Master this crown jewel of trading to improve your profitability

Hey everybody. Happy Tuesday. I hope you’re doing well. Like I said, in case you missed yesterday’s episode, we’ll have episode obviously today. I’ll be here tomorrow with Ganja. Then I’m going to be off Thursday and Friday. I’ll be back this coming Monday. So following on yesterday’s episode, I’d like to talk to you about when people meet me, they’re like, I don’t understand. You have these monster positions on and you wouldn’t even know in meeting you that you’re managing all this risk. And I always think about what does that mean managing all this risk? Because just like you have car and automobile insurance, I always look at my protective stops as being my insurance against the runaway market. If it should suddenly turn on me or if it should just weaken sufficiently to knock me out, I usually think I have my stops placed in such a way that they’re not so tight where the average noise of the day won’t smash me.
And so that always comes down to position sizing, but I’ve always said that that’s where we make our money. It’s not so much about the entries or the exits really, because all of those numbers are kind of relative to your position size. And so I think in some of the coursework I’m putting together on actual trading tactics, I’m going to just show you how you can look at the same risk but in a different way. So this way you can process your feelings around it because ultimately it’s like thoughts, feelings, actions. So it’s very difficult if you don’t have emotional mastery to trade really well because where you place your stop is going to always be based on you following your emotional system, not your trading system. So I think I just learned to do, I figured having, well role models for sure, but if you want pro results, you have to do the things that the pros do and it speaks to consistency. Consistency means doing pretty much the same process over and over and over despite how you feel. And coming in towards the end of the week of doing jiujitsu all week, I trading six days a week, so the fourth to fifth, the sixth day, which is Saturday, we’re off. I don’t train on Sunday. On those days I’m feeling my age feeling beat up. That’s the way it goes, and I don’t want to go to class on certain days, but I don’t make that decision up based on how I feel. My commitment is to go to class every day

If for no other reason just to drill and to learn new technique. And so no matter what I’m feeling in my body or how my body feels, I’m leaving and I’m getting there early as another, I’m not going kind of drag my ass and then get there 10 minutes late. I don’t feel like going class is at six o’clock, it’s 10 minutes from my place and I’ll oftentimes leave at five 20 and I’ll get there by 5 30, 5 40. So I’m still 20 minutes early despite feeling like I’ve been getting my ass kicked all week, which is whether you win or lose, you still feel the impact of grappling. So in trading you can do the same thing no matter how you feel. Just follow your rules. You can feel all your feelings afterwards, feel the feelings on the weekend. So in the middle of the week, the best thing that you can do, and I talked about we knew Ken Za, the late great baseball mental coach for the Cubs, and then I think he did a few other things, but he was a great guy, lived in the South Bay and he would talk about baseball and he’d say, look, you get up.
The best thing you can do is put your best swing on your pitch. You have to control the controllables, not sit there and wonder of all the different ways that the market or the trade could work out, even though you’re probably very bright. And yes, you could say that you could win, you could lose, you could break even the reasons why any of those scenarios would play out are probably too numerous to delineate. So instead of even thinking about that, to me it’s like, who caress? As long as you have your protective stop in, I don’t care why I get stopped out. If a trade either getting my original trade gets knocked out, it never made me money, or I made two or three or five or six or whatever it is, and I put my trailing stop and my stop knocked me out, that’s what it’s supposed to do.
So all I really think about on any given day is moving, entering or adjusting stops, and the one thing I don’t do is if I’m long something and it starts to tick against me a little bit, I do not renegotiate where my protective stop is, that always stays in place because I’m not afraid to have, and that’s going to happen too. You’re going to get knocked out, it’s going to rally back in your face. You might get back in, you might get knocked out again. In fact, that happened to me in the very first few months of when I joined the trading tribe. I was in soybeans. I’d get in, I’d get knocked out, it’d rallied back up, I’d get back in, I’d get knocked out, and this happened quite a bit of time. I was trading 2% risk units, so I was like, strange stuff ain’t working. So obviously that’s being facetious. It’s kind of an inside joke, but

That’s going to happen to you and look at me now. I’m still standing. So I think your reluctance to feel like these things that kind of happen to everybody might be actually holding you back. Remember what I said, the feelings that you want to feel are on the other side of the feelings that you don’t want to feel. You bite your nose to spite your face if you don’t invite all that in, because that’s part of it. Doesn’t mean you suck, doesn’t mean you’re an idiot and you can, again, if you want to flagellate yourself, by all means do that. I just know that winning traitors, don’t sit there and lament.
It takes hours of time. You put on the trade, you’re going to get knocked out. You feel like you wasted your time. That’s the way it goes. That’s part of the business. The best thing that you can do is control. If you want to be self-contained, just put the risk on, put your stops in. You have the benefit of not even have to look at the screen. Now, some of you are trying to figure it out within the middle of the day, so I get it. I just don’t think that you necessarily have to do that. I think you can know what your levels are before the day opens and put your orders in accordingly, and then you could go out and do fun stuff. Your orders are already in for the day. It frees up a lot of time and you can find yourself almost living two different lives because once your trading stuff is handled and your orders are in, you just have to wait for the market to come to you.
You’ll never chase. And if the market levels don’t get hit, you come back, enter the same orders the next day and just do that over and over and just repeat that process. The best thing that you can do, that’s the only thing that you can control is your own behavior. So put those orders in, you’ll stay calm and then focus not on what you don’t have, but what you can do, which is just move your stops, enter your stops and then adjust them. There’s one little caveat that I should mention and that is oftentimes if I put a trade on, I’ll have immediately, as soon as I get filled, it’s like a hair trigger response. I know guys are a little sensitive to that, but I automatically put in my protective stop. Now, I will on a discretionary basis use a times stop, which means if I’m long something and I need obviously right, there’s only three things that can happen. It’s going to go up, it’s going to go sideways, it’s going to go down. But normally if the momentum stalls, like my timing is bad because after 35 years, I think my analysis is okay, it serves me. It might not be as good as yours, but it works. Mine works for

Me. Say it’s a Monday, if I’m not making money by Tuesday’s close or even like Wednesday’s open, then I offset the trade because the momentum has stalled and that can mean that weakness is there and that the buyers have stopped showing up and when it stalls at that level and everybody in the world is looking at the same instrument at that price and new buyers aren’t showing up to take advantage of what I anticipate would’ve been a lower price compared to where it could be in the future, then I use, that’s called the times stop. So my price isn’t hit, but I do offset the risk and more time I have a good feel for the market. More times than not, the thing does start to weaken and leak, and so all I’m really doing is preserving that R number because eventually if I let it go and if I’m up a lot, sometimes I’ll sit on it.
I admit that doesn’t sound like it’s consistent behavior, but it is kind of relative. It is a discretionary trade. So I did say that at the beginning, but those again, the best thing that you can do is let the market come to you, put in your buy stops above the market, put your sell stops in below the market, add the risk to your portfolio, and then instantaneously have a rule to put in your protective stop, and that’s the best you can do. Watching it all day isn’t going to steer the market. And two, looking at the screen may induce you do take an action in the marketplace when you really have no business doing so. Why would you do that? Well, let’s say that you’re in a drawdown and you’re emotionally, you’re feeling some negative emotion. I always think emotions are good. All of them are good. So I kind of contradict myself there, but you’re feeling a feeling that you’re not comfortable with. Let’s leave it at that, and you do show a gain after being in the drawdown. You might be induced to take that winner just for the emotional win. So again, go back to your goals, which should be the things that dominate your behaviors. Like what are you doing this for?
Are you doing it to feel good? Are you’re doing it to make money? Because oftentimes the financial decisions and the trading tactics that you have to deploy might not necessarily feel good. That’s why when I speak to you about these things, it’s about simplifying it right down to the simplest iota of human behavior, which is no more technically challenging than filling out an email. So think about this as you want to invite more abundance is stop worrying about where things are going to go. You already know where they’re going to go. They’re going to go up, they’re going to go down, they’re going to go sideways

And don’t overcomplicate things. The only thing you can control is adding the stops to the marketplace for them to get filled where you add risk to the portfolio, and then as soon as you get filled on those, you enter your protective stops to remove the risk if things don’t go your way. It’s super simple. Don’t overthink stuff. The worst thing you could do is start thinking about price targets. That’s the other thing in these zones. I don’t know who comes up with this, but to me it’s very small minded thinking because then again, it induces you to think that you have to do something where someone who has a position for a hundred dollars move in Nvidia has watched these zones kind of come and go, and they sat right in the trade. So to me, the only difference between the person who’s taking smaller gains and the person who’s taking bigger gains, again, comes down to mindset. I want to blow through all those. What you would think is selling zones or taking profit zones, I’ll sit through those, let the small traders take those gains. I’m staying in for the bigger move. That’s a decision you can make.
So make it, it’s yours to make. You’re in the trade already. You’re making money. There’s no guarantee that the thing’s going to disappear tomorrow. I don’t know. There’s no written rule that says, oh, once you hit the three R profit rule or profit zone, you better be careful. You better take those gains. Nobody in market wizards has said that, so you can kind of set yourself up accordingly. Honestly, these are just meditations today and yesterday’s episode of just more like how can you do these simple little things to investigate? How do you feel around the uncertainty of trading? Because most of this stuff is mindset, and you can make up in your mind that you want to make 20 times your capital. The tactical part of doing that is easy, but you have to make up your mind that that’s what you want for all your work.
Remember I’ve said, what do you want trading to do for you? How do you want it to serve you? Do you want it to captivate you all day where you’re sitting in front of your screen and doing it like crossword puzzles? You can certainly do that. You can make this a blue collar job if you want, easy. Most people do. I would prefer to have a higher quality of life myself, but to each their own. Anyway, I’ll be here tomorrow with Ganja. That episode was recorded last week, but it’s ready for tomorrow, so I won’t see you until this coming Monday. I want to wish you all a happy Thanksgiving if you celebrate and a good three or four days off perhaps from the market. I’ll see you Monday.

Subscribe to the show  

Click here to  get your free copy of The Inner Voice of Trading audiobook.