Your biggest losses aren’t necessarily from actually taking trading losses or things with brackets around the numbers, but perhaps missed opportunities. I’m Michael Martin. I’m a Los Angeles based trader and I talk about stocks, options and futures, what I trade, someone asked me if I would do a video on my biggest losses and I really talked about them in The Inner Voice of Trading. To be honest with you, those were the ones that were really the biggest magnitude and also the biggest emotional impact on me. So you can get the audio book version for free, the links in the description. I think the ones that hurt me the most though were things that I had seen and for one reason or another, I didn’t take it seriously enough or it didn’t look like it was my particular setup, so I kind of disregarded it, tried to make a mental note, which of course is a big mistake and I never put an alert in the system and next thing you know, I look four days later and it might be up a big number and I miss the trade.
And so if you believe what I say when we’re in a market where you only need several names a year to really make your year, especially with my style of trade, not in and out, in and out, in and out, I’m looking to kind of scale in and to build into positions. The missing those opportunities can be particularly painful both emotionally and financially because if you trade with leverage and the thing moves, it really hurts because those missed opportunities. You might not see it. You might not see another opportunity that has the same, that could have had the same type of an impact. Now I look at a time in the mid two thousands I had had a CTA, it got purchased by another company. That company had a 401k plan, so I was installed as “manquisition” and I had a $50k rollover at that point, and then they actually breached the contract, which I don’t want to get into.
So after two, it was supposed to be a five year deal. I left after two and I rolled that account over into a futures margin account and I started trading and I was in the right place at the right time, and I started and I caught the moves in sugar, gold and copper China. At least the rumor was China was going through enormous growth. They were buying all the commodities that you could possibly get. So that account went in a nine month period of time. Again, I was trading minimum 2% risk units and still adding to my winners almost an unlimited time. That account went from $50k to about $279k in 9 months, and I caught, like I said, gigantic moves in gold and in copper in those days I was seeing $0.14 moves in copper. You were seeing gold go from $500 to $800, sugar went from 9 to 19, and I was heavily loaded.
So when I think about the market and how everything works, I always had the kind of a similar trading strategy for those instruments at that period of time. But if those moves didn’t show up, you can have all the ability in the world. You can’t just go and say, I’m going to harvest X amount of money out of the marketplace because you have to put the trades on and the moves kind of have to be there. If the moves don’t show up, the best you can do is sit like a sniper and wait. So conversely, if I imagine at that period of time that I had all that ability, which I did, but for whatever reason I didn’t have it within me to put the damn trades on. Maybe I was looking at equities, maybe I was looking at this and that I was clearing ED&F Man for futures, Goldman Sachs for equities.
So I had all the resources that I could possibly need. Typically in those days I entered my own, Goldman had bought Spear Leeds Kellogg, and I believe that was the platform was called REDI Plus. So I would enter my own equity trades, which I didn’t really like to do just because if there’s a mistake, it’s on me. Whereas with my futures then and now I still call them into the floor so that if there’s an error on execution, it’s recorded and it’s not in my error account. So that’s typically why I pay the pros like I do to get the job done. Plus I like another set of eyes and ears on the account. You kind of get what you pay for, and I don’t ask for discounts. Going back though to those missed opportunities. You can have all the ability in the world, but if you can’t be decisive and you can’t put the trade on, it’s like did the trade even exist?
And then you get into your head and you start getting into negative thinking, right? You talk about winning streaks and losing streaks. When I approach the markets, and this is a big mental takeaway, is I come to the market every day knowing I’m going to win. I don’t know what instrument’s going to move because I’m not looking at the MNQs trying to make $2/point – You see what I’m saying? Or whatever it is. And I know if you are, you are where you are, but I just figured like, okay, based on my preparation the night before, there might be as few as two or three things on my radar that I’m going to set alerts for. Sometimes there’s more, but it all comes from the market. I’m not in my will coming to the market saying I’m looking at the NQ’s or the ES is every day I’m promiscuous. I think you should be too. Otherwise you’re missing out on opportunity. And that’s kind of what we’re talking about today. You have to look across all instruments. Once you know what your setup is, then it shouldn’t really matter whether it’s Nvidia or whether it’s the Einy cup and handle is cup and handle. If that’s what you’re trading and you have a mental hangup as to why you would trade one and not the other.
But Mike, the margin’s lower and I can’t afford to buy as much. But that’s not an argument. That’s something that you’ve made up in your mind. That was material. Your goal is to try to grow your net worth, not become a person who just trades the E-minis or the micro contracts. That’s small-minded thinking, and I think by definition, traders are people who have to be bigger minded traders. They have to think big. Think about making big money. Think about, and if this is where you’re at, one thing that can help you is you have to start manifesting it. Start by dreaming about taking winners off only when they have a comma in the P&L and set your stops accordingly. But Mike, things don’t just go to 5R. Well, that’s bullshit. Sometimes they do, but you might be small-minded and thinking, I don’t like it when it pulls back $200 on me so I could be up $300. Then it pulls back $200, so I’m only up $100. I don’t like that feeling, so I’m going to stop out of the trade. I mean, that’s something that you have to get over, right? Because an emotional issue, the money’s not that material.
So you are your own worst enemy at that point. You cut off your nose to spite your face. I can share with you that when I was in certain trades, like in gold and silver or even the copper, the sugar, they do go up and down, but maybe in an upward fashion you have to calibrate your emotional system to be able to deal with those small pullbacks in uptrends. They’re not reasons to sell. I don’t necessarily know that there are reasons to add more at that point, but don’t psych yourself out of winning trades when they’re going up just because they’re going up and down in an upward trend. That’s how trends work. Same thing with short sales. There might be a rally if that’s what it is, or a, and I don’t even know what you really have to define what a rally is, but if you are trading stocks, and the thing is going down, if the thing is up 50 cents in a downtrend, I don’t know that that’s a rally, right?
But learn to calibrate your system to be open-minded so that you do not miss those opportunities. That could be enormously profitable for you. Because once you get to your, I always have a goal for myself where I want to be up 10% in January because now I know I have a buffer even though that that’s money in the account. I never like to lose corpus, which is a fancy word for account balance. It comes from dealing with trusts and foundations. Corpus is typically the money in the account. So I started using that word because now it characterizes your account balance in a different way. It puts more of emotional, it puts more of an emotion on it. So I start to think about corpus as the body, which makes sense because kind of what the damn word means. So say you have $500,000, I don’t like to see $497k, so I tend to be super stingy, and that’s why I risk small amounts of capital like one 10th of 1% at the beginning. So this way I could be wrong 10 times and I still have 99% of my capital, but I get to put trades on because why? I don’t want the missed opportunities. Now, I will share with you, it’s likely that I have more money under control than anyone watching the show, and I’m risking one 10th of 1%. Listen to what I’m saying. Do you think that that makes me emasculated?
Not in the least. I know myself when I’m wrong, which is plenty of times. What does wrong mean? You lose money. It doesn’t matter why. If you buy a $10 and it goes to $9.90, you’re wrong. It doesn’t matter how you want to qualify it. But this way, if I have one 10th of 1% risk units, I could be wrong 10 times in a row, I still have 99% of my money. So in the way my mind works, what’s the difference between 99%, 100% and 101%, for example? Nothing. No difference. So when I do that enough and my account equity goes a 101%, to 102%, to 103%, 104% – back to 103%, back to your beginning equity at 100%, 102.5%, 102%, 102.5%, I’m still skewing things ever so slightly, even though there’s pullbacks. So then you get to the point where you’re up 10% to $550k, in my previous example.
Now it’s like, okay, well I’m in a trade and I know if I am losing money, I’m not losing anything from the original $500k, I’m losing from gains and or unrealized gains, but I’m still taking those chances. I’m still putting those trades on. So if you have regrets or you have fears about losing money, the best thing you can do is trade smaller, sticking to one strategy, get good at that, build your confidence, put those trades on, add second strategy or other asset class, go back to risking one 10th of 1% and trade. Now your normal size with your primary strategy. This way, when you’re taking those new chances that will both have financial and emotional payoffs, it will not destabilize you from your main baton ball. So this is what I’m talking about. If you’re trying to come out of a drawdown and you had $500k and you drew it down to $495k, you might have an emotional need to want to get your account back to breakeven. How do you do that? Well, you risk one 10th of 1% and you take every signal. You can’t overthink things. Now I’m just starting with one 10th of 1%, right? Look at this. In fact, I’ll tell you exactly how to look at it. Your overall optimal risk size might be say one half of 1%. So with $1 million, that would be $5k. Now say you look at $5k, that might be 16 contracts. Well, no one says you have to put the 16 on all at once.
So that means, okay, well let me break. I’ll chop that up into fourths, and I will trade four contracts long. First risking the same ATR. If you do the math, you’ll find out that you’re risking one one fourth, right? One fourth of a half. What’s that equal? One eighth. What’s an eighth 0.125? Is that close to one 10th of 1%, which is 0.1? Oh yes, method to my madness, steal from it. You can enter four times and build into your 1/2 of 1%, adjusting your protective stops all the way. And if you do that enough, you might find that when your winners win and you put on your fourth piece, which gets you to 1/2 of 1%, you’re only really risking one 10th of 1% of your capital because your other positions, I’ve made you money. The first two will make you money. Your protective stop will be at your third entry, and your fourth one is one where you would lose. So this way you trade smaller, you scale into your win winners. Most of you are like, well, I’m risk on risk off. If it moves that much, that’s where I’d be selling. And I’d be like, well, extend your timeframe. Hold it longer, hold it overnight. If you’re risking one 10th of 1% based on your protective stop and it has a gigantic move against you, maybe you’ll lose a half a percent. That’s nothing to be scared of.
It might be aggravating and frustrating, but it’s nothing to make you not want to try. I can’t do that. Can’t take risk home overnight. What are you crazy? That’s insanity. I’m like, no, it ain’t. I mean, if you’re trading back in the day with foreign exchange, you could lever your account like 200:1, which I don’t advise. That’s why I don’t advise trading foreign exchange at the beginning, is because you need to learn how to manage cash, meaning trade with no leverage. Trading into a highly levered interbank market
Is the moth to the flame. It’s much better to trade and learn how to trade cash first than trying to use leverage. Because my thought, my opinion is you might disagree, is that if you can’t trade cash, you really have no business using leverage because it just amplifies everything. It amplifies bad behavior. You don’t know what you’re doing. So focus on finding one strategy and sticking with that. And if you’re scared, just trade it smaller. And if you’re still scared, we’ll cut that position size in half because you have to learn how to trade through those strong feelings again, because the ones that you want to feel could be the other sides on the other side of the ones that you don’t want to feel here. And now that happens a lot when people think about buying new hives or buying breakouts.