Yoga, Time Blocking, and Risk per Trade

Michael Martin answers Reader's Questions

ask yourself good questions

What is your Favorite Yoga Pose

It’s Ardha Chandrasana – or Half Moon Pose.

half moon

What it does for you

more half moon

You have to practice your yoga the most when you’re off the mat and not in class. That’s the whole point. Like great trades, you have to take them home at night.

What is your trading day look like

Trading begins the night before. I run my systems at 6 pm Sunday night for Monday’s trading. Call in the orders by phone.

The orders are worked during the day and all I do is wait for the phone to ring with a fill. If I’m filled, I give them a protective stop immediately. Sometimes the there are no fills, then I repeat the process the next day with the same orders. 

Most of the time I’m reading and studying. I don’t have cable – I’ve cut the cord about 13 years ago. I practice yoga most days from 12 to 2 pm PT.

How much should I Risk Per Trade

In establishing a position, I risk 0.10% (10 basis points) per trade then it grows from there. I am willing to add continuously if the trade continues to work in my favor.

By risk so little at the beginning, I couldn’t care less about any trade at any given time. I add when I’m making money, and that’s how I decide.

We are powerless over the markets and how the instruments perform once we’re long or short. With such small risk at the beginning, I’m not emotionally invested in the outcome of any trade. Even after adding several additional 0.10% units of risk, I’m still indifferent. For example, if I get to add 4 additional units, I’m only at 0.50% risk or 1/2 of 1%. Peace is a choice.

FYI – I loathe having to look at a computer monitor or screen so I don’t do it. My brokers are incentivized to fill my trades so I trust that I’ll get filled when my stops are hit. That probably seems blasphemous to day traders, but I want to make money and have a high quality of life.

Conclusion

Making trading look like blue collar despair is not what trading is about for me. It shouldn’t be labor intensive. Hence most traders lack the emotional intelligence to be their own best coaches. 

Too many traders are emotionally invested in having to be correct on their trades. I’d rather focus on making money over longer periods of time, and if that means having a commodity futures position on for 3 months, so be it. That does’t make me an investor. Sometimes, it takes that long for “high tide” to come in. 

If you’re struggling or not making money, do yourself a favor in 2018. Stop looking at 5 minute bars and start thinking longer term. You’ll make more money and you’ll be happier.

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Why the majority of people will lose money on bitcoin

No system, no patience, and no vision will sink everyone

how to pick market tops

If the average person cannot explain to you what the blockchain is, how is the recent level of bitcoin a bubble? 

I’ve seen this before in the commodity markets and although we’re likely to see volatility that’s uncommon in the markets, you can study the spread of viruses to get a better feel for this type of growth. 

Risk Management in the Age of Bitcoin

You can control the effect of volatility in your portfolio by decreasing your position size. You can further minimize your loss potential by using low to no leverage. 

If Amazon or Walmart decide to take a crypto currency as a form of payment, demand for the underlying will explode as none are currently considered mainstream in terms of usage despite a steady stream of headlines about them. 

Once this happens, I believe the best opportunity for adding crypto currency risk to your portfolio will be via an investment, not a trade. No crypto currency has gone mainstream yet, so all the talk is about “the trade” and that means the majority of people will leave the majority of the money on the table. 

Why a small investment in Bitcoin could be worth $3 million

McDonald’s went public in 1965 around its 10th anniversary. It was not mainstream until 10 years later and it still had a ton of growth to go. For example, they did not begin serving Chicken McNuggets until 1982, almost 20 years after IPO’ing.

If you’d bought 25 shares of MCD at the IPO price of $22.50 (a investment of $562.50 in 1965), your position would be worth over $3 million today at a price of $175 per share and adjusting for splits. That’s more than 5,400 times your money over the same time period. That’s also 50 years ago, so who can tell how they would have handled the position. MCD has split 12 times since the IPO. 

Sure there had been some great trades along the way. There have also been some dead periods too, but when people who have not been trained to time the market or to trade, they leave the majority of the money on the table. 

I think the reason is the people like to seem reasonable. Let’s say you invested in MCD and you sold your entire position when it had doubled.

Maybe you felt at the time you didn’t want to be greedy. Or you feared giving it all back…

What is the opportunity cost of that lack of emotional awareness or mindfulness around your process (or lack of one)? 

Conclusion

Where is the opportunity in bitcoin or any crypto currency at this point? While I believe there will be parabolic moves, great trades, big drawdowns, the best bet is to invest in it and hold it for 20 years. 

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Professional traders focus on process, not results

You will have emotional breakthroughs if you rely on your system

positive intentions

Focus on process and stay out of the results. Performance will show up if you trade a system with positive expected values. By focusing on the process or your system, you become the casino. Each time your system is open for business [trading], you are making money. You should strongly consider investing in a backtesting simulator. 

When I started trading, I put a high level of emotion of making money on myself. That became expensive and I became frustrated about doing things that weren’t paying off. They were never GOING TO PAY OFF, but I didn’t know it at the time. I live by the adage that hard work will pay off…it was my turn. The thing is, I wasn’t working smartly. And worse, I had no definable trading edge. 

The funny thing is that as soon as I detached from the money spiritually, my trading improved in leaps and bounds, both emotionally and financially. I found out that expectations have built-in disappointments.

Nowadays, I think of the money as points in a video game. I don’t actually play video games, but I still look at the net equity as how to keep score. As in poker, your money [chips] are your ammunition. I know when I make bad bets, I will most likely lose. Once in a blue moon, I’ll get random luck and split a hand or everyone will fold to me. That’s not a good business to be in though. 

I can remember that as soon I had become emotionally invested in the outcome of a trade before I put the trade on…I could feel the disappointment before I offset the risk. 

Such Betrayal.

Losing Money But Making Good Mistakes

One good thing that I can say about this time was that I was risking real capital – not paper trading. I also was taking the risk home with me which is what I always advocate. New traders should not be focusing on 5 minute bars. Focus on the intermediate to long term moves, and once you master those [in 2-3 years] come back to shorter time frames risking 0.10% on trades so you don’t do any lasting damage to your portfolio. 

Conclusion

Holding a trade for three months doesn’t make us investors. It says that we have stepped aside and let forces that are much more intelligent and powerful than us take over. All we can do is enter our stops and let the market go where it’s going to go. 

If you find yourself trading 100 shares but offsetting them before the market close, consider trading 20 shares and taking them home if you making money on them at the close. You will learn about your emotions from the experience which is invaluable and can only be done by living it.

If 20 is too painful, try 10. But I also ask you to do this: why the lack of trust? Is it you don’t trust yourself or you don’t trust your process? Where does that come from, meaning, what scientific study did you read where it delineated that you should offset winners NO MATTER WHAT at the close and go home flat? 

If you take home 10 or 20 shares of a winning trade, you’ll learn a lot about yourself emotionally as a trader. That wisdom is priceless to us. Learn and understand what your emotions are trying to teach you. They want to be advocates, not antagonists. If you feel the opposite is true, your process is likely the reason why. 

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Learn to minimize portfolio volatility without cutting positions

Equity Pairs trades and Intra-commodity spreads work well for this

spreads and pairs trading

The measurement for volatility takes into account the magnitude of the vol, not the direction.

You obviously don’t want to be in high vol, directionless markets, unless you are trading option butterflies or condors that can take advantage of those types of markets. 

Long / Short Equity Trades (pairs)

For equities, you can deploy what’s called a “pairs trade.”

Anyone can gear their portfolio for 100% RoR, but you have to be willing to endure a 40-60% drawdown both financially and emotionally. Hard to do. Slower and steady growth might be a better fit for your tolerance for risk as well as what you are looking to do professionally, such as running public money.

[I have a documented 100% monthly return, however I was in fact coming off of a 40% drawdown so my starting equity was only up 20% by the end of that reporting period/month.]

Spread trades are about relative performance between the two instruments, meaning your are looking for the long to outperform the short. There has to be high correlation between the two instruments else there is no relationship.

You can find good candidates for these types of trades by looking in each sector and going long the “best in class,” and shorting the dog. One of the best at doing this was Tiger Management’s Julian Robertson and his traders.

I wrote about pairs trading in Inner Voice of Trading where I was Long MSFT and Short NSCP figuring that Netscape was going to have a hard time getting clients to purchase a premium, albeit superior browser, while MSFT was giving Internet Explorer away for free. 

One trade I’m in right now is Long PYPL and Short SQ in the mobile payment space. You have unlimited loss potential by being short a stock fyi.

Commodity Spread Trading

You can learn a lot about commodity spreads at Moore Research. Commodity spreads are a great way for newer commodity traders to get involved with those markets as you are both hedged and you are afforded lower margin requirements since you are simultaneously long and short the same commodity, but in different months. 

Conclusion

By trading equity pairs or intra-commodity spreads, you cut the volatility in your portfolio yet keep the directional bias that will create the alpha. Risk-adjusted returns are the goal here.

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How to skew the odds in your favor to dominate

These are just a few of the benefits

trading systems

By trading a complete trading system, you solidify places in your trading where your success can break down. Relying on system-generated trades, you get to focus on high expected value trades and eliminate the sub-optimal trades. 

Benefits of a complete trading system

A good cure for daily set-ups is a systematized set of rules. It takes out all the uncertainty around your decision making process. That can give you a sense of confidence and self-esteem. 

You get to trade from a place of personal power. Hard to make money trading long term without confidence. 

You won’t have to interpret any chart patterns: the price will pick up anything about the instrument that is bullish or bearish. You will therefore be cured of the need to massage charts all day and night, thereby freeing up hours of time each day and the brain power that goes with it.

You can trade any market in the world, in different time zones, and in different currencies. The mathematical possibilities are endless.

You can blend several trading systems like an asset allocation to smooth out your equity curve. For example, you can put 40% in a breakout system and 60% in a moving average system. Or, you can put 50% in a short to intermediate trend following system, and 50% in a long term trend following system. Possibilities are endless. 

You don’t need subscriptions, chat rooms, or premium research.  

Trading Systems and Emotions

Systems don’t remove emotions from your trading although that has been included in many marketing materials. I believe that began by a clever marketer who doesn’t trade and wouldn’t know if that statement was true or not. 

You still have to put on the trades, and if you experience fear around losing money or greed around not making enough, you can hijack the system and blow up. 

Ed Seykota set up the Incline Village Trading Tribe for traders to get in touch with their feelings and psychology around trading for this very reason. We never spoke about trades, set-ups, or chart patterns.

It was not only a complete snooze to do so, those don’t help a trader become profitable. They do, however, provide fodder for good conversation and for building relationships and bonding I guess, but you can do that without becoming a trader if that’s what your real goal is – to bond with people. 

Conclusion

I think trading a complete trading system can provide you with a great quality of life. It makes no sense to beat the crap out of yourself to make it as a trader otherwise.

Martyrs don’t get paid and as Jim Morrison sang, “…no time to wallow in the mire…” Build yourself a simple system that takes care of your entries, exits, and position sizing, and in doing so you’ll remove the weakest link in your trading: you.

Deploy a trading system and you’ll dominate the retail guys trying to read charts. You’ll have a better equity curve, a business you can market (and sell), and have a great quality of life to enjoy your wealth and health.

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