because it gets them used to the fact that they’re going to lose money. You just want to make sure that your losses are contained and you’re not going to lose any bit of money that’s going to put you out of business or kill your dreams. But you have to remember, if you’re going to go swing for the fences, you’re also going to strike out a lot. And if you’re just starting out, don’t worry about those emotional wins. Worry
About the rules that you’re compatible with that give you a trading edge. They, theyre help you create alpha. They have positive expected value and that on some days there might not be setups for you, so you have to wait and come back tomorrow. Guarantee you, there’s people out there who were three years or less and they’re putting on trades that they know they have no business being in, but they’re doing it because they want to be engaged. They want to feel like they’re traders, so they do trading things. Does it matter now? They’re not doing it to make money. You see? Then you mature even more and you’re like, okay, well there’s no setups for me today based on the criteria that you have, and so come back Monday, come back Tuesday. That’s just the way it is.
So I would not worry about then in summary about what your optimal risk unit is right now, because what you’re trying to do is learn your craft and figure out can you actually make money with small bits, because then it’s easy to scale. That’s the easy part. So while you’re figuring it out, do it hyper small and then worry about graduating to what you think your optimal position size would be, because that’s where you’re going to make and lose the money that you want to make, is that it’s all in the position sizing, but at the beginning you’re just experimenting. So why would, you wouldn’t have to worry about optimal position sizing at that point. Anyway, it’s been a great week. I hope you’ve had a lot of success and you’ve learned a lot about yourself. I always appreciate you being here. Please like and subscribe and I’ll see you Monday.
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