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Trader mindset is the most important thing that you need besides having some type of skill to manage the risk. What traders are, they’re risk managers and you can really train your mind to make money. What do I mean by that? Well, when I went to Wall Street, I did make assumptions, and I’ve mentioned before a lot of them were completely wrong, but at the end of the day, my mindset was such that I know I could win at this. I saw who was doing it, I saw how well they were doing, and it was easy to emulate their behavior, at least from the outside. Then I needed to learn the inner game, and that’s where the money actually is made as far as I’m concerned, right? It’s widely understood that 80% or so of trading is about psychology. People will come out and say trading psychology doesn’t matter, but for those who, people who say that they were born with the right psychology, so it was never an issue for them.
Unfortunately, for the millions of other people who are going to try to trade, especially if they come from a very academic background, they’re going to find out that the level of failure on a per trade basis is very high. The frequency is very, very high, but as long as you don’t go on tilt, you can train yourself to understand the new math, and that’s the mathematics of expectation. That’s understanding that 60 70% of the trades that you put on are going to lose you money, and the ones that will make you money can make you money very quickly, and you can take scalps like we talked about yesterday, or you can learn to get comfortable taking overnight risk and over the weekend risk, and I have studies that show where you can actually make your money. The thing is, I think traders make things very, very difficult for themselves because they want to have the macho win, the emotional win I put on the trade, I carved it out of stone and I did all this work and this is how I got rewarded for the trade.
I’ve been there. I understand that it’s definitely a peacocking thing, but when you look at the results of buy and hold, which takes really no particular skill whatsoever, and you could make almost as much money, you don’t have the same emotional payoff because there’s nothing to brag about. You just put on a good trade, it made you money, you left it on for as long as possible and you took it off. So the emotional win for that type of trade is very, very different than someone who has four monitors. 18 indicators has real-time data, has a headset on, is listening to a squawk box. That’s a whole different type of emotional reward system that’s lost on me. I don’t need that stuff. I kind of think that it’s younger guy macho stuff, personally speaking, but I’ve had those types of trades where I’ve done sufficient work, put a trade on, used all my own ingenuity, used and relied on my own sense of

Timing and made a bunch of money and it felt very good. I felt self-actualized, but at the end of the day I had to start to think how much time do I want to actually put into this and how do I have a quality of life? It’s not written anywhere particular that you have to spend eight hours in front of the screen every day. That’s your choice that you choose to believe that. So this stuff gets kind of deep. In the meantime, you can train your mind to see other possibilities. That’s also up to you to be open-minded because I think this is, to me, the shorter term stuff is really built for younger folks who have unlimited energy and this and that, but I don’t know too many guys who are 70 years old that are scalping even though they might’ve done that because the need for the money isn’t there anymore. They’ve already made their tens of millions of dollars, so it doesn’t move the needle for them to sit and scalp unless they can see something from five miles away and they’re like, oh, yeah, that’s so obvious to me. Just going to go put on the trade and nail it because the old guys, yes, still got it. That kind of stuff. So as you age, you tend to have longer holding periods, not everybody, but that’s what my experience has suggested.
So be mindful of everything that you’re doing and all the choices that you’re making. You can understand. You can only see so much, but there’s a whole other world of trading that you might not see, and to me, if you’re going to be a pro, you want to investigate all of those channels to see what one’s the best fit, so you don’t have to necessarily marry the first girl you ask out on a date, so to speak. You should get to know the environment a little bit. Now, I trained my mind by not taking my losses personally. I knew that I had to be in it to win it. I knew I had to put on risk in order to make money, so I had to think what’s a good risk versus what’s a bad risk? I also kind of understood that sometimes in the short run, you’re shot by friendly fire.
You could have a really good trade, really good name, good fundamentals, which I think you should study. If you’re learning stocks, you should definitely learn fundamentals and not just rely on charts and level twos and come to understand that I’m going to have bad luck and bad timing on top of bad decision making, and then reconcile that with yourself early on and not beat yourself up over it and just understand that this is going to come over time. Baseball players, they’re going to strike out, they’re going to put trades on, excuse me. They’re going to get to bat, and they might not even be facing a good pitcher, but they still might get called out on strikes.

There be bad calls. They might swing at pitches that fool them that have late movement, and that doesn’t mean they can’t be hall of fame. So I trained my mind to make more money by not getting emotionally invested in any one particular trade. So pick the darlings of the day. You know what they are, MicroStrategy, SMCI, Nvidia, anything with AI attached to it. We’ve seen this before Bitcoin, remember this, what do you think are the names that people will make the most money on? Write the top three down. Then show me the list and I’m going to show you the top three names where people lose the most money on because if you don’t have a strategy and you get sucked over to the light like the moth, you’re going to get blasted. And if you know anything about history from ’82 to ’87 before the correction, we’re in a really big bull market, but most individual investors lost money because they had no sense of timing. They were trying to time the market without knowing how to do it, and you can do it. Most traders are time in the market every day, right?
Then same thing, if you watched what happened from ’95 to 2000 in the Dot Com era, the names that people made money on, it doesn’t matter. What was it? Cisco, Sun Microsystems, Vertical Net, CMGI, right? Siebel Systems, JDS Uniphase – for the Love of God, Global Crossing. You can list a number of those names, the top 10 holdings of that five-year window, but those were also the same names where people lost the most amount of money, so why was that? Well, they weren’t mentally prepared. They got in at a late stage. They were in a stage two breakout buying into the fifth base, very, very, just as it started to go to stage four breakdown. They tried to sell puts and they got exercised against, and it seemed so easy for everyone else to make money, but you have to train yourself what not to do. You can’t fall victim to every emotion that’s running through your body, and that takes time.
That’s not something that can be done in one day. You could learn scalping tactics. You could read an article and probably walk away with a couple of gems. You could learn the trend following methodology in the same amount of time, but in order to put it into practice and to make it your own and to do it and to do it and to own it, where it becomes second nature, which is where the magic happens, where you’re not second guessing yourself, you’re not trying to look at your discords and be like, oh, what is so-and-so hey, is this a good time to get in? You have to be independent. You have to be a leader. You have to take the action despite your fear and whatever else you might be feeling.

That all come that mental training takes a lot more time than the actual learning of the trading. The intellectual side’s, the easy part, as I’ve said before, if you don’t know who you are, it doesn’t matter what you know, don’t know what makes you tick, you see, and so you have to learn through real experience. This is an experiential process, not necessarily an intellectual or an academic one. That’s the easy part of trading, even the screening part. There’s all solutions for that. It’s very easy to find, so keep whatever you do, keep your mindset in such a spot where you have to think you’re a winner. If you say, why do I always lose? In my humble opinion, you get what you think about and you give that power. Words have power. I’ve said that before, and so I don’t give power to negative words.
I don’t say like, oh, I got stopped out again. That always happens to me. I don’t recognize it that way. I say something like, well, that’s the place where I was willing to transfer the risk to somebody else, and they were willing to take it on more power to them. I hope they do well because I know I’m winning. I didn’t necessarily win today, but I do. Winning things all based upon your behavior, not necessarily what, so you have to do everything in your power to stay in a good mindset, really. Thoughts, feelings, actions. You can think about what you want to do, then put yourself in that emotional state and then take the right actions. You might not make money today, and I let go of that too. I let go of saying, I need to have a green day every day. I don’t.
I just need to follow my rules, and I know when I do that, the math is in my favor when the winners show up, I don’t know. I’m powerless over that in the way I think in my paradigm, I’m responsible for everything, don’t get me wrong, but I don’t put that kind of pressure on myself where I have to have a green day every day, and especially if you’re starting out, I think that’s the wrong way to do it, but my coach and my mentor says, take $50 even, because at least it’s a win if that’s what you’re comfortable with, but then you have to add it all up and say, is it worth it for me to do that? I can share with you after a while, after you’ve done that for a month or two, you get tired of taking $50 wins.
You’re like, what am I doing this for? I’m running to stand still, you too, song. I’m running to stand still, and I didn’t want to do that. I needed to grow and amplify my cash in a big way because the $5k, $6k, whatever that I had in my account, I knew that that wasn’t, if I made even 20% on that, it’s a thousand dollars. That’s one month of student loans. That wasn’t going to move the needle for me, so I had to put myself in the mindset and make the determination that I’m going to make three, four, 500% of my cash on my account balance. That’s what I meant by that, right? Then you have to envision it and say, okay, well then what do I have to go through in order to get there? What kind of pullbacks and drawdowns do I need to go through?
It’s a lot different from scalping, but I knew the market would, if I caught the right moves at the right time, especially in futures, the market would do the work for me. Plus I had the leverage, so I was like, okay, if I put myself in the right place at the right time, the leverage and the market forces that are more powerful than I’ll ever be will put the wind at my back and move my account balance, and then I got used to that. I got used to that overnight risk. I got used to that over the weekend risk with futures positions, because when the moves happen in your favor, they tend to open up with you. Your long, they open higher.
It doesn’t have to be by a lot, but when the trends hit, they hit very, very well, and you can make more money from doing less work, which in my opinion is what you should be doing. You shouldn’t be ready, willing, and able to have to do all this extra work to reinvent yourself every day. That’s my take. You can make a lot of money by taking the risk home. Some of you like the feeling of being busy, so you feed that beast. I don’t like doing busy work. If I’m in winning trades, I like to stay with it, but that’s my mindset. Your mindset may be very, very different. You might like that. All that activity, you might be in a community of people and you’re kind of feeding off of that brotherhood. I’m a loner. I don’t want to hear from anybody, even my clients.
My first rule on the client agreement is don’t call me. Do not call me. I’m not looking to make friends. When you’re younger, you have to make those sacrifices and deal with the people calling you like, Hey, I see this is moving. How come we’re not in it? Or, oh, yeah, we’ve made a lot of money. We made 20,000 in each Bitcoin. How come we are not taking profits here? I don’t want to hear about that. I’m not Merrill Lynch. I’m not interested in having that kind of relationship with people. Again, mindset. I’m training myself to make money. I’m not training myself to take on your emotional bullshit. Watching the market because you’re bored stiff, doesn’t work that way. So think about where your emotions and your psychology come to play in every decision that you make in your analysis to your entry, to your position sizing, to how do you take your losses in a disciplined way, and then also how do you take your winners? Why do you take your winners when you do? And if you start to look at that, you can begin to see patterns, and then that’s when you can begin to make small emotional changes, and in my opinion, and when you’re ready, willing and able to do the work and make those emotional changes, that’s exactly when you’ll start to make more money.

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So contrary popular belief, I don’t really have a problem with scalping. I have a problem with the people who market scalping, right? Because scalping myself, right? We’re in that kind of market where there’s some gigantic moves. Look at any of the MSTR, SMCI, certainly Nvidia. You could look at Cocoa if you trade futures. Some of those moves are very, very pronounced. There’s obviously risk involved, but I don’t have a problem per se. Again, with scalping, I know people who can do it. I do believe you need to have an enormously great sense of timing. I think you can see it again and watch it and understand it intellectually, but that doesn’t necessarily mean that you can do it. And so when I see marketers putting out videos on how easy it is, I hope you understand. You probably felt it too. It’s just not the reality.
I know there are people who do it very, very well, but you have to understand that it’s widely understood that only five to 6% of the people who day trade make it from everyone who tries and within the day trading space. That doesn’t necessarily mean that those people can scalp either. Like it’s a very, very unique skill, and if you’re doing it and you’re making money, you’re making a living. That’s great. I think it’s disingenuous to tell folks who have $1,000 – $2,000 that they can scalp their way to financial freedom without adding money. Significant amounts like thousands and thousands of dollars to their account. “But Mike, I’m in this Discord where they’re all doing it,” and I’m like, in statistics, we call those survivors. We call those people survivors. You don’t see the people who didn’t make it. So you have to be practical.
You have to be objective. Even if you don’t want to. You can choose to believe what you want, but I’ve been around a long time and I’ve seen it. I’ve seen the folks who can do it, and so when I say a handful, it’s a figurative way of saying it, but percentage wise, even in the 5% of the people who make it, there’s a very small percentage of those folks can actually scalp. It takes a very, very unique feel for the market. You can develop it. You’ll have to try. You’ll have to experiment. You’ll have to risk real money.
Paper trading can help, but nothing feels as good overall when you’re doing it with real money and winning and losing because then you get to calibrate your system because again, not just, you’re going to need to be super accurate because with scalping, you’re talking about being in a position maybe for one to two minutes, and there’s a lot that go on. There’s order flow, right? You’re looking at level two. You’re looking at relative strength. You’re looking at volume. I have mixed emotions about it. Volume doesn’t equal liquidity, but if you see volume showing up on the tape for that instant and you have really, really good instincts, you can absolutely nail the trade very, very quickly. But my whole thing when I compare that, because when I do my scalping, the thing that I think about is timeframes. So if I see an opportunity to scalp something, I can look at that as a trade entry as people, we label it according to what our emotional needs are. To me, if you see some kind of a breakout price after consolidation or it’s retesting a certain level and you see volume showing up, you can say that that’s my scalp entry. But another person who’s sitting down the hall, perhaps at another firm can say, well, that’s my swing trade entry. That’s my entry that I’m going to have. I bought it on Wednesday. Let’s see if I can hold it. And if the move follows through to the end of the day, then that would be a day trade, not a scalp. If you hold it to Thursday, Friday, now we’re in a swing trade, you get the same entry.
If you’re a position or a trend follower, you can label it how you want. So there’s not any specific entries that I think if you’re looking to try to develop your craft, you could look at your scalp entry as the entry for a trend trade. Why do you have to label it a certain way? To me, when I look at all the different education stuff that’s out there, to me, any of those entry rules can apply to any number of holding periods. You choose emotionally to remove the risk when you do, and that’s a very personal decision for me. Like I said, when I was on with JC Parets and All Star Charts, it’s like I’m at the stage now where I know I have a great work ethic, but that doesn’t mean that I want to work like a dog every day.
You see, and I mentioned Pareto Efficiency. I want to, I want the most amount of output for the least amount of inputs, which is a fancy way of saying I want to make the most amount of money for doing the least amount of work. Now, I tend to do my work as my preparation the day before, typically the night before, and then I review in the morning, and that feels better for me emotionally than to have to do my preparation in the morning. Keep in mind, I’m in Los Angeles, so environment has a big part of my decision, right? I’m already up at 4:30-5:00 in the morning. I don’t want to have to do my biggest crunch work that early in the morning. I’d rather review the work that I did the day before and say, okay, how are things behaving overnight? Where can I step in?
Where do things look like they’re going to back off and I might need another day? Those decisions are much better for me again, in my environment. If you’re in New York City, you got all the time in the world to get to the office by six or seven in the morning for the opening bell, and some of you don’t even do any trades until 11 o’clock, right? You don’t trade in the first hour and a half. Let the market set up and tell you where the ranges are, right? That might be another way to do it. So for me, you have all the time. The time zone helps you.

For me, the time zone works better in the aftermarket in managing my risk that way. After the close closing bell, and then certainly as I come into the evening, as I was telling JC after 8, 9, 10, 11, 12 o’clock, midnight, I can see what’s happening in other parts of the world where it’s already too late for the folks on the east coast already probably in bed. But for me, if I’m up at 10 o’clock, it’s 1:00 AM in the east coast, I can see what’s happening in Asia in real time. So that gives me a bit of a tactical, or at least the situational advantage, is I can kind of see how things are following through. That helps a lot in currencies. It also happens in metals like gold and silver. You can see them start to trade overseas, and you can manage your positions accordingly. If those markets in the stock indices are starting to sell off, it could trickle over and creep into what’s happening with say, NASDAQ or S&P.
So I can initiate a position or better manage my risk by offsetting some of my risk for the things that I’m taking home overnight. But what I’m trying to say is if you’re going to try to develop a feel, it’s very, very, I think it’s a skill that can be evolved. It comes through an enormous amount of trial and error. Again, I have skill, but I was born with it, I believe, and I certainly worked hard to develop it. So on some level I can share with you that I’m lucky, but on another level, I can share with you that I did work hard to kind of hone that craft. Keep in mind, if you’re new to the show, all I did at the beginning was fail. I was underfunded. Everything that I thought I knew about Wall Street or thought what would happen for me when I got there was completely wrong, and I had to simplify and cut back.
I had to eliminate foreign exchange trading, interbank, foreign exchange, and options trading altogether, because when I looked at my behavior, I wasn’t getting any results. My stock trading was okay. I stuck with quality names, and I think I was probably in a bit of a bull market. My skill where I completely understood the market was in trading physical commodities. It seemed to come natural to me. So that’s what I focused on so that I could build a track record and more importantly, build my confidence because once you, even guys as dumb as the damn doorknob walking into your office, that person has confidence. They’re going to achieve a lot in life just because of moxie. So what I don’t like is when people try to tell you how easy it is and how much money you can make in such a short period of time with no experience and no money, it’s a come on. I don’t know. They might’ve had certain type of success in their career starting out, and they could be in the right place at the right time, but I don’t care if someone’s had six months of success with ai. That’s not enough time for me to trust it. I certainly wouldn’t put any money into any algorithmic trading using AI because I came up learning how to run my own systems and building my own models, and I’ve not completely sold on the whole AI is going to change the world thing. I think it’s going to do a lot in replacing jobs, and it could do a lot for client service for sure. That’s the evidence that I could see right now. But most of the traders that I know want to be more hands-on. Very few people want to delegate the decision-making to fully automated systems or even purely systematized trend following models. Most of those people are still even reading charts and figuring it out the day off. So there’s a lot that’s going to have to happen culturally, I think before the whole of Wall Street goes in hook line and sinker, and so you need to be careful, right?
Buyer beware. Caveat emptor. I know for sure that if you have the right emotional constitution and you know that you don’t freak out when you lose money, you do have a chance because that’s something that everyone has to do. Even the guys who are in market wizards had to pay some kind of, they all had to go through some type of emotional hazing to get into the trading frat, and they all had to lose gigantic sums of money, probably a lot more than you’ll ever have to lose, but don’t think for two seconds, just because some guy in marketing tells you how easy it is to do this and that you could make a lot of money and then go to cash, have no overnight risk. I know that sounds emotionally appealing, but it’s very, very, very difficult to do. I do it. It took me a long time to get there.
I know I have friends that do it, and they’re very, very good at it, but no one comes out of their mother’s womb necessarily. With that innate ability, it’s going to take you some time to learn your craft, and you have to think about the time and the money and the effort that you’re willing to spend in order to learn that, because too many people quit too soon. They don’t have the right expectations, right? Expectations have built in disappointments, so just know that it’s probably going to take you several years to really get where you want to be. I know you want to get there tomorrow, but it’s just like a relationship. They take time to evolve.

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How much do you need to start trading? Man, that’s a tough question. I started with like $5-$6,000. I had saved up a bunch. I had done a lot of preparation, watched the markets. I had kind of paper traded, which wasn’t as sophisticated back then as it is now. You have all the software and these different programs and access to real-time markets. You can actually put in the trades and see how you do. That didn’t exist back then. You had to do it all by hand, so admittedly it was a little ham hocked, but it was the best we could do. At the time.
I saved up enough money so that I could buy enough positions. What I didn’t want to do was have such a small account where I could only really buy or sell one particular instrument. I know diversification matters even for traders. I also knew that day trading wasn’t going to work because of the expenses involved. It was too much money. Again, stocks traded in eighths at the time, so you were looking at an eighth to a quarter spread and you were looking at about a quarter commission in and out, so you practically needed to see, depending on the name, between 50 cents and a dollar to make any money or basically to break even. So it was not tape reading and doing that, which I eventually got good at. I’ll talk about that tomorrow and scalping. It was much harder back then. Again, because of the cost structure and this and that too.
You have to remember, I worked as a financial advisor and when you work as a financial advisor, the firm doesn’t necessarily care how much you make for the client. You don’t get graded on that. You get graded on the number of new accounts that you open, the net new assets that you bring into the firm and the sum total of all your commissions and fees over the course of the month. Those are the three things that you’re graded on. Never does it ever come up. Like want to give Michael Martin a big pat on the back this month, one of his accounts were up 15% with only a 2% drawdown. Those conversations never happen inside the wirehouse, and that was in a day when you were actually picking stocks. Now everything is wrapped up and this and that. So what I did, do you have to remember too, I had clients who I was executing trades for as I was learning my craft for my own money.
I was doing very well for my clients and those commissions added up, so I would pinch off. There wasn’t a lot of money to go around. I, I’m sure, I don’t know the exact number because I can’t remember that far back, but I think it was probably like $1400, $1500 a month rent from Manhattan, which nowadays looks cheap. I know for a fact I had a thousand a month to pay some student loans back. I did get some academic scholarships, but I still had a lot of money to pay back. So by the time I had my take home pay, there wasn’t a lot to go around, but I knew if I didn’t grow the corpus or the account balance

Just by making deposits in, I was never going to have a grub steak, but man, I know how hard it was. There were times when after every bill was paid, I’d have a thousand dollars to last me the month, and that included food. That included dry cleaning, keeping my shoes shined, going to work looking good, and that maybe taking a client out for a cup of coffee, meeting someone for a beer meeting, a prospect for the same, and so I had to be very, very judicious with where I was spending my money. There was just not a lot to go around, but I think in today’s day and age, if you had, I’ve spoken about this a few times, $5,000 is not a lot. I mean because what ends up happening is it is a lot of money. Look, I caddied golf bags. I remember how excited it was to see a hundred dollar bill.
I come from a working class background, but what happens is when your account’s underfunded, you start doing bad habits again. I’m going to talk about scalp and tomorrow, but for the most part, you’re relegated to looking at one or two instruments, probably those mini contracts or what have you, because that’s really all you can afford to do is put up that type of margin. You’re probably also hypervigilant of the amount of money, so you’re being overbearing and watching hawking and stalking basically the trades because every little tick really affects your account balance. If you have $5k, $50 is 1%, and so it’s too easy to be down five or 10% with a small account, and that could really affect you mentally. So you start to develop these bad habits that don’t really serve you, but because you’re emotionally a wreck because you don’t have enough money, you start doing them. You don’t know what else to do. Now I know that because I kind of did that too, but I had to learn to keep an inventory, not necessarily a diary and not even a journal, but just keep a mental note of my behavior around my trading so I know what I knew and I would learn what to eliminate and watching the screen all day wasn’t really good for me.
I could see and feel every tick. So what I would do is I’d put my trade on, I’d put on a protective stop and let it go, and I wouldn’t sit there and stalk the trade all day and watch it. That brings up another point. When you have $5k and you’re looking to take risk, $50 to make $150, tell me at the end of the week what you’re making and compare that for all the hours that you put in to minimum wage. Now, I know you have to put time in to learn your craft, but you need to keep track of that because I get the emails and the comments, more emails, not comments on YouTube. The emails are more private and I don’t kiss and tell, but the majority of the emails I get are like, man, I’ve been struggling trying to scalp with $5k for three years, and at that point it’s like, man, you got to give up or you have to try something else that’s not working for you.
To do that in the short term, you need to have a very, very good feel. I know again, you could look over the shoulder and watch the folks who are really good at doing it and understand it intellectually. There’s no doubt about that. So when they tell you the marketers that you can learn how to trade, that’s true, but learning how to trade doesn’t mean that you can trade. There’s a huge disconnect there, and you don’t know it until you’ve tried it. Why do I know that? Because again, I get emails from people who’ve bought every damn training program under the sun, and the response is typically like it didn’t go as easy as they said it would in the marketing and if you’ve got a funny story, you don’t have to mention your name, but drop it in the comments because you all go through that.
Lucky for me, the internet didn’t exist back then, so I didn’t have to fall victim to all the fucking bullshit that goes on with what I see through Instagram, and now that’s ai. They’ll find any new hook to try to separate you from the money, especially if they could make it a recurring, what they call an evergreen continuity business. Those membership businesses are called continuity becomes annuity income for the person putting the show on. It’s like anything else. So I took my money and I divided it up four ways looking even at blue chip stuff, they weren’t sexy names because there wasn’t a lot of sex appeal. Technology was not a big deal back then, and if you traded NASDAQ listed stocks, those were considered very, very risky. They didn’t have the listing requirements that New York did, meaning the New York Stock Exchange, so you had AOLN, which was the first ticker for America Online, which was traded on Nasdaq.
You had Microsoft, apple, Intel. They were a handful of names, but it wasn’t as prolific. Even some of those companies like Cisco or Sun Microsystems that eventually became bigger players during the.com era were small risky stocks post IPO stuff. So you had to be very careful, and I can remember having Jet JetBlue Airlines and trading Wendy’s stock or buying McDonald’s at $25. I needed to stick with quality because I didn’t know anything. I didn’t know any better, and I didn’t want to lose money for doing really, really stupid things. I knew that much. So with $5k, I tried to divide my money up into four pieces and I’d put one piece to work, and then if it worked out, I would add to it and hopefully catch the trend as best I could. Even if it was for just a couple of days, couple of weeks, then I knew I could pay for the commissions.
I was smart enough to know that I knew that I was going to have to pay for my losers out of my winners. I didn’t want to go into drawdown and just take down all my cash, and so I continually added. I traded, I lost. I certainly learned, so I mean, I kind of said it before. I feel like with the trading, the way I was doing it in a very, very mindful way, I did have a knack, but I had to eliminate things in order to get to where my skill was, and I was lucky. I was very, very lucky. I was born with a skill. I have a really good memory. I had a lot of things going for me, but it was only going through all that trial and error that helped me see how to really do it and make money at it, and that was really a process of elimination.
I talked about a lot of those yesterday. There’s probably a bigger list, but go back to the story I kept adding to my account, even if it was $200, it was the discipline and the intention of doing that. I would add, I was committed to my craft. I wanted to learn my craft and learn as much as I possibly could, and then after three years after I got really, really good, I took a look at seeing where if I looked at how my gains or my client and my own account were compared to the commissions and fees, I did the math under a 2/20 structure and found out I could make six times more money if I took profit allocation, which wasn’t permissible inside the firm. So I left. I started working for myself, and I’ve never looked back, but every month when I had a little bit extra, I would put that into the account and I would never mix my savings and my trading.
You can’t trade with scared money. If you are laid off or job was eliminated or whatever, and you think you’re going to just take a pool of capital and trade it and pay your bills out of your trading because you’ve listened to some marketer, I don’t even know who that is, but you can’t do it. You’re going to always be trading with scared money. You’re better off saying, I’m going to take, I don’t know. I would say minimum six months of your overhead. That means if you had $25k and you have $4,000 a month overhead, you really don’t have enough to trade. You don’t want to have to worry about paying your bills because I promise you, you’re going to do really, really desperate things. You will try to sell options. You’ll sell puts just in time for a big correction. You’ll get delivered against when you were accounting on all that money and those options expiring worth. Listen, going into your account and then sweep it into your bank account. I would keep it separate and then fund your account a little bit over time. Sometimes for me, if I had a really, really good month, I could put in $500 to $1,000. Other times I only had $100 to $200, and I’m sure sometimes it was even as bad as $50, but I wanted to instill in myself having the discipline of adding it and making that commitment to my account, but times banned times were lean and losses. When the losses,

It affected me too because then I was like, man, I don’t have a lot of cash to go around. My lifestyle choices are completely humble and very, very frugal. I wasn’t cheap. I had whatever I spent money on, I bought the best stuff. I had custom made shirts, I had Armani suits. You had to look the part. So that was the investment in my career. On that side of it, as far as funding the account, it wasn’t until you get to like 10 K that you got some breathing room where you’re not relegated to have to just trade one particular style or one particular contract. You can’t afford the margin or Reg T on trading certain stocks. So if you’re in that spot and you’re struggling, be kind to yourself, but also you have to be realistic and be very, very practical in that this is trading for a living, especially on the shorter term timeframes.
I’ll be bold and say it’s really for people who have money. It’s very, very difficult to start in this business. If you’re broke and go from rags to riches. I know someone will do it just like someone won the 1.8 billion Powerball more power to ’em, but I get the emails and I know that if you’re an underfunded account and you’re going to try to scalp or day trade, it’s very, very difficult. I don’t mean to sound this way, but someone’s got to be honest with you. I know a handful of people do make it. My hat’s off to ’em, but that’s where the greatest amount of failure is where I think most people go try to trade and they find out the hard way that the daily data, the intraday data is the most random data. So to make important trading decisions, looking at data that’s kind of flaky, like the flakies person that you’re putting yourself in a tough spot, so don’t be angry if you bought into the story.
It’s a lot harder than you think, and saving money along the way is probably going to help you a lot more. Rather than saying, I have a funding account and I’m just going to go with this finite amount of money, and I’m going to look at it like a call option. You want to continue to add to your account to give yourself the chance you are going to lose money, and you want to give yourself a bigger opportunity to look across many, many, many more names as opposed to looking and trying to trade just one particular instrument.

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Man, when I started trading, I had all these preconceptions of what it was going to take for me to make it, and guess what? They were all wrong. I was wrong on every front. In fact, I had to flip them 180 degrees to make any sense out of ’em, which was both humiliating and emasculating at the same time. But the good news is I fell fast. I fell forward, and I learned the hard way I wrote about them. By the way, in the inner voice of trading, you can get the audio book for free. Link is in the description. The first thing that is, it’s almost comical, right? Which is why I say it now because I don’t have any ego. The first thing that I came to find out, which was again, very humiliating, was that indicators are largely useless. In fact, they’re all useless. I don’t care what one you use, they probably make you feel good. I call them emotional. Yes, you can use RSI, yes, A TRI don’t look at that as an indicator as it is a measurement. You know what I’m saying?
And I’ll be, if you have a back test than a study, don’t say nine out of tens. That’s bullshit. So if you have something that’s back tested where you can use an indicator as a trigger that’s better, that outperforms price itself, then please send it to me and I’ll give you credit for it. But for my style of trading, which probably is very different from yours, in many ways, I found that the indicators didn’t help me at all. But here’s the problem with indicators. For the most part, they’re free. You know what I mean? So it’s like, let’s just put ’em on. You got nothing to lose. I can throw on 1, 2, 3, 4, 5, overlay the chart. Sometimes they’re below, and next thing you know, you’re trying to read an eight point font. There’s so much crap on the screen, and I found out I was using them because I was unwilling to feel certain feelings.
And the more personal and emotional power that I developed over time, especially when I was starting out, the less I needed the indicators. I didn’t need to just make sure, because that’s the impulsive side of me serves me well when I have a governor on it. And the governor really comes down to the second thing, which is position sizing. Position sizing, despite needing to sniper entries and all that kind of stuff you make and you lose your money by position size. Your entries, in other words, can be super sloppy. You probably can’t handle that emotionally, right? It makes you freak out if there’s, again, if you’re scalping for small, we’re going to talk about scalping this week. There’s a few misconceptions about it. I know some people can do it very, very well. Most people can’t, and especially if you have a small account, it’s just not worth it. You can’t make any money. But position size was something that I needed to figure out. I didn’t know because back in the day, you have to understand that they would penalize you if you bought odd lots. So if your account was a certain size and you couldn’t afford a hundred

Shares, they actually penalized you, I think a quarter or a flat rate of an extra 50 bucks. So I started to think like, man, these places aren’t really there to help you at all. They’re there to find new ways to fuck you out of your money with all the fees. You think the banks are bad with bounced checks or insufficient funds. I don’t have that problem anymore. Obviously I did when I was a kid, but at the end of the day, they had these odd lot fees, and so now it’s like, man, I’m trying to manage the risk in the most appropriate way. I have funded a certain funding in my account. I think I started like five, $6,000 before I really started trading full time. And I just came to realize that the position size, there’s a couple of ways that you could make big money.
I wasn’t interested in making peanuts. I needed to make big money again because of the cost structure, right? So go back. You have to know your history. You can’t judge me based on today’s data. It didn’t exist back then. I was already in the business for six, seven years before Decimalization even came about. Same thing for the ein. It didn’t exist when I started. So you find that you have a small position and you hold it for a longer period of time for a larger move, you can make big money. That’s kind of what I fell into, is buying good instruments in trending markets, holding them for as long as I possibly could in stocks and futures. The other way is to take a monster position and try to scalp it for a smaller move over several minutes. You can do that too, but you need to have a fantastic sense of timing.
If you watching people over the shoulder, that’s great. You could look at it, you can see it. You could learn it intellectually, but that does not mean that you could pull it off by any stretch of the imagination. Accuracy is a mind fuck. Like I said, that was number three, the accuracy game. You kind of come in from an academic standpoint, and you’re used to being, right. Nineties are better than eighties are better than 70% test scores. But you find out that slippage tells you a lot about the type of trade that you’re in. It tells you a lot about who else is there, right? The last thing I want to do is put an order for 200 gold contracts on the floor and get everything filled at one price. That’s a big problem. You don’t until you get there, you don’t know. But getting super clean entries is not necessarily the goal.
To me, that’s an emotional issue, not a financial one. So I stopped caring about being correct all the time, and I knew that if I was right, say 30, 40% of the time that I had to learn how to expected values and mathematics of expectation apply to trading because it didn’t occur to me naturally. I knew it because I had studied it in school. I studied econometrics with Febu Drime, who’s legendary in econometric space, rest his soul, and I’ll give you an extra one. The fourth one is that if you can catch the moves early on, you only really need two or three, maybe four trades the year to make your year if you know how to position size accordingly and stay in the moves for longer periods of time, right? If you look at some of these guys who compete, they’re not scalping in these contests.
They’re putting and using leverage, and they’re dividing up their capital. They’re putting for every a hundred grand, they’re trading 200,000 a capital with $50,000, position sizes with a hundred thousand in equity. That’s how they’re making these monster gains. They’re not day trading it. They’re position traders effectively building into positions and letting the names move. So if you can catch a handful of those over the course of the year, they can really make your whole year. You don’t need to fuss about knowing what’s moving every single day. A $5 move doesn’t necessarily mean that that’s a missed opportunity for you. So you have to do your diligence, you have to manage your lists, and you have to use alerts. These were all very painful lessons because the opportunity cost was high, as well as the actual financial losses. But all of that stuff goes into the tuition part. You have to account for the emotional growth that you’re going to go through, because trading is going to push all of your buttons. Whatever your biggest character defect is, trading is going to find a way to put you face to face with that. So you might as well make friends with it.

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Hey everybody, it’s Michael Martin. Thanks for being here. So I get a lot of questions about where do I put my protective stops, especially if I’m going to add to my winners. Now I have two pieces and I have to account two pieces of risk. How do I account for that on the mathematics side? Well, the good news is that the math doesn’t really exceed fourth grade math, at least in the state of New York. You’re looking at some basic multiplication, a little addition. So let’s take a look at something I’ve put together for you, and that is a bit of a study chart here. Say you had a million dollars, you have to make some assumptions. You risk 5K, which is one half or 1%. In this column we have at least for futures, you have to normalize the risk, right? Because you can’t trade two contracts of everything as we’ll see in a moment.
So we put in the standardized sizes of the contracts, and then we look up what the prevailing volatility is as measured by the 20 day a TR. And after everything is said and done, you’ll see the number of contracts that would work out for the respective risk that you’re willing to take. It’s one of the reasons why in commodities we don’t really use tiers because as you can see, two crude oil contracts is equal to five sugars, which is equal to 16 corn, even though the contracts are different in terms of the size, they’re equal from a risk standpoint that a person’s willing to take on the trade. The other thing we need to remember is that there’s an inverse relationship between the number of contracts and the prevailing volatility, the risk that you’re willing to take. So if the risk on crude went up substantially, it would affect the number of contracts.
So if this went up to say $4, it would cut. We can’t have 1.25 contracts. I suppose if you were using micros, you could find out combinations, but ultimately we can’t do that here. So let’s take corn for an example. Let’s say we were going to buy one risk unit. You could do risk on and risk off, which I’m sure is how a lot of folks do it, and that would be where you basically put on you position, you buy one risk unit and you risk 6 cents. And if you do the math, you can figure out what that all adds up to. Roughly 6 cents is 300 a contract times 16, and there you have, it’s probably 4,800 bucks or something, which is within your $5,000, one half of 1%, but there’s an inverse relationship between that. So if some of you are a little skittish on putting the entire position on all at once, that’s okay.
That’s understandable. Maybe you want to actually cut that in half so you can do the math in your head. You can buy eight and risk 12 cents because the math will still work out. As long as you cut your position size, you can use your same entries to get long. You would just give it 12 cents on the downside, which would make a lot of sense. You could obviously keep doing this just for fun and risk 24, you could do blah, blah, blah. Keep risking accordingly and give yourself an enormous amount of room. But here’s how I do the math in my head is I know if I buy 16 contracts at a particular breakout, stop by, stop on the breakout. I know that every 6 cents that the thing moves, it’s going to pay me my one half of 1%. If you cut your position and you’re buying eight, then obviously if that’s what your R is, then the 12 cents makes up your R, right?
So that’s kind of how I do the math in my head is I calculate the position size and then I know calculating where my protective stop is. I understand then what my portfolio is doing. This is one of the reasons why, and it’s how you can train yourself to not look at your p and l during the day because you can just look at the change in the price and you could do the math in your head, right? Don’t be so excited to take your gains too early. You’d be happy to be there in the first place. So again, some of you might have a bigger appetite, you might also have a really good sense of timing. So you could technically buy 32, which would be doubling this, but then you’d have to cut what your risk is. Now that can be done, but the way I look at six sense right now on corn is that’s the personality of the contract.
That’s what I could expect it to do on any given day without necessarily being directional. So if I try to buy any number of units, even 16, I could go back to my original adjusted risk unit of 16 contracts. If my stop is at three, you could be getting stopped out based on the noise, right? Because again, six is the prevailing vol of the day. Some of you might have a very, very good sense of timing, more power to you, I do too. It’s just that you don’t want to get knocked out of what could be a good trade just because you’re putting your stops just way too tight. So what that would look like in the grand scheme of things, if you were going to enter an order, you’d buy 16 corn at four 50 on a stop, and then as soon as you got filled, you’d risk that 6 cents and you’d put an order in to sell all 16 at 4 44, which is 6 cents below, no problem.
That’s basic math, right? You did a little multiplication and division to figure out what your deal was, and then calculating your protective stop was just that damn easy. Some of you might want to get into and piecemeal your way in because that’s more your temperament. So your first breakout, you could do the same thing, but you can buy half as much. Knowing that risking one half of 1% is your optimal size, you might find that it’s better for your temperament and your personality for you to kind of step into it one piece at a time. So you say you cut the thing in half, you can buy eight corn contracts at four 50 knowing that you’re going to add, right? Because obviously if you bought eight, which is half, you could give the thing 12 cents. We know that. But if your intention is to add, then you still have to honor your 6 cents, and that’s where you would put in your initial stop at 4 44. Does that make sense? So then if you were going to add, you would basically come down and add another eight at three a TR above, which is 3 cents above, which is one half of your A TR, and that’s been proven. That’s already in the public domain as where’s the optimal spot to get into your trade. And then at that point you would put in your protective stop 6 cents below that, you’d put your protective stop six inch below that point, and then you could stagger them accordingly. Now again, the math works out the same.
This really comes down to taste and preferences. I am kind of one to stagger in, but usually when the party’s over, I tend to want to puke the whole thing out all at once, and that would look more like over here. Where are we? So we can fill in some of this stuff and buy 4 50, 4 53. Then you could sell it. But then you could also realize that ultimately it’s really just one big glom of risk altogether. It’s really how you mess with the numbers. This would be the way in Chicago Board of Trade, this would be the average cost of 4 51 and a half, because the last digit is the number of eighths because they don’t have room on the board to write fractions. So in corn speak, you have your average price here. That would be $4 51 and a half cents on average, and then you would sell 6 cents below that.
So all the math typically works out. You can kind of do this on your own, put together your own sheet, start to mess with the numbers a little bit, and then make adjustments. Then as the thing moves higher, say it goes to five bucks, you would just trail your stops accordingly. You could say, alright, I’m at $5 on my first eight that I bought. I’m up 50 cents, but I’m going to trail with 6 cents. Stop. So I would be at 4 94, and then I would do the same thing here. Just protect your capital the same way. Just drop it 6 cents below. That’s the one. Or you could do the average cost method. It’s all a function of what feelings you want to feel. I’m not one to feel regret myself.

Let me say it to you this way. I’m not someone who feels regret. So if I have a position on, and I’ve scaled my way in, I tend to sell everything all at once. I think I usually tend to get out when the getting’s good. However, sometimes you get knocked out, it consolidates and then it starts to break back out to the upside. So you just buy again at a higher price. That doesn’t mean that’s a bad trade. You’re paying more. You did the best you could in real time to protect your cash, which is job number one. Your job is to play century and guard your cash, right? You’re trying to defend against losses. When you could make money, that’s great. You want to stay in them for as long as possible, but at the end of the day, sometimes you get knocked out, and that’s just the way it goes.
Tomorrow, you get knocked out of a trade Friday, you might find Monday’s open is strong, so you got to get back in at a higher price. There’s nothing wrong with that. I think, I don’t want to sound this way, but you got to get over that, right? Because lower prices don’t mean better prices. You put too much judgment on the number, the number’s just relative. So say you did that and you got stopped out of everything at five bucks Monday morning, it opens at five 10 and you’re making new highs again. You don’t know that it’s not going to six or five 50 and the way I think in my mind emotionally, if I look at getting long at $5, 5 0 5 or $5 10 cents, and then I look at, and I can envision a target price. I don’t use targets, but if I see that it stalls or even just evaluate the position at five 50, what’s the difference between five 50 minus 5 10, 5 50 minus 5 0 5 or five 50 minus $5?
The answer is nothing. There is no difference. If you’re counting pennies like that, you’re either cheap or you’re not thinking big enough. It doesn’t matter what your basis is. What’s important is your position size. That’s where we make our money. Your entries can be fantastically sloppy in the grand scheme of things, so throw out this nonsense. Look, if you’re scalping for a hundred bucks, yeah, it probably matters, but I’m talking about making real money not peanuts. So don’t get so fussy about your entries. To me emotionally, there’s no difference between 5 0 5 and five 10. If I’m going to sell the whole position at five 50, it doesn’t matter. I let that go. It gives me a lot of liberty and a lot of emotional control to not get so uptight about my entries when I’m adding to my winners. I don’t process feelings that those higher prices are inferior, especially if I had been in the trade at four 50 and I got stopped at 4 95, 4 90, that was me just trying to figure out and protect my capital when the markets had moved.
New data will come into play. Then I’ll have to adjust my thinking, but I’m not so rigid into saying like, oh, I can’t possibly pay five 10 because I already was in at four 50. That trade is now over. It’s in your past. There’s nothing to rue about or lament about. You were in the trade. You made your money, you got out. Now there’s new data that you have to assimilate into the trading, and if it starts to make new highs, you might as well participate. You can’t sit there and watch it go. Now, every account is different and you have to follow the parameters of what you’re doing and trying to make money at the same time. Follow risk, right? For example, it’s very difficult if you’re looking at trading some certain futures like coco, for example, which has been on a tear. The thing doesn’t have any daily limit moves. So while you can see it make monster gains, you could easily wake. If it’s up 500 points in one particular day, I promise you, when the moves are over, you might see days where it’s down a thousand points in a day, which is typically how it happens. So you have to kind of position size based on what the worst case scenario is, and take this work a step further. Anyway, you like this video? Take a look at this one.