Why it’s Important to Remain Emotionally Balanced for Superior Risk Adjusted Returns

You will always lose more if you go on tilt

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Calibrate the risk that’s appropriate for your account and your emotional constitution. If you are trading too big, sooner or later you’ll find yourself in a situation that you wish you weren’t in.

Risk Management & Position Sizing

Normalize risk across all instruments so that you can create risk units. This way, every instrument will be the same in terms of the risk that you’ll represent in your portfolio.

Many commodity traders use the 20-Day ATR (Average True Range) in order to calculate the daily dollar-volatility per instrument. Then, they divide that into the percentage of capital that they are willing to lose per trade.

Example:

If the Gold ATR is $2.50 (it’s not) then the daily dollar vol is $250 since the gold contract is 100 troy ounces. If you have a $100,000 account and you only want to risk 1% per trade, you can figure out the maximum number of contracts to trade.

$100,000 x 1% = $1,000

Daily Dollar-Vol on Gold = $250 ($2.50 x 100 oz)

Therefore, you can only trade 4 Gold Contracts since $1,000 / $250 = 4 contracts

You can also trade only 2 contracts and give them $5 of risk between your entry and exit. The risk to your portfolio will work out to be the same.

Then to manage the risk, if you enter the gold market long per your entry signal at X Price and place your protective sell stop $2.50 (the Gold ATR value) below the entry price. 

Sometimes, the ATR-based risk on a particular instrument will be too big for you to trade given the risk amount of your overall portfolio that you are willing to take.

Say the 20-Day ATR on the ES (E-mini S&P) is 30 and each full point is $50, then the dollar-vol is $1,500. If you only want to risk 1% of your $100,000 per trade, the ES is too volatile for you at this point since $1,500 > $1,000.

This rule can help keep you out of trouble by keeping you out of trades that can might hurt you financially. Like in surfing, once you catch a wave that’s too big and powerful for your level of surfing ability, it’s too late to call time-out…you can’t just surf the small part of the wave.

Likewise, If you try to trade with a stop that is a fraction of the 20-Day ATR, you are highly likely to get stopped out for losses regularly. You can’t change the nature of the instrument. Think of the ATR like a personality gauge that will reveal the true identity of what you’re dealing with.

If you know someone who is a mean and nasty drunk, you can’t typically deal with them on only the good days. That’s why you have to avoid them altogether – just like instruments that have dollar-vol values that are too high for your capital. This is most important risk management concept to manifest in your trading DNA.

Trader Psychology

Keep in mind that measuring ATR can be done with a computer and you can backtest all your entry and exit rules with the risk across all instruments normalized. That is how you stay emotionally balanced

In doing so, you remove all the guesswork. You have the added benefit of not falling in love with any one instrument risk management wise since each trade will be the same percentage risk in your portfolio (at first, if you don’t add to your winners).

More importantly, you won’t become despondent when you lose money on any one particular trade since they all represent the same risk and therefore you’ll not be married to the outcome of any one trade.

It’s hard to remain objective, especially if you are looking at the headlines of the day for your trades. Trading a system can remove all of that for you, but you’ll still have to a) put on the trades and the protective stops; b) not over-ride the system and “not” take the signals; and c) not over-ride the system and put on trades that were not system generated. 

Trading Commodity Spreads

If the volatility in the commodities markets are too great for outright trading, you can consider trading intra-commodity spreads. In a spread, you are simultaneously long and short two contracts of the same underlying but of different expiration months.

Instead of trading for an up or down directional trade, you trade the relationship between the two contracts for them to narrow or widen. 

You are afforded lower margin with spreads, so if your account is smaller, it might be a good fit for you to get going in commodities. The good news is that most professional traders know the spread markets very well so it’s a good idea to learn them anyway at one time or another.

You typically have lower risk since you are long and short at the time time and the seasonality of physical commodities tends to be very reliable. 

We have some free educational training videos for you on this topic.

Go to MartinKronicle and set up your Free Account to get access. 

Your login credentials will be emailed to you.

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Two Essential Things Necessary to Achieve 10-Baggers in Your Portfolio

One of them is not what you'd expect

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You have to plan for 10-baggers in your portfolio and position yourself tactically and psychologically. 

Two things need to occur regularly:

1) big moves don’t typically happen intraday

2) you have to believe that you are capable of doing it emotionally and psychologically

Tactically speaking, you need to let time and money work for you for best results. A 10-bagger has to have been a 4-bagger first. Don’t cut the 4-baggers at the knees. Place a trailing sell stop order and let the trend continue (if long). Don’t impose your will on the trend. 

Sit on your hands and let the market forces work for you.

Think in terms of percentages and not dollars. If you risk 0.50% per trade and it’s a 10-bagger, you’ll add 5% to your overall portfolio. What will that do to your Incentive Fees? 

If you’re smartly abandoning day trading (smart move), you need to find a better way to deal with the discomfort that you feel when you don’t take short-term winners at the end of the day or before the weekend.

What is the discomfort trying to teach you? For each of us it’s different. 

The unwillingness to feel the discomfort in your trading is also denying you the feeling of what you’d feel by having a 10-bagger in your portfolio. 

In other words, the feeling of having a 10-bagger is on THE OTHER SIDE of the feeling of taking short-term profits. You must be able to walk through the feeling and be with it.

Why don’t you want to feel the feelings around getting a 10-bagger? Aren’t you worth it? I think you are…you are willing to do the work – you might as well get paid as much as you can for it.

You can release that discomfort in yoga class or in your Trading Tribe – and replace the satisfaction you get and not sabotage your trading and still get to feel the feeling that you seem to want to have (because you’re seeking it everyday – you’re a pleasure seeker, just like me).

Great Trading Articles & Podcasts

2 Ways to Add to Your Winner for Huge Gains

Building Pyramids for Asymmetric Trading Gains Part 1

Building Pyramids for Asymmetric Trading Gains Part 2

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The Hidden Meaning of Surrender in Trading and How to Discover What it Means to You

The Inner Voice of Trading Audiobook - Chapter 2 - Surrender

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Overcome Mediocre Performance and Boost Your Results

Amateur Traders Overlook this Key Ingredient Necessary for Success

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What are your personal Mission Statement and Strategic Plan for your trading? If you have them, my guess is you have tasks and goals with specific dates. 

Professional traders also have Emotional Plans to take into account the Relative Strength Indicator (RSI) of their feelings about what they do during the day. Our psychology and emotional makeup dictate how we act and behave during the day. 

How do you plan to feel good? If “I feel good when I make money and I feel bad when I lose money” is the ethos, we need to rework this a little. All you can do is follow your backtested rules. If you have the discipline to do so, define “happy” as “I followed my rules today which was the best I could do, therefore my thoughts, feelings, and behavior are in alignment and that alignment will lead to superior performance over the next year.”

We can’t predict when the profits will show up, so having a monthly goal of 5%, for example, might provide you with the goal of frustration because that is the result. [Intentions equal results.]

Rely on “Trading Best Practices”

Best Practices in trading does not include day trading, intraday trading, or anything short term. Behavior predicts where we end up in life. What we do today provides us with the trajectory to where we want to go. We need to be mindful of the quantity and quality of the work we do.

Go through your activity with a fine-tooth comb. How do each of the points add up to profitability? Or, what 2 or 3 items in combination add up to to a positive slope on your trajectory. 

What do you want trading to do for you in your life? What does it fulfill?

What do you want your money to do for you? 

Making money is the end result of a big technical and emotional system. 

“Discipline Equals Freedom” – from the book Extreme Ownership

We need to work hard, but also work smartly. If we focus on bad habits, we will be working hard, but not smartly. That’s what day trading is to me: hard work for no money and a great expense of time. 

Notice where your behavior breaks down and diverges from what your Mission Statement delineates.

Building Your Trading Plan

If it’s technical, take a class and read up. If it’s emotional, take a yoga class, learn to meditate, or join a Trading Tribe. 

We are all students over the entire duration of our trading. The best traders are mindful of everything they do and don’t do. Everything they want to feel and not want to feel. 

Keep in mind that the feelings that you don’t want to feel have as much power over your behavior as the feelings that you actively seek out. 

Don’t judge your feelings, seek the wisdom that they are trying to teach you. If the feeling of public Pride is the “heads” side of the coin, realize that “tails” is public, abject humility. Use this rule to help target the feelings you want in your emotional system. 

Great Trading Articles & Podcasts

Charlie Munger The Psychology of Human Misjudgment

The Revealing Truth About Your Feelings and Success

One Surefire Way to Be the Best You Can Be

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Why Sourcing Ideas From the Media is Not Research

Traders live in a paradigm of personal responsibility

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We as humans love stories and our brains are great at putting pieces together and following logical sequences. That doesn’t mean they are worthy of investment or for trading. 

“Stories” as they relate to investment themes are a bad for of entertainment. When you marry this logic with fear or greed, you can put yourself in a very unenvious situation very quickly by losing a great deal of money quickly or worse. 

Looking for a promise in a world of prevarication. Why would you need to be alerted to an idea from mass media instead of doing your own research? Who’s accountable for the gains and losses? 

Developing Your Own Trading Process

You must think along the lines of being your own person – that’s how you have a principle-centric life. You are in control and own all your gains and losses. Picking ideas from the media isn’t a trading process anymore than chart reading is.

And following an on-air personality and trading alongside them is no different than betting that King Charles is going to hit his next shot or Houston Astros’ Center Fielder and World Series MVP George Springer is going to hit another Home Run. Go look up the Hot Hand Fallacy.

Ask any real trader and they’ll agree with me: traders live in a paradigm of personal responsibility. 

In the end, you need to own your own process. If you don’t have one, don’t trade until you do. You cannot delegate the key aspects of a trading system to someone else nor make key decisions based upon someone else’s philosophy. 

Here’s what you’re missing if you are sourcing your trade ideas from TV or from the charts you see published via the Twitterati:

1) entry price

2) exit price

3) position size & risk management

4) stage of trend (if there is a trend)

…”and the grandaddy of them all…”

5) correlation risk to what else is in your portfolio

We can add another once we add you to the equation:

6) the best way to express the risk for your psychological makeup

That means, do you rely on the the equity, options, or futures markets to effect the trade? Which is most suitable for you and your emotional constitution, years to retirement, and tolerance for risk. 

Develop your own fundamental ideas from your daily life. That is something you can witness by yourself. Then, marry up what you see for yourself with the direction of the trend. 

If there is no trend, you might be wrong or you might be early to the trade. If the trend has begun, that’s not a bad thing – there might be much more left to it.

Don’t be turned off from this situation as most trend followers are “fast followers” and adapters than inventors, so to speak. 

More Great Trading Articles & Podcasts

How to Scour Data for the Best Trades

Three Components of a Trading System

Trading Systems Do Not Remove Emotion from Trading

Two Free Offers

Tony Saliba’s Options Playbook

Inner Voice of Trading Audiobook

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