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This is an automated transcript
Click here to get your free copy of The Inner Voice of Trading audiobook.
This is an automated transcript
So I want to address a reader question that came in. It’s like, well, when do you know to, where do you know to put your stops? When do you know when to do it? Well, obviously you put your stops in right away, but I think really the question is how do you know the difference between a pullback and a correction? That’s really the question because the math of entering your protective stops and then adjusting them higher is really all fourth grade math. At least it was in New York state. But what happens is people start looking at charts and they start trying to uptime and downtime is if that is going to give them information and listen to me very closely, you cannot prepare for a trade on the fly if the market is open and you’re trying to sit there making decisions, especially when you’re newer, you can trust that your instincts are going to betray you.
The more you can understand that. Now, take a week off from trading and just understand that you are the human being at this stage are the weakest part of your trading. So was I, right? So this is not a kick in the head that overthinking things at the exact wrong moment typically isn’t going to serve you. It will relieve you of the stress of having a trade on. But if that’s your approach, I would take some time off from trading and understanding that there’s a different way to look at risks. There’s good risks and there’s bad risks. What are bad risks? Risks associated with overtrading because commissions are free or nil, you’re doing 13 trades a day, too many. There’s not that many markets that are trending, and unless it’s at a bright spot where the things that you are in are really, really trending and you’re adding to your winners and adjusting your stops accordingly, there’s really not that many orders to have to enter.
So I don’t, there’s nothing really as far as I’m concerned, that you need to do to prepare on the fly or to try to make a decision on the fly. Everything that you need to know how to do, you can do the night before or worst case scenario. If you want to be less prepared for the day, do it the morning of. But I’m not a guy who’s trading news headlines. Even if I’m in a winner and a negative news headline comes out, I don’t adjust on the fly for that because I watch the price. How is everyone else behaving? Because I know what my risk is and I’m comfortable with what my risk is, whether it’s my initial one half or 1% or it’s one half of 1% after I have a big gain. I don’t sit there and try to interpret that information and start holding committee meetings and for the love of God, I don’t want to be on a headphone listening to other people talking about stuff.
I don’t need anyone else’s opinion because I’m comfortable with what the risks are. How long did it take me to get to that spot? Well, pretty damn quick actually, within a year. And I was a guy who was trying a lot of things because I knew I had to experiment with real money in order to figure out what was my process, what were my chops, chops like my trading chops, what were my techniques for artists, their gestural marks for Van Halen. You know what it sounds like when he’s playing, right? Same thing with the edge from U two or Andy Summers of the police or Alex Lifeson of Rush or Steven, how of yes, or Alan Holdsworth or my teacher Mike Stern. You listen to them, they’ll have signature sounds and that comes from doing a lot of playing with their guitars plugged in and the amps on.
And so likewise, you have to do the same thing. You have to trade with real money, figure out how risk feels for you, and get used to feeling good when you have risk on and the market’s moving in your favor. Okay? I got tired of taking small gains because it didn’t move the needle enough for me. So I used that real life experience to change my behavior because I needed to make more money. I couldn’t care about when I started. Total return on the s and p was 12 point a quarter percent, and it was about 10 for the DAO at the time. If I remember it’s going, there’s cobwebs up here.
And so I was thinking like, okay, what’s alpha versus beta? Well, beta could be market risk. I also kind of look at it as the return that you get with market risk. If you were to buy and hold something that’s very, very public, like say the s and p 500, the alpha part is what you can do from your own ingenuity as far as I would know, above and beyond buy and hold. That’s what is unique to you. That’s what you bring to the table as a trader, money manager, portfolio manager, whatever role you might be playing Prop trader, it doesn’t matter to me. Titles really don’t mean much. It’s all the same thing.
And making, say I outperformed the market and I did 15% when the market was doing 12 on average. Forget about even relative returns, you’re still losing money. Relative return would be like, well, the market was down 10, but I only lost three. Well, I don’t get paid for losing money. So that’s what brokers do at the wirehouse. It’s like, well, we outperform the market, our diversification, all that stuff matters. And it does kind of matter. Realizing that diversification is risk reduction, not risk management. So you say to yourself, well, 15% market did 12. Look at me.
That feels good for two minutes. Like a girl winking at you on the subway platform on your way home to see your wife. So that matters, like I said, for about seconds. And you realize 15% rate of return on a $5,000 account. I can’t really get a ticker tape parade for that in the Canyon of heroes in lower Manhattan that it’s not going to work. So I needed to think, I was talking about Tuesday. I needed to demand more from the marketplace, but I also knew that I had to do the work, which meant I had to do good analysis. I had to throw away things that don’t work point and figure charts. I had to stop trying to trade more frequently again because the commission structure and the bid asks, spreads were all in eighths and it was very expensive to trade. Short term. We had probably a quarter in the bides spread and at least an eighth markup on the way in and the same thing on the way out. So three eights twice means I needed 75 cents on a stock just to pay for the damn trade. So the short-term aspect of trading and even reading the tape, which I became very, very good at, was not my cost structure to my business was too high if I was working as a prop trader inside Bear Stearns, for example, different ball of wax.
But that wasn’t the case for me. So I had to find a methodology that worked and I had experimented with real money getting to the point where I was like, man, I don’t mean to sound greedy. That was the second stage was, I need to make more money, but I don’t want to be greedy. I don’t want to be reckless and I don’t want to make stupid decisions. But I really had to think 50 to a hundred percent rate of return to move the needle. Why? Well, because each and every week we got paid once a month. And so it was like, again, I had a couple hundred bucks in my pocket and two weeks left of the month, and I was really tired of that. So I said, well, which feeling do I want to get rid of? Do I want to still feel that feeling of being dead ass broke or do I want to feel the feeling of taking small wins and having those emotional wins but still no money? So you get to decide which feeling do you want to feel more frequently? Which one do you want to mute?
And I said, I can’t celebrate small wins because it’s not moving the needle for me, and I’m still having these two week issues coming into the end of the month. Again, this is going way back to when Adam met Eve and was looking at the apple, I suppose when I was starting out. And so I needed to find better behavior. That means I had to get used to stuff being very, very different quickly, and there’s no one to cry to. There was no there one to reach out to. It was me and my higher power, me and my maker and a couple park bench days and long walks through sheep’s meadow and the great lawn for play in Central Park in New York City. So I said, if I’m going to do this, it has to make sense for me financially.
It has to be worth the effort, it has to be worth the angst. All of that stuff has to pay off for me. So it wasn’t a big window that was maybe, I can’t remember exactly, but six months to a year. But I remember it being quick because I was like, I can’t afford to take small gains because it’s not moving the needle. IE my account balance enough. So I had to think bigger. I had to think about getting into moves that were going to sustain. At least they had the opportunity to sustain themselves. And if I got knocked out, I got knocked out, the only thing I could do was manage my risk in real time, and that was with my protective stop order.
And I didn’t fuss about slippage and skid and use limits or this and that or better because that again was fear-based and I didn’t care about slippage. If it was time to get out of the trade, the idea is to get out of the inventory. Don’t worry about the damn price at that point. Some of you try to get too cute with like, well, I can’t take the slippage and skid and I’m unwilling to sell it there. Well, good. That’s how you invite bigger losses. To me, putting limits on those types of things is you end up losing more when the thing goes down because now your limit can’t get struck because it’s way below or way above deal with the slippage and skid because that’s going to be a smaller number when your stop gets triggered and the order becomes a market is a market order. That’s how that works. When stops get elected, the order becomes a market order and you get filled next in line. So the slippage and any skid that you might have at that point is going to be minimal compared to whether you’re hanging on for dear life with another price qualifier where you need the price to be a certain level. If the market starts moving sharply against you, get the hell out. Just as an aside.
So again, going back to Tuesday’s lesson with today’s lesson, I needed to move the needle because I was tired of getting into this comfortable routine where I’d come in, boot up the machine, look at the things, do this and that. You can get into this rutt of behavior that makes you think you’re being productive, but you don’t have the results to show for it. These are the results right here. And I was very honest with myself in saying, I’m doing all this work, but it has to add up to something, and that means my account balance has to go up at a sharp angle. It has to go parabolic. That’s what I was demanding from the market because I was putting in the hours I was doing the work. Then I quickly understood that my behavior has to be aligned with what I’m thinking. And that happened very, very quickly.
It felt weird, but it all felt weird to me. I didn’t know I had no experience, so I had to be ready, willing, and able to invite all those emotions into my life. That’s how I got onto this. I always had a strong inner voice from when I was a young kid, but I always was reflecting like, why do I feel this way? Why do these feelings come up? Well, because they’re all new experiences and new experiences are always going to give you some type of emotional response. Sometimes they’re going to make you feel good, sometimes you’re going to be scared, sometimes you’re not going to know what to say. So you give it the catchall phrase, the cul-de-sac of all emotions. It feels weird, which is kind of a bullshit way of explaining things. And I wanted to have more integrity with myself, so I used much more colorful language language that’s not appropriate for mixed company.
So it wasn’t that I was hard on myself, I was just very honest and said, okay, how do I conjugate this behavior with what my goals are? And if there’s a variance there, it’s probably because of an emotion. And that’s where I started to think sometimes the feelings that I want to feel are on the other side of feelings that I’m feeling right now, and they’re really strong and they make me want to turn around and go this way because safety feels better. But safety means no risk. Reward comes with risks. So are you taking emotional risks? Because for the younger folks out there, if you are 24 to 34 and you’re trading and you’re afraid to lose money overnight over the weekend, I’ve got good news for you. The majority of the money that you’re going to make in your career are in the years before you, not behind you.
So whatever you lose in the market, you could still earn back. It’s time to let go. They say, let go and let God praise Jesus. So I needed to get comfortable with those uncomfortable feelings and say, this is what the pros do to make the money. Somehow they get comfortable. And I could remember being in trades, adjusting my stops, and literally I’d have to leave the office and go walk around the block to get out of the nervous energy, do whatever it takes. But I wasn’t going to undermine my own success by trying to overlay an emotional strategy to a good trade and knock me out of an otherwise good market that was making me money because I knew at the end of the day, all my activity had to go add up to me growing my account in a parabolic manner, and that’s what I demanded from the market.
I also had to demand that from myself. Those were some, I don’t want to say growing pains, but those were the things that, that was the hazing of it. That was the emotional hazing is you need to find a way to calibrate your system. This is my system with your behavior and what the market’s showing you. And all three of those things need to be aligned. Don’t get used to taking small gains. You’ll get way too comfortable and never make any money. And I didn’t care again about making 15%. If that’s the way the chips fell, then that’s the reality. But that wasn’t my goal making 15% when the s and p was doing 12 and a quarter on average. You have to think one, two, 300% and think that that’s possible. And if you aren’t trading short term and you have your numbers, you can calculate the expected value of a trade, then you can use Kelly criterion and kind of figure out how many trades do you have to put on in order for you to hit your goals.
You might come to the realization that what you’re doing feels good, even if you’re making money, but you’re not going to come close to hitting your goal. And in my mind’s eye, you might not even be getting paid what you deserve to be paid, but you will be rewarded by the universe commensurately, no one makes millions by taking the easy way out and by easy way out. I don’t just mean the physical activity, I mean the emotional way. It’s two payoffs to every trade. It’s true for everybody. Kovner, Paul Jones, everybody. There’s payoffs, no one’s immune. Anyway, I appreciate you all being here. Please like and subscribe as Ganja says. And if you haven’t already gotten a copy of the audio book version of The Inner Voice of Trading, you can get it at Martin Chronicle in the top right corner. It is for free. And that’s it. I’ll see you all here tomorrow.
Hey everybody, it’s Michael Martin. Hope you’re doing well. Normally you have ganja today, but we couldn’t get our schedules together. His professional stuff, my professional stuff, we couldn’t figure it out on the schedule, so I’m just doing today by myself. He’ll be back next week. I wanted to say thanks to a bunch of folks who have written in and I don’t like writing stuff down, so I’m just going to trading leprechaun. Thanks so much Driftway Auto, I appreciate you. Thanks for writing and you are a great love watching you. Appreciate that OMG. Want to say thank you. Then Raj said The best philosopher on trading is right here and now in front of me. What a strong mind you have, Michael. Thank you very much for saying so and as far as, so there’s a lot of that stuff. I don’t want to bore you, but I appreciate all the feedback. I do read all the comments and where I can say something halfway intelligent that will help you. I do. Otherwise, I don’t want to pontificate and start speaking about things that no one really caress about.
Tessa, I have watched through every video because of how much value you add. I’m in my second year in beating SPY. I have benefited greatly from your lessons forever grateful for you, taking the time and expertise to perfect the craft of presentation. Your experience really comes through this dharma, the dharma and the sga. So let’s talk about a few things. There’s a few things here. The first one is appreciate your efforts, Mike. This is from Ronnie. Appreciate all your efforts, Mike, and it’s a comment on the best way million dollar traders let winners run. Appreciate all your efforts, Mike. I’m struggling to book losses. I generally keep a target of 5K, but generally exceed it. How do I mentally prepare to book the loss? Well, I think before you sit down and you start thinking about ideating your trading ideas, you have to always revisit this whole concept that we have where trading is probabilistic.
So another viewer wrote in and said, I took a couple of hits this week and I’m like, that’s the wrong language to use. No one’s taking any hits. What does that even mean? Losses hits, losses are not hits. Losses are what you expect probably 50 to 70% of the time. So why is that a hit if it’s the most frequent aspect of your trading? I don’t understand why people use language. It’s either that they’re lazy or that they haven’t really taken the time to put the thought in to what it is that they’re actually doing and it’s not a dig. But you have to understand the whole reason I’m sitting in front of you today and having had the experience that I’ve had is because of language. The language that I choose to use in my inner voice that has to be omnipotent and omniscient.
Your self-talk has to be very powerful. If your self-talk is weak, your behavior’s weak and don’t make me bore you with what happens with behavior. We all know where that ends up. So it all starts with your inner voice. That’s why I wrote the inner voice of trading and that’s why I filled the book up with nothing but what you would think of as failure. I had monster winning trades. I was in sugar went up 200% on a price basis in oh 5 0 6. That trade’s not in the book because no one needs another frigging jackass writing about how he was 26 and he made $7 million working 20 minutes a day. It’s not believable and it’s not something that you could likely replicate. So more power to the people who are succeeding, but again, it’s not for every man, every person so to speak. So mentally preparing for the loss, easy way to do that is to look at the results that you’ve gotten and look at the frequency with which you lose.
Now, you might have, there’s two R words that begin with R reluctance and regret. You have reluctance to take your losses at the $5,000 spot, which is easy enough to do. You can do the math, I’ve said it before, it’s fourth grade math, and you can do that very, very easily. You’re reluctant to do it. Why? Well, because you don’t want to feel regret. You haven’t come to have peace around regrets. Where does the regret come? You put in your order. You buy something long, it works against you. You’re at your whatever, the 5,000, I don’t know what percent that means. You should always be thinking in terms of percentages. You get stopped there and then it comes back in your face. If you are reluctant to feel that feeling, it’s going to dominate your behavior. So you have to find a way to make friends with it because I’ve been trading for over three decades and that scenario is going to play out.
So if you know ahead of time that it’s going to play out, you can’t build your trading around that as something to avoid because sooner or later, whatever feeling you don’t want to feel, the market is going to gyrate in such a way to put you exactly in that spot probably very, very frequently so that you can figure out what that feeling is trying to teach you. The same way if I said, man, I can’t believe all the Teslas I saw on the road on my way to your house, and then what do you start doing? You start looking and noticing all the Teslas and they were always right there in front of you. So again, choose your words very carefully because then the more you recite them in your brain, in your consciousness, the more you highlight them. Losses aren’t hits, they’re part of your journey getting to profitability, and again, if you have anywhere from 30 to 50% accuracy, it means you’re going to have 70 to 50% inaccuracy. Now that could again mean bad luck, bad timing or shitty analysis, but that kind of goes with it if you want to be a pro trader or get the results that pros get. It comes from consistency.
And so I wouldn’t talk about taking hits, taking a hit could be more like in the way I use the expression, if you read the book where I had feeder cattle or no, it was life cattle, not that there’s a difference to you and I was caught in a limit move against me and there was really nothing I could do about it. That’s the point. But I kept a good attitude. I knew what my position sizing was. If you have reluctance to take those types of losses or you’re getting to those 5K, whatever, again, you should think of it in terms of percentages quicker than you’d like, well then you’d have to cut your position sizing maybe drastically so that you don’t get to it so quickly and give it more room this way instead of having a thousand shares that go five bucks against you have 500 shares and give it much more room because once you have your entry point, your stop should be calculated before you put the trade on. You’re not going to try to shoot from the hip and enter at market because that’s an emotional reaction to things. That’s kind of like, man, I can’t take the pain of missing out and I’ve got to get in. I got to do it now. Boom, hotkeys got all my shit lined up.
So I would say that that approach, it needs to evolve because it’s not going to go away and if you don’t process your feelings around reluctance or regret, they’re going to run your life. The feelings that you don’t want to feel have so much power, maybe even more power over you than the ones that you do want to feel. So make friends with that and I talk about it because that to me is the most important part of trading. It’s not going through someone’s training program and it’s not buying somebody’s damn book, right? Because even take a really good book like my friend Brian Shannon’s book on anchored v Wap, I don’t have any financial gain in it. I’m not affiliate sales on Amazon or this and that. Brian’s my friend, I’ve known him for 20 years. I love the guy, but even if you digested that book in its entirety and he’d tell you the same thing, if you have a problem with reluctance or regret, all the great theory and trading tactics in the world aren’t going to help you. Those feelings are going to overcome you at the worst possible time and undermine your trading.
It’s why I refuse to sell a how to trade class unless you’re going to do the emotional work because that is the work that’s 80, 90% of it everyone can understand well. So when someone says you, I can teach you to trade, maybe they can, or another one is a person can learn how to trade in and of itself, that’s a true statement, but that doesn’t mean you can trade because once you add emotion to it, you become another person. Many of you anyway, and the sad part is many of you don’t want to trade. You think you want to trade, but you don’t like who you become when it’s time to put the risk on.
So I would say change your language. Changing your language can change how you feel and understand what it is about risk. And if that doesn’t work, then reach out to me. Go look at the blog. There’s a place where you can do an education inquiry and we’ll see if we’re a good fit to work together because one way or another you have to overcome it and if you’ve tried every avenue for yourself, then see what we can do to help. But I would get used to the fact that there is a certain frequency, Ronnie, with which you’re going to lose your job as a speculator isn’t to go hellbent for election and emulate all the traders who are putting up their how-to videos on YouTube. That’s not the point. Your job is to think like New York Giants player number 56, Lawrence Taylor and be the best defensive player that you could possibly be. He was the best ever, in my opinion. Jordan’s the best basketball player I’ve ever seen and gretzky’s the best hockey player. I don’t care what Alex is going to do with goal scoring, I don’t look at points as if you say who’s the highest scorer, those numbers are black and white, but that doesn’t mean the best as far as I’m concerned. So you have to mentally prepare for the loss before you put on the trades and say, if I put on a hundred trades 60% of the time, I’m going to lose that money.
Then figure out when you do win and say, okay, well I know I’m going to lose that money, but the good news is is that when I lose the five, when I win, I win 15. So anytime I put a trade on, it’s just like casting my lure or bait into the water. Sometimes I’m going to snag something, sometimes I’m not. I’m just going to keep trying so that the trades just become attempts for you to figure out when and what and why and how you can get the winners. Then you can go back and kind of massage your process to say, okay, how can I make this more efficient and how can I avoid suboptimal trades? Where are there things that are slipping through the cracks where I’m putting on trades that I lose money on, but I know ahead of time on some level that I have no business being in those trades?
That to me is how you can become a profitable trader. It’s not needing to go read another damn book, watch another video and figure out what the magic pattern’s going to be because there isn’t one. The marketing language I know is very powerful. These people hire copywriters who are getting paid literally tens of thousands of dollars to write copy to hit you in your emotional buttons so that you click on the buy now button. I know it, I know it. I’ve read the books. I know who the best copywriters are. The best one ever was Eugene Schwartz. He’s since passed away, but there’s a reason why they make so much money because they can compel people to act emotionally,
And this might be a correlation between how many damn courses that you’re buying on the how to and how poorly you’re doing trading. You’re blowing your nose when you have a cold. You’re not going to the actual cause, you’re taking care of a symptom and that you feel insecure and you’re willing to buy your way out of it, but it’s not going to go away because every trading system, every discretionary chart pattern is like a person and they have their own emotional constitution and you might not have good chemistry with what you’re actually looking at, even though intellectually you can understand how to do it and sooner or later even your favorite people are going to find a way to push your buttons and that’s on you. That’s on you. If you let other people push your buttons, it’s on you. They’re just being themselves and it’s up for you to reconcile that and figure it out and don’t be a bitch about it.
Don’t blame other people. If you are having problems, it’s on you. It’s up for you to fix, and if you think it’s buying another book or buying another fucking $97 course because they’re just missing the one pattern, then keep doing it. Keep avoiding doing the hard work. Whatever you do that gives job security for the rest of us because we’re willing to have the discipline to look at the parts that don’t feel good, but I’m getting tired of hearing it, hearing myself say it because I feel like you know what to do. The question is why can’t you bring yourself to do it?
I know how hard it is. I wrote a book on it. I wrote a book on my struggles so that you could identify with the fact that it doesn’t come easy pretty much to anybody. And if you even read the first Market Wizards book, I think, what’s the next one? Bride of market wizards, son of market wizards. Everybody in any of those chapters, whether it was Ed or Michael or Bruce or Paul or Richard Dennis, they all had an emotional hazing that they had to go through right When Richard Dennis started on the floor, the board of trade or whatever, he was so afraid his brother was putting in the orders or something like that. So everyone goes through that. So embrace it and be in that spot. You’re not in the feelings. You’re with them. Figure out what they’re trying to tell you and then deconstruct your limiting beliefs that are holding you back because a lot of it just could be that you have the wrong philosophy on how things actually work.
So I would definitely make sure that you use better language because part of that could be like, okay, some days you win, some days you lose. That’s just the way that it’s going to go. Your expectation, your mathematical expectation and your emotional expectation is that you’re there to win intentions, equal results, but trading is probabilistic and that even before you put on the trade, you might only have a 30 40% chance of winning. So I would approach every trade like that, even though I want the outcome to be positive. It’s just not practical to think that way, and so I’m at peace with it because I can’t, if you look at the word risk, a lot of people are like, no, no, no, I’m not trading. That stuff is risky.
My whole thing is if you look at buy and hold investors, to me that requires a certain type of, I don’t care about the outcome, style risk management because all they’re doing maybe is diversifying their portfolios and diversification. That’s risk reduction, but it’s not risk management and sometimes you find out the hard way. Now you want to delegate your buy sell decisions to another manager, no problem, and if you have 30 something years plus to retirement, you’re right who caress, that’s a whole other life away from you right now, so what do you care about it? But it’s too open-ended for me,
So I wouldn’t look at losses as causing a psychological dent because you have to look at the fact that they’re going to happen and they’re probably going to happen more frequently than your winners. So somehow you have to make friends with that process and just realize that that’s you on your path to getting where you want to be. Those are the necessary instances of trading that you have to go through. I don’t want to say struggled because really no struggle about it. You put in your buys stop to enter, you immediately put in your protective sell stop to protect your capital and 40% or maybe 60% of the time that you’re actually going to get stopped out. So you should be more comfortable with that because it’s the more likely scenario.
So much of this can be done ahead of time. The next one I might as well cover while we’re here, comes from J Fan 1000 on a video called Do You Have Winning Intentions? Say, Mike, I want to say thanks for the vision. Thanks for watching. It was a slap in the face I needed. Well, I didn’t mean to smack anyone in the face. Sometimes it can shake your shit up a little bit. I’ve been legging into my positions to add to the winners, but the cost average gets catapulted. Another great word so far away from my original entry, I’m not liking it. Laugh out loud. What is your take? So I mean, I don’t know. I can’t tell if you’re using commodity futures or stocks. It sounds like stocks, I’m guessing now if you’re using some type of gauge for volatility, because you have to understand, given the fact that commodity futures, the majority of them have different standardized sizes, you have to try to figure out what’s the dollar volatility.
And many people use a number of the average true range to kind of calculate what that volatility is. Now, I know corn, wheat and soybeans all have the same volume based standardized size at 5,000 bushels, but you can’t go in and trade five contracts of sugar, five of cocoa, five of gold because they are all different standardized sizes, right? Sugar is 50 long tons, 112,000 pounds. Gold’s owe at a hundred Troy ounces. Cocoa is 10 metric tons. And so you’d have to figure out based on the volatility, what the dollar vault is for each of those instruments, and then knowing what our unit is, your risk of your overall capital, how many contracts of each, because you might find that you can handle only one gold, but maybe five sugar and then three of cocoa. And although the contract sizes are different, they all represent based on their own unique volatility as measured by say, 10 day or 20 day, 50 day A TR.
Doesn’t matter to me what one you use. Those would be the prevailing number of contracts for that risk unit. And then you could talk about adding to your winners. Some people refer to this as pyramiding. I don’t use that expression myself, but it’s typically something that you either do or you don’t do. It’s not something that you try once in a while. Then you bring a bias into your trading, like I’m really bullish on this, so I’m, I’m going to add to my winners here. You want to try to act and behave consistently, especially if you’re starting out. So why I say the difference between stocks and commodity futures is because it’s already in the public domain that with commodity futures, if you are going to adjust your position sizing for a TR and not try to sit and try to overlay 10 different strategies on the E mini, which is the wrong way to go in my opinion, as opposed to just finding one strategy that you could use across every instrument out there that is attainable for your financial risk, it would be a much more robust process.
It would also cut your bias and stop you trying to uptime and downtime looking for cloud formations when there’s nothing there forcing trades that you have no business being in, it’s in the public domain that adding to your winners at one half of the prevailing A TR is the optimal spot to do so. Point four is good 0.6 of the A TR is okay, but if you’ve back tested and use the simulator such as trading blocks, there’s a step function inside of trading blocks which allows you to test and see, okay, if you’re going to add to the winner at what multiple of the A TR is the best, and it kind of looks like an inverted, like a parabola where it gets better and better and better up to 0.5, and then you’ve got decreasing benefit by waiting till the price moves further than one half a TR as your entry point.
So that to me is something you can disagree with it. But then the question is do you have to go back test and find a better rule then? So if you’re using futures, a good place to start would be adding to your winner at one half the A TR. How do you do that? Well say the thing has an A TR of 60, and so half of that would be 30. If your entry was at 20, then your next unit of risk would be at 2030 and then 2060 and then 2090, and you could figure out for yourself how many risk units you want to add or not, and then you could also adjust your position sizing in that. You can use equal risk units where if say the risk unit for, I think sugar I had in the previous example was say three. You could add three contracts then at every 30 points above your previous fill up to a certain number of maximum risk units directionally.
Or you could say, I don’t want to buy something if a market does happen to get toppy and could have a potential to come back at me. Just from a mean reversion standpoint, which is something that you have to live with, you might say, well, I’m going to cut that down to one or two and not buy three. Obviously, it’s easier to do if your risk unit has an even number of contracts because that divides by two. You can divide that by half. So if you were trading six contracts, you might say, well, I’m going to add six and then I’m going to add three every half a TR. You could say, I want to add six as my first unit, six as my second, and then if the market really moves away, I still want to participate, but I’m going to cut my sizes by half or by what two thirds and just add two.
So you can choose that and back test and see what one better fits your emotional constitution because there’s no one way if you’re looking at stocks, again, what’s in the public domain of how other successful people are doing it, they oftentimes will look to buy things long after a consolidation or what people would call a stage one in the grand scheme of things, look for the breakout into what they would call a stage two uptrend. Add their first risk unit, not their optimal position. Let the thing run. Let it create a base, right? Or yeah, inside a base inside the stage and then add at the next breakout above. That’s another way to do it, and you can also vary your position sizes. You don’t have to buy the full jammy all at once.
Of course, if you buy your first piece, the thing might go and never stop. There might not be any basing, so you’re not going to get an opportunity to add to your winner in that regard. It’s part of life. Too bad. It’s happened to me. That’s the way it goes. So yes, I think it’s a truism that says if you’re going to buy something at 20 and then it bases and then the next breakout is 24, and then it takes off and then the next base doesn’t happen until 30, you’re not going to look uniform. And depending on how much you buy at those places, the one thing that you could say is that yes, your average cost is going to go up, but when you’re looking at trying to make 50, 60 bucks a share, I don’t care if the range of entries could go from 20 to 30 because if it’s going to 60 or if that’s what my intention is to hold the trade that much, then again, you have to change the way you’re thinking. If you think $2 is a big move, that’s a different mindset. That’s not allowed in my house. Take your shoes off and also leave your small-minded thinking at the door. That’s not what we do here. You can’t make money with that, and if you do, it’s probably because you’re trading too large.
But at any rate, I’d be super careful about the language that you use. And yes, it’s true that if you average into your short sales that your cost basis is going to change. And if you average into uptrends by adding to your winners, you’re at, your average cost is going to grow. But the point being is that you’ll have more on, you’ll have more of a position on more shares, more contracts, so that even a smaller move is still going to mean greater rate of return for you. You’re probably looking at like, here’s my basis and here’s where my exit, and I want that to be big based on one risk unit as opposed to adding all the way, having a higher average cost for your position and a smaller distance. So it’s kind of like you make it up in volume kind of a deal. So again, meditate on your language. It really helps to kind of journal this stuff out and then go back and look at the words that you’re choosing because in that scenario, there’s really nothing wrong about that. I’ve been legging into my winners in my positions adding to the winners, but the average cost average, what does so far away mean? You’re probably looking at a dollars and cents.
I don’t know. What’s so far away means that seems super subjective. I should have pointed that out earlier because again, if you buy something at 20 and your next entry is at 26, then your next entry is the 30. That doesn’t psych me out. If you’re buying the things the right way and you’re in things that when you look the left on the chart, there’s no structure in the way. You’re putting in multi period highs. Looking at the dailies and the weeklies, I’m not talking about intraday stuff. You have to expect to pay more just like you would. You got to pay more you quality stuff. Anyway, two really, really good reader questions. I appreciate them all coming in. I’m not bitch slapping anybody. I’m just saying this is based on the language that you’ve written. Investigate your language and make sure you write down the things that you’re actually thinking because it might not be realistic or practical, and I think your words have a lot of power, so I’m always hyper aware of the things that I say to myself and the language that I use because words have power. Anyway, I appreciate you. You’re all being here. Please like and subscribe. Get the audio book for free if you want, over at Martin Chronicle and Ganja is okay. He’ll be here next week and I’ll see you tomorrow.
What’s cracking, ma? How’s everyone today? Happy Tuesday. So the thing that can help you with this whole stop thing is you’re probably settling for less when it comes to making money. And in my opinion, you have to be absolutely unreasonable with making money absolutely unreasonable. I mean, what the hell are you taking all this risk for to make peanuts? And so what I mean by being unreasonable is you can’t be satisfied making 200 bucks a day and then be like, yeah, I’m showing everyone my trade ticket. I just smashed a trade for 200 bucks. If you’re doing that, you’re probably thinking about that’s like a sushi dinner for you and a date maybe, or it’s your favorite pair of kicks. Like again, get out of thinking in terms of dollars and start thinking in terms of percentages and start to envision for yourself how a current trade that you’re in could increase your assets under management, your account balance, your corpus, whatever the number. The thing is, it’s all different ways to say the same thing. How can that move the needle by five to 10%?
Don’t get in the habit of taking one quarter of 1% trades. Now, if you get stopped out at those levels, that’s the way God wanted it. But for the most part, your intentional activity should be, I’m going to put on a trade I’m going to add to my winners. I’m going to add change and adjust my protective stops as I need to, but I’m demanding from the market. Monster gains. Don’t tiptoe your way into futures. It’s the wrong industry. You have to be very, very brazen with your intentions. You can’t come in, be like, go, please give me some money. Please, Jesus, that’s not going to work. You can’t come to the market with a fear-based mentality. You have to play superior defense. But that’s just like enter protective stop. That’s the best you can do. Watching it isn’t going to help you.
Watching the market’s not going to help you manage risk. Now, I can say that because my system is calibrated for that. I’ve had, like I said, three and a half decades of constant observation, so I’m in a different spot. But when I was younger, starting out, it was exciting to watch the markets, but I realized that I’m not trading for excitement. I’m trying to make money here. And that when I watched the market and I saw I had $200 in my pocket and I had two weeks to go, I had four different people that wanted that money who I, for the various bills that I had to pay towards the end of the month, I was like, man, I got to make things happen. I have to create more profits. I don’t want to keep being in this situation where I’m robbing from Peter to pay Paul.
And so I had to develop the other side of my business obviously and serve my clients to generate the commissions and the fees until I had enough assets under management to go out on my own and earn incentive fees. And that was a real game changer. But in the meantime, what I didn’t want to do is get excited about making a day’s pay in one hour. I had to get rid of that thinking. It’s an interesting observation, but it doesn’t necessarily serve you if your goal is to make big money. So again, you have to demand from the universe all the abundance that you want. Don’t be like, well, one day it’s going to happen someday. Someday doesn’t exist any more than you’re saying, I’m going to be a world-class trader. I’m going to be means future tense and the future doesn’t exist. All you have is right now, so you can make up your mind right now in the ever evolving moment of now, of now, right now, of right now, right now that that’s what you demand from the marketplace.
Then you have to conjugate your behavior with that intention because it’s not going to come and kick you in the ass, especially if you’re cauterizing and taking off good risks. So the only way that I found able to marry my belief system with my behavior was to adjust my stops, stay in strongly trending markets and then stay out of my own way and stop thinking about stuff. Because going back to last week, if you were ready, willing, and able to risk a half a percent on any particular trade, what’s the damn difference? If it’s the initial half that would come out of your corpus coming into the day, right? Or you’re in a winning trade and you’re still risking that one half of 1%, why does it change? Because that’s the market communicating to you in no if and or buts that you’re on the right side of the trade. Again, whether it’s good luck, good timing or good analysis, what do you care? Figure it out after. You don’t need to think about it in real time. If you overthink things without being trained, you’re going to make the wrong decision all the time. That’s how I would bet against you. Not to say it that way, but I can count on you to do the wrong thing.
And the rest of us are like, man, it’s so easy to make money when you’re in a good trending market. Just stay out of your own way. Let the thing go. It doesn’t matter what happens on any given day, it’s going to go up and down in a positive slope. Y equals mx plus BM is positive. Great. Stay in the trade, right? I mean, you could write a children’s book on trading and say, okay, here’s the chart that you’re looking at. And if it’s not in the no, if it’s in northeast quadrant here, that’s a bi signal unto itself, especially if it’s daily or weekly. If it’s in the lower right corner, short it or stay, avoid. And if the thing’s going sideways for whatever reason, please for the name of God and everything that’s holy, don’t start down timing to look for opportunities. And that’s a message for you.
You stock index traders. If the trends aren’t happening on the dailies or weeklies, there’s nothing to do during the day. Find another instrument. Let the market do the work for you. It’s so easy to find up trending stocks for the love of God. I get so many emails from people who are struggling and they send me the charts and of course there’s 45 overlays on it and they’re like, man, these indicators are failing me. And I’m like, yeah, because they’re not indicators. They don’t indicate anything. They’re really confirmers. The price and the volume will tell you, especially price, everything that you need to know. What does Brian Shannon say? Only price pays. We say basically very similar things using different language, but the price will tell you where it wants to go. That’s the leading indicator, if you will. Everything else kind of confirms. So your indicators, again, are band-aids to help you deal with the feelings that you don’t want to feel around the uncertainty. Will my gains be there in the morning? Please, Jesus, please.
And I think you all get kind of uptight about this stuff when you should just let things unfold. And if you come in with that type of trepidation, granted, you always have to respect risk, right? So I’m saying macro. There’s the absolute minutia of managing the risk add risk with a buy stop above the market. Let the market come to you. Don’t chase your order gets filled, you automatically put in your protective sale. Stop. That’s the best you can do. Let the market activity unfold because you don’t know. No one does, and I’m not throwing names under the bus here, but people can have a good idea, they can figure that. They can have a good understanding of how things are going to go. But in reality, most people have a really bad at prediction. And I’m talking everybody from Bruce Covner all the way down to the guy who’s starting tomorrow or today, prediction is a sucker’s bet.
You don’t know all the forces that are at work. You don’t know what everyone else’s. Why are they in the trade? What are they doing? Are they adding to winners? Are there big investors who have hedge funds or forti act companies that have to step in and buy more stock? You really don’t know. You really don’t know. You can’t see most of that, and they’re selling you on wondering about what the market makers can see. It’s irrelevant. It’s irrelevant to how you manage risk. All you can do is put in your protective stops and if you sell short, you put your buys stop in above the market, the thing goes down, you can adjust your buys, stop lower. Don’t worry about your win ratio. If you’re winning 40% of the time, you’re going to be absolutely fine, but you need to start putting these things in context.
That accuracy is the name of the game. And sniper like entries matter. Nope, they don’t. You need to be relatively correct. And I’ve done, I’ve done some stuff and I’ve put orders in where there are massive amounts of slippage that would make you puke. I mean, thousands of dollars of slippage and skid on an entry, obviously we’re putting size on. So relatively speaking, again, it’s nothing to fret about because it’s a percentage game, but you need to start thinking abundantly and to start to think about how you are worth it or are you worth it? Maybe you have low self-esteem. Maybe you think you need to put in 10 years before you’re worth it. That’s not how my mind works. But this is the kind of stuff that we speak about in the coaching and the people sit back like, yeah, where did I get that limiting belief? Which parent taught me that?
Was it my overbearing father? Was it my engulfing and in devouring mom? Or was it some other sibling that was a know-It-all but is still living home at 32? You could make up your mind that that’s what you deserve right now. What the hell are you waiting for? I didn’t have a choice. I’m not getting into it anymore. I’m tired of talking about it. You all know if I failed on Wall Street, what I had to go back to and I didn’t want to do that. I was physically and mentally exhausted from doing that. I’d been working half my life doing that stuff and it was time for me to turn it on and work smartly now.
So that’s intention. When they say intentions, equal results, you have to believe that you’re entitled to it, that that’s part of who you are. Now, that’s what you do. You do the things that pro traders do. What do pro traders do? They manage their risk. They buy strongly trending markets. They move and adjust their stops and that’s it. And they let the big players kind of move the markets. And from lack of selling and increased buying, there’ll be ebbs and flows of the demand within the overall move, and all you do is have to hang on. Your protective stop will knock you out at the right time, but don’t think that you know better and that you can step in and figure that out on the fly by watching one minute bars or two and five minute divergences. Oh my God, that that process has killed more traitors than I think, than Bernie Madoff or Philip Bennett from Refco or John Corzine at Man Financial, or the other place. What was it? PFGBEST? Maybe I can’t remember all the firms that have gone wrong from egos anyway, think intentionally. You’re entitled to those if you do the work. Doing the work means putting your stops in and stay out of your own way and dealing with the emotional crap that really has nothing to do with trading. It’s your baggage that you’re bringing to the table that really doesn’t serve you, although you think it does. So you’re constantly wrestling with these emotions like, I want to make money, but I’m really afraid to
Lose. People feel pain a couple multiples more than they feel the pleasure of it. So the fear will pervade you and actually take you out of trades when you’re actually making money. Can you imagine the Vietnam that’s going on in somebody’s head there? I don’t want that. Anyway, those are my thoughts. I’ll be here tomorrow with Ganja. We have a great episode. I appreciate y’all being here, and I’ll see you tomorrow.