Welcome back folks. Happy Tuesday. So I had a good question that came in from, I think it was Roman. I’m going to read it here, and it is a comment under the video where Gaja puts up M M S E P, which would be Michael Martin Show, episode 12, the biggest misconception about trading. I think we got to work on that title for our Wednesday shows, but who knows? Good video. Again, maybe you could talk about setting goals again. What qualifies as a good goal in trading, if not a financial one, how you managed to find set goals for yourself when you started out, and how they might have changed over time. Thanks in advance. So there’s a couple questions in here.
So I always knew that I needed a process. I was obviously in a very different financial situation when I started and I didn’t know anything. I was also, I didn’t know anything really about the business in many ways. I knew I had great instincts as a trader, and those instincts served me well. What I needed to do was to find the process. So although I know I needed to have more wins or no more net income from the wins i e more credits, quantity of credits than losses, right? Net income, I didn’t know what that was going to look like. At first. I thought it was an accuracy game then since I was a kind of bit of a math, whereas I understood expected values and Bay Theorem. So I was like, oh, that makes much better sense. That takes the pressure off me of not needing to be right.
And then you can use Kelly criteria to figure out all the stuff that you need to do to hit your goals. It’s a little bit too much to do without being able to diagram it and illustrate it. That’s the way I say diagram and sign lang. Michael Martin. Sign language could also mean when there’s a crazy driver on the streets of la. So my goals weren’t necessarily about making the money because I knew if I made money on a trader, I’d be like, well, great, but how the hell did I get here? So I didn’t want to feel that feeling. So I knew I had to focus on the process. That’s just probably dumb ass luck. I knew that I had to focus on the process. I also knew how to manipulate data. My nose was always modeling stuff. I looked at, I’d look at the box scores of baseball games and look and see if Ron Gire went deep into a game, what was the likelihood of the Yankees winning?
So in the Probabil base, the right, what’s the probability of gire went seven innings, or if Gire had X amount of strikeouts, what was the outcome of the game win or lose? So I’d look at things like that. Now, these days you can go to different gambling sites and bet on the outcome of everything that I wasn’t betting, but I wanted to understand the math. I also looked at humidity levels and temperatures of New York City in the month of August to see if it had any predictive value in having a longer summer. That would go into the September, october. I don’t think I could draw any conclusions, but I used to look at the data like that to see if there was stuff. It’s like a crossword puzzle because the data’s right under your nose. Everyone could see the data. So I would get that data and put it together in spreadsheets and just try to come up with macros to see if it would show me anything. Just as a test to myself. I didn’t actually care if the summer went long. I actually liked the fall in New York much better than almost any other deal. So it wasn’t like I had an interest in the outcome. I didn’t care. I just wanted to see if there was any way to look at the data.
So the goal for me was to find, and I didn’t say it as articulately then, but I needed to know a process. What’s my trading model? What is it that I’m going to do every day? I was quick to get into it almost impulsively, but then I was also impulsive in cutting and being decisive like a trader, a good trader should be. I cut away into bank foreign exchange. I let go of options. I even put equity trading on the side because I had to focus on where I had skill, which at the beginning you don’t even really know, but you do have some evidence you got to haunt, you have to go with it. So that’s what I would focus on today if I could talk to my younger self, is to focus on the process more on the outcome. Because too many people get emotionally invested in the outcome of something and they don’t really have the process down.
Then they get all mad or angry or frustrated or despondent. Doesn’t matter what the feeling is. But intentions equal results. So I would in other to understand that, go back in your life and see where you’re winging it or maybe you’re acting impulsively or maybe you have unrealistic expectations where you think you’re putting in a lot of work. Remember, because thinking is actually procrastination. Maybe you’re actually procrastinating by thinking too much, doing not enough work on the modeling, putting trades on, getting angry at the results and then bitching and belly aching to everybody. That’s a fucked up emotional model. But you see it all the time. People, they buy into the marketing hype of various things.
I also didn’t look at the pros that I had access to and resent them or nor did I admire them because I had a very sober way of looking at the fact that they had experience and they developed a model with which they were compatible and they were able to execute that over and over and over again because I knew there wasn’t any good stock picking gurus. There was never about hot tips. They didn’t exist. Hot tips exist in the mind of the unsophisticated, and I would never let anyone rent my brain that way. My brain is too good. So I would think, okay, well what did they have to do to get where they were? How did they think about the markets? Were they in the right place at the right time? The folks who made their first investments in technology in the mid nineties and for five years think that they were like hot shots.
In reality, when the tide goes up, all the boats go to again, no, no, no dig on them, but you know, need to know what your model is. If you’d started trading from 68 to 70 like Victor did, it was a bear market. So if you didn’t know how to short sell, it was a hard place to try to make money on the long side. You could interpret that you’re an idiot if you’re looking at the results of buying long in a bear market, might be something that we have to think about now, given the environment that we’re in now, I did need the money. That was the point, that was the end goal. But I didn’t say like, oh, I need to make money right now. What I need to do is I need to find a process that works for me. What’s my, how do I ideate, right?
My trades, is it from reading the newspaper? Is it because financial TV didn’t really exist at the time? It was kind of just starting, but it was still at a very nation stage. It wasn’t what you see today. So it was, and I don’t find it for me as a human being, I don’t find it particularly useful. I don’t care to see Paul Tu Jones interviewed about stuff, interesting guy, but it doesn’t help me trade better, good human being. F Robin Hood’s given away over 2 billion. But that’s not, again, any information that I could use to help me be a better trader. It can help me certainly have a role as a role model for Humana, humanitarian stuff. And I have a lot of nonprofits that I’m involved with in one that’s very important to me.
I’ll talk about another time. It involves kids who live in the favelas in parts of Rio de Janeiro that we sponsor and train and bring to America that just competed in the world championship. They do very well, but they train eight hours a day. So you get what you get out of it, what you put in. And so my goals actually didn’t change over time. That was the second part of it or the third part of it. There’s a few moving parts to Roman’s question because the goal is always to try to stick to your process. The amount of net worth changes and the market environment changes. But the thing that you should focus on all the time is your process, because the markets are going to change, right? They’re going to morph because they respond to the economy, not just the American economy, but they’ll change to global economy.
Interest rates have a lot to do with how stocks perform. Interest rates also affect the US dollar. Higher interest rates tend to support in a bullish way, the dollar not all the time because there’s lots of factors. So what happens if the dollar goes up compared to what happens with foreign investment, for example. So you need to know all these things and be mindful because what worked in 21 didn’t necessarily work in 22. See, and that’s particularly harder for the shorter term traders because the shorter term models can get out of whack a lot sooner than the longer term models. If I’m testing things over 10 or 20 years, those models don’t just all of a sudden not work. But if I’m trading one minute bars, it literally might not work next week. And so that’s the choice that you make deliberately to fulfill your financial and emotional needs if you’re doing it that way.
And I’m sure if you ask or if even I asked my friends who are in the shorter term space, they’ve had to evolve and they have to evolve quickly because like I said, the markets are going to change in what works in the shorter term space one period of time. They can change very, very quickly. But I think one of the benefits of longer term holding periods, I suspect is probably the best way to call it. I have found in back testing models, again, not predictive, but what I have found is that if you ran data on 60 different commodities or a thousand certain capitalized stocks and you modeled that they don’t work up to a certain point and then they don’t work anymore, they do ebb and flow, and you can certainly isolate periods of time within that back test and see that there were certain losing periods that if you had isolated then by themselves, you’d be like, well, this system doesn’t make money.
But when you back it out and you look over a longer period of time. So I could give you an example. You might run a trading strategy that worked for the last 20 years, going back to 2003, but in 2017 it lost money. So if you look at some of the shorter term simulators where they only let you test one idea, you might come to the wrong conclusion, right? Because you’re only looking at a smaller data set now a year, I guess to some people, if you’re looking at one minute bars, a year’s worth of data could be a lot of data points. But if you’re running something that’s a little bit more robust, that’s going to work across more than just say, the Russell two K, the emen and the nqs, and you’re more promiscuous in that. You have metals, you have the grains, you have the softs, you might have interest rates, you might have currency, you might have large cap growth up to 500, whatever the number might be, and how you segregate capitalization.
You might have a model that just looks at in index components and you want to be objective and look at that data. So I also looked at longer term data, which saved me a lot of the duress of having to figure out and what I would say, reinvent myself every day. That to me was exhausting. I didn’t want to have to come in every day and think, what am I going to do? I wanted to know exactly what I was going to do, although the instrument might change. A lot of people come to the market again, especially the short term folks who look at, and this is probably some ad trading advice too. If you’re struggling and you’re trying to day trade or look at short term timeframes on just the indices, those indices are strongly correlated. Admittedly, you can look at spreads between NASDAQ and s and p for sure and see some differences, especially in this environment.
But this is a unique, unique in circumstance. Most of the time, those markets are highly correlated, and if one goes up, they kind of all go up. So if you don’t see something in the emen, I think I’ll debate you on it, but you might be forcing trades, right was the point. And I didn’t want to come in and have to force myself into trades because I had a financial goal. I wanted to have a process goal where I knew what the process was going to be every day. It might be a different vehicle to help me get there. So that was something that I was lucky to strike upon early, and then that’s carried forward over the years. So that really doesn’t change. I think when you have a financial goal, your goals will tend to change more frequently, but if your goal is to have a process that’s going to pay you handsomely over periods of time, then I think you’ll have to do less work.
And it’s more about editing the model and making smaller adjustments than having to come up with a whole other model, right? Again, maybe I was lucky to fall into it that way. Again, I was physically trained, so I kind of understood how the hedging business works, where most commodity traders are straight out just speculators. So I did maybe have a bit of an edge, and then I later kind of came to understanding, speaking about edge, that if you don’t have an edge and there isn’t a vehicle for you to express that edge, giving your trading style on any particular day, then you got to take the day off, go take a blanket and a radio in the newspaper and a cup of coffee and do the crossword puzzle in the great lawn, or go walk through a museum or go do something else, as opposed to trying to reinvent something right on the fly, especially if you’re newer, because you don’t have the right instincts, instincts to kind of do that, and you could be looking to fulfill an emotional need for that particular day more than a financial one. It’s okay to miss a day. It’s okay to take a day off. But anyway, there’s all different shapes and sizes you might feel differently. As always, I appreciate the feedback. Any rebuttals or comments or disagreements, it’s all good because it helps
Move the conversation forward and everything has to be in context. It’s hard to do that in such a short window of time here. But please consider liking and subscribing. Send all your comments over. I see them. I’ll be here tomorrow with Ganja and look forward to seeing you then. Take care.
Click here to get your free copy of The Inner Voice of Trading audiobook.
This is an automated transcript