Hi everybody. Michael Martin. Thanks for being here. So question came in about how did I analyze the data right from Monday’s episode about my being wrong and then figuring out the wrongness was because I was early to a trade that eventually worked out, right? I say early means wrong because I don’t know at that moment in time if the name’s going to go up. So the best I can do is manage risk in the here and the now. I don’t get to manage risk using what I think is going to happen next week. I have to look at largely the price right now, you see? But so then the analysis comes down. Yes, I kept very accurate records, but you can also think about it from base theory, more conditional probabilities. What’s the probability of event B? If we can observe the probability of event A, so I knew what my overall losing percentage was, and I don’t have positions that jump through stops and this and that.
So my largest loss and my average loss are the same thing. Why was because you take them religiously. So there wouldn’t be, if I was risking two bucks, I wouldn’t have a $10 loser. I would just stop everything at two bucks. And so that’s both your biggest loss and your average loss. And so you want to watch that in your own behavior and see if you break your rules, does it tend to benefit you? Because in the short run, it might feel good emotionally to take that risk to try to earn your money back. It’s typically something people do at the wrong time when they’re losing money. The time to trade bigger, or maybe more frequently is when you’re in a crazy winning streak because then the market is saying, we are absolutely amenable to your trading style. Again, the emotional benefit of trading smaller at the beginning for me was that if I got stopped out on any one particular day, it wasn’t a big deal. And it doesn’t mean I don’t care about the money, especially when it’s other people’s money, but I would rather lose less money much more frequently, right, than lose a lot of money as frequently. So you can look at conditional probabilities and say, again, it helps to do it with a simulator. If you’re good with spreadsheets, then by all means, but you can think of again, what they consider conditional probabilities. It’s in the world of statistics, but it doesn’t get beyond say, using algebra, which I presume most of.
Again, what is the probability of event B happening, right? Given the known probability of event A, which you can observe. So the event A for me was trading and using my optimal position size on the initial entry, I found out that yes, I could make money, but then I have to conjugate a few other things. I am going to have a larger drawdown, both in magnitude and
Duration to recover. So I’m saying, okay, finances can be defined many, many ways. Applied microeconomics, you could say it’s the time value of money. If I’m going to see a 50% mover, I don’t want to see that if I’m trading 70 cent dollars. Do you see what I’m saying? I would rather start and have close to my highest equity point to see that move if I’m in a big draw down and then the move comes in, right? I talked about what happens in, if you sold a house for half a million dollars and you put the money to work on October 1st, 1987 versus it clearing escrow on November 1st, 87, it’s the same trade that’s the same liquidity, but there was a big event that happened in between, and that’s a 28 whatever percent haircut on your capital if you were just doing the market stuff, at least by the Dow.
So you don’t have to go berserk on the math, but you do have to analyze your own behavior. If you want some private stuff, then shoot over an email. But please just ask one question. I don’t need the backstory, just ask the question. If I need more information, I’ll ask you. But when you send me a block of email with no spaces and stuff like that to be, I’m telling you now it’s tldr, I’m not going to read it. I don’t have the time for it. Because in order to understand the backstory, you’re kind of making the miss miss the assumption that I need all the background to understand what your issue is today, which typically means you’re dealing with some form of regret.
How do I know I’ve been there? So I don’t need the reasons why you feel regret. I just need you to answer the question. If I need more context, I’ll get it from you, but you can shoot that over because studying your own behavior to me is the quickest way to get to success because only why you do stuff the way that you do it. That’s alpha. You just want alpha to be positive though, not negative. So by all means, think about conditional probabilities. Think about the emotional payoffs. How could you trade maybe and make as much money but doing it slightly differently than you’re doing it today? For me, that meant cutting my initial position sizes to a point where I could afford to be early and wrong in the way I look at that word and still have some of those trades come back and work and work out for me as opposed to being super prudent.
Kudos to me for getting stopped out. Granted was in a big drawdown, but it could have been much worse if I didn’t stop it. You see, if I didn’t stop my equity at that point. So be kind to yourself and learn from yourself because it’s improvement, it’s progress, not perfection. And in trading, I don’t know too many people that didn’t have to go through the rigmaroles of paying some form of tuition. And it’s not just financial, it’s emotional tuition. Cause you don’t know what you’re doing that makes you feel insecure. That could hit your self-esteem, at least it did for me. And so you have persistence and determination and, and to me, when you add persistence and determination, what you’re really speaking about is a person’s resiliency, attitude, and resiliency, right? Resiliency. If you don’t have it, you get pissy because you’re losing money. You can really shut yourself down and end up.
You don’t want to be your own worst enemy is what I’m trying to say at the end of the day. So you can study your own behavior and see what works for you. Otherwise, market’s hard enough. You don’t want to beat yourself up, take your punches from the market because guess what? You don’t have a choice. So it appreciate, again, the questions. They’re all pretty good. They get me thinking on things of where, especially on the margin to equity one, there was a time where I thought that was actually much more material. And it happens a lot when you’re speaking with institutional allocators. They’re like, what’s your daily? What’s your margin to equity? And I personally think that’s a stupid metric. Daily vol might matter because they’re looking at you as maybe one of many, many traders that they have or portfolio managers in their stall or at their horse ranch, so to speak.
So they need to make sure that everyone plays nice in the sandbox and that they’re not actually adding extra risk by adding you among the people that they allocate to. So that might make sense, but again, if someone starts talking margin to equity rules, it doesn’t really make a lot of sense. You really have to look at the results and you have to look at drawdowns. Anyway, please like and subscribe. I’ll keep trying to come up with good stuff that meets your needs that’s also very timely based on what’s going on in the market. And I’ll absolutely respond to all the questions that you send via email or through the comments themselves. Thanks for being here, folks. I’ll see you tomorrow.
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