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.