Reviewing Q3 and prepping for Q4

I hope you had a good week. And then you have some fun plans for the weekend. So look, we’re about two weeks out from the beginning of Q4 – October, November, and December of the calendar year. And so now might be a good time to kind of reevaluate. What did you do in Q3? What have you done year to date, for example, and what changes do you want to implement? What new feelings do you want to feel? What feelings do you not want to feel? What actions can you take inventory on? Are those actions adding up to either pleasure in your personal life or superior trading in your professional life? So it’s a good time to kind of start the process, to think about where you’ve been reevaluate some things, if you need to and act accordingly.

I like to think in terms of speaking to myself in the present tense, as if I’m actually in possession of the goals that I’m setting for myself, not “I’m going to do…”, future tenses and the future don’t exist. So you can really inject your body with a lot of enthusiasm and excitement and speak and say things like, instead of saying like, “I’m going to be a world class trader” say, “I am a world class trader,” that’s a whole different mindset at that point. And you can infuse your body with a lot of energy that’s positive and give you better mojo than sitting about daydreaming.

Well, “Someday I’ll be that…” because that when I hear like “I’m going to do this,” I never, I never believe anybody when they say, oh, “I’m going to do this” because that’s the future tense, as opposed to saying, well, “I have a plan to do this,” or “I’m in the process of X, Y, Z.” That to me is someone who’s empowered and who probably is taking action, who probably does have their goal written down or their action plan to go to at least achieve it, to invite the failure.

Because again, just like anything in trading, the trading part is going to give you all the education that you need. So same thing in life. You just have to go out and do it and execute doesn’t matter what it’s going to look like. That’s what, that’s how these people have great success is that they were fearless or they felt their fear, but they didn’t stop them from taking action. So as it relates to your life, we have Q4 that world is where it is. What will happen? You’ll have midterm elections. I think coming up we’ll have a whole bunch of stuff coming out of the Fed. So we kind of can anticipate that. And so with that in mind, and with that knowledge ahead of time what can you do to set yourself up better, both in your life and in your trading, what processes have you been doing year to date that feel good, but don’t really get you any results. Can you decrease your screen time to Have more fun in your life.

Don’t turn trading into a blue collar job. How can you cut your screen time and still be effective? How can you better make use of stops and alerts to free up your time, but still be mindful of managing risk. Those are good open ended questions to ask yourself. Because they’re not yes/no questions. They’re “how” questions and those “how” questions and those “what” questions can keep you in the solution because now you’re coming up with answers to questions that you normally wouldn’t ask yourself. And then you can go to put that wisdom to work. What you don’t want to do is become lazy and stop thinking about having goals. So you can have weekly goals for sure. And those will all add up to some of the bigger goals that you wanted to achieve for the year.

It depends on who you are for sure. I tend to do this all the time, like every day am I hitting my goals? You know? because the minute I stop thinking about my goals, I’m letting myself off the hook and that means I’m getting lazy. It also means I’m not using all the tools and the gifts that I’ve been given. So you can evaluate yourself. I’m in no position to judge anybody, but you don’t want to be doing the same thing every day. Don’t get into some rote, mechanical way of living set goals for yourself so that you make sure that you, that you’re growing in your personal life and in your personal life. Because you’re the one who’s in control. It’s not stuff happening to you. You can manifest what you want, but you have to increase your level of awareness on those things you see.

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Working against yourself

So I got an email from someone saying, “Hey, Mike, you know the things that I’m looking at and my screens – they’re not working, nothing’s working, I’m looking at the name. So I’m wondering should I switch to options?” And my answer is no, now’s not the time to start trading a new asset class with a new strategy because your screens for your normal trading, aren’t working out.” Now, if you want an education, by all means study a new asset class, study a new trading style, for sure. But if the market is communicating with you and saying now is not the time, then take solace in sitting on your hands. Because as a speculator, you have one thing that big 40 Act companies and other large institutional investors don’t have the opportunity to do…and that’s the right to not participate.

Being able to sit on your hands is a great advantage is especially if you’re a long, only player trading a certain capitalization or you know, a certain whether it’s growth or value, international domestic, doesn’t matter to me. If what you’re screening for and what’s worked in the past, isn’t working right now, then now is not the time to force the issue. The universe is communicating with you very, very clearly. All you have to do is listen. Now you might feel like you’re missing out on opportunity, but I can assure you that that’s not the case because the opportunity that you’re missing out on might very well be not inducing a drawdown or a further drawdown by you exercising your right to not participate. You know, everyone thinks that, well, I have to sit on my hands. I’m missing opportunity.

Well there’s opportunities to make. There are opportunities to make and there are opportunities to lose. So which one do you think you’re, you’re missing out on? Most people don’t like FOMO is that there’s some gain that you’re missing out on or there’s some economic utility that you feel you should be getting that you’re not getting. So my whole take on all of that is sit on your hands, take it easy, wait for the market dynamic to change. And if you want to study something else, no problem. I wouldn’t put any money to work on it because it seems to me that you’re looking to fill an emotional need. Not necessarily a financial one, because everything moves and ebbs and flows. What works today might not work in October in several months. And what works in October might no longer work anymore. And the things that you worked from January through whatever this is – early September will come back to working again. You know, the trick is to be able to endure those periods of time because there’s a financial drawdown, but there’s also an emotional draw down. And of course you want to make money.

Of course you want to focus on playing superior defense, but there are times like this when you might find for your particular style that it’s time to sit out. Doesn’t mean you’re a loser. It doesn’t mean you’re not trying to act like a pro. It doesn’t mean anything about you as a person. Your job is to manage risk and with that to play superior defense. So anything that goes against that is you fulfilling some kind of an emotional need. Not a financial one. And again, I agree that there are two different outcomes to a particular trade, financial and emotional. You don’t want to find yourself in a spot where you’re putting on trades because you feel like you have to, because that’s when you start losing money and then you look back and trust me, I’ve been there and you’re like, why did I put that trade on?

Maybe you’ve already been in those circumstances, but you could easily avoid doing any of that by thinking ahead of time saying “I don’t want to have those regrets. I don’t want to do something for the sake of being active.” And then two months out into the future, look back and say, huh, I invited a 5, 10, 15% draw down to my account because I couldn’t just sit still. And I’ll argue that this is something that the majority of you suffer from is that you feel like you always have to be active. A good example of that is the weekly and the daily charts are down, but you’re going to downtime it to find something that’s working. There’s, there’s an up trend in like a 1, 3, 5, 20 minute bar. So even though those numbers and those levels are not statistically significant because you’re still in a protracted down trend, you have to find a way to see some kind of an uptrend.

That to me is forcing the issue. And when you force the issue, just like in relationships, it doesn’t typically work out. And if nothing else happens, it doesn’t put you in a good light.

Please consider subscribing. We have shows up on YouTube and Spotify, Stitcher and especially apple podcasts. , if you’re there consider leaving a review that would help a lot. I get good data. I like to know because there’s really no other way to kind of get feedback from folks. Of course, you’re welcome to write in via email. That’s how I get a lot of the topics to speak about. And if you’re new to the show, thanks for being here. I hope you liked it.

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The pain you get from jumping the gun

So I couldn’t help but notice with the current state of the economy, everyone’s shooting their mouth off about having opinions about what’s going to happen. And I find that all kind of interesting, but it’s kind of like asking somebody who their favorite rock band is, is what their favorite song is. It’s somewhat interesting, but I can’t really trade on it. However, there are some of you out there that are fans of certain people could be Muhammad El Brian. It could be Jeremy Grantham. Doesn’t matter to me who it is, but, and, and maybe you’re big fans of theirs. Maybe they they’re super bright people. They articulate in a way that things resonate with you. And then over time, you start to develop your own theories about stuff. So keep this in mind.

Remember that there are three things that can happen on any good trade you have. As far as the financial outcome is concerned, you have good luck, bad luck, good timing, bad timing, good analysis, bad analysis. So if you wanted to make, say, for example, a bullish case for stocks, because you think all the upcoming rate hikes are otherwise already priced into the market. And you put your bet on. What could happen? You could have a market crash that would be bad luck. You could have bad analysis where there is no bounce and the market keeps going down. You could have bad timing in that. The market in the short run goes down after you’ve already made your long bets and then recovers. So I remember Paul Tudor Jones saying “price moves first, fundamentals follow.” There’s a way to trade that type of ideology.

If you start with your ethos or a fundamental point of view, and then come to the market to trade it. I remember Jim Rogers came to Santa Monica for a speaking engagement. So I met up with him afterwards and we were hanging out. And he said here are some of the things that I’m doing. And he goes, “I realize I might be a little bit early, but that’s my style – it’s like, when I’m wrong, it’s because I’m too early. But I temper that with betting really, really small.” And an example of that is like, if you put down 1/10th of 1% as an initial stake, knowing that you’re going to add, and the thing moves against you, even by a whopping 50%, you’re only down five basis points on your overall portfolio. So that’s how you can stomach being early, as you have to bet small. I got an email from a nice guy. He’s a follower. And he said “I see the semiconductors are off big in the aftermarket.” And my first response while not putting a whole lot of thought into the question was, “well, they’re all in downtrends. So you wouldn’t have to worry about the thing being down against you in the aftermarket, because you wouldn’t buy stocks that are in a down trend, right?”

Unless you’re trying to get cute and be a bottom picker, which I don’t advocate right now, if you’re buying things that are in up trends, the way you could mitigate some of the risk is to position size for what you would think would be a worst case scenario. That’s how you would handle that. So in the same breath here, you might have strong opinions about the world economy, the US economy, or whatever economy it is that you’re looking at. And you might want to put that theory to work as far as an investment or trading thesis. Well, what I would do is wait for the market to actually start moving in the direction that would kind of conjugate with what your thesis is. There’s no heroism in being early.

…Unless you’re betting again, terribly small, like Jim Rogers said, because what could happen is you could be right eventually, but you might have to be early and endure. Who knows what? Five, 10, 15% drawdown before the rest of the stuff kicks in. So my whole take would be like, have your thesis have your theory, but wait for the market to give you the thumbs up that it’s going to start to move in the direction of your thesis. Otherwise you’re trying to jump the gun. You might have a fear of missing out. You might have a a little ego thing going and that you want to prove everybody wrong, which, okay, I’ve been there, but that’s typically not a way to make money. Now, if markets are going down, wait for them to consolidate and then start an up, move, wait for that breakout. Then you put your strategy to work. You see, for example, if you think there is going to be a bounce, wait for the bounce to happen. Don’t try to guess when it is. It’s very difficult to do.

And there’s several ways to do that. If you’re a fan or have a book a couple books by Victor Sperandeo – he has the 123 Reversal – he has the 2B Reversal. So there’s a few ways to look for that to happen, where you can actually see evidence that there are other people who are thinking the way that you do. There’s nothing really to be proud about if you are the first one. What are you going to do with that? And how much it’s going to mean to you financially – 1%? That’s not worth it to me. It’s not worth taking on the risk of losing 10% to make an extra 1%, because you’re going to try to time the thing exactly. Look at market structure. If you have the time you think any of these episodes have resonated with you, please consider going to Apple Podcasts or whatever, and leaving a short review. Doesn’t have to be War & Peace. You can leave a couple sentences and let other folks know what you, how you benefit from the show because they might benefit. Also. Thanks very much for being here. Folks. I will see you tomorrow.

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Be mindful that winners rotate

So at the end of the day, you could also find yourself falling in love with the names that got you where you were, and the way I look at things like this, probably very different the way other people look at them. And I think of things as being ready to betray you. So the minute you start to think, like I’ve been trading this one particular name, I’ve made all this money, I’m up 50%. That’s annualized at a 100%. I’m just going to keep trading this name. Now I know that there are folks who trade short term stuff and focus on only indices like emini, for example, or otherwise. And that’s your style. So I’m not really talking to you because you don’t really have a robust system or a set of rules. You’re focusing on one instrument, probably one time frame.

And again, I’ve spoken until I’m blue in the face about all of that stuff. It’s an interesting place to start, but then sooner or later you have to branch out. At any rate, whatever got you to where you are today, just realize that those trends don’t necessarily continue. Everything kind of moves. If you look at I was involved in a pretty good sugar trade many, many years ago and the price of sugar had actually doubled. It went from 8 or 9 to like 19 and I caught a good chunk of the move. I got stopped at 18, even on my entire position.

And if you look at the chart, it was the March of 2006 Sugar contract [SBH06] – coffee, sugar, cocoa exchange at the time. And the whole chart after that move was a disaster. It was all over the place.
I’ll see if I can find one and, and post it in the blog post. But the thing is get it while the getting’s good. But then also realize that market dynamics can change very, very quickly. And the instruments that you traded for the gains that you have at up to this point could also be the ones that take all your money for the rest of the year and bring you into a drawdown so that you only finish up the year 15%, for example. So you have to be fast on your feet and stay aware of what’s going on and objective because the minute you start saying like, “this is how it’s going to be every day” without doing the proper analysis, you can put yourself in a tough spot where, “Hey, this was working and now it’s not working anymore.” You see? And I’ve been there. That’s why I’m talking about it. Because I feel like, oh yes, this thing is beautiful. We’re going to sail off into the sunset and here I’m going to calculate all the money that I’m going to make. And then what am I going to do with all the money or how I’m going to grow my account?

And I lose focus. I lose focus on the present and I lose focus on what my job number one is. And that’s to play superior defense. So what can you do? Well, if you go back and look at your history, you can kind of see what was your winning percent? How many trades did you put on? How many winners did you have? How many losers did you have? What was the expected value? What was the, is there, was there a draw down? How big and how much larger were your winners over your losers? So now at least when you’re looking at the second half of the year and you start trading, what happens if you take 3, 4, 5 losers in a row, what does that do to you and your trading?

How does that alter things? Do you start to trade smaller? Do you cut your frequency? Do you give the chart a breather? Come back to it, find another name. You’re not going to change your discipline. You might change the vehicle. So the moral of the story here is that there’s a certain vehicle or several of them that helps you get where you are right now. Enjoy it. But they might not be the same names that carry you through the rest of the year. That much is not predictable either. That’s again, why I don’t get into annualizing and start getting my hopes up, because that’s an emotional game. That’s not a trading game. You see? So I want to stay present. I want to be objective. Sure. I’m very, very grateful for where I am right now for the work that I’ve done. But I also have to know that maybe what’s going to carry me for the rest of the year isn’t on my radar screen just yet. So stay that objective.

The minute you start falling in love with something you’ve lost your objectivity and that could and help you end up staying in trades longer. How many people got killed on NVDA, for example? They had been making so much money and all of a sudden the thing turned for a whole bunch of reasons. And they were like, “yeah, it’s going to come back again,” illustrating some of the problems of trying to buy bounces or pullbacks as they work for a while until they don’t work anymore. And then they cost you a lot of money. Anyway, please consider subscribing. Because they get some really good data about the episodes that you like. And then I can focus on those or themes around those and continue to hopefully create good content for you. because even though the show’s only five, 10 minutes a day, I don’t want to waste your time.

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Don’t get your hopes up by annualizing returns

So I got a good email from someone who said, “Hey, I’m having a really good year. You know, I’m up 50% and that’s annualizing a 100% so what should I do about it?” And I’m not sure that there’s anything to do about it. Congratulations for being where you are right now, I would shy away from annualizing numbers for a whole bunch of reasons. One is annualizing is a way of forecasting and forecasting means the future. And we don’t know what the future is. We only have today. So I try to stay grounded in the moment of now not to live in the future and walk around like, “wow, I’m up a 100%.” And then if I can do that year over year, and now I start to have expectations.

And then what happens if those expectations don’t get met? They say expectations have built in disappointments. And so you can put yourself in a tough spot. If you’re up 50% right now you want to just focusing on managing risk and not getting ahead of yourself. Of course, look, congratulations again. I’m not trying to pee on anyone’s parade, but I will say that you going to be careful when you start to anticipate the annualization becoming predictive, because it’s not. If you’re up 50%, there’s a strong chance you could keep going, but there’s an equally probable situation where you finish the year up 40%, up 50% up 60%. Because every time you put on a trade the thing about trading is people think, “well, this is my model. This is what the odds, this is what the expected value is.”

But the truth is is that it all changes every day, every trade things change. So you’re kind of dealing with guesstimate. All you have is your behavior and you are being disciplined, but where that all ends up at the end of the year is very difficult to predict just based on where you’ve already been. So yes, things are trending higher. And again, congratulations, it’s not about trying to discount how well you’ve done. It’s just that trying to infer how things are going to go going forward is very, very difficult to determine based upon how well you’ve done so far.

Case in point look at if you follow American baseball, the New York Yankees got out to a great start. And they’ve basically collapsed since the All Star break. And earlier in the year, they were comparing this team to the 1998 Yankees and all these different things. And if we could only do this and that, blah, blah, blah, and now it’s like they’re playing – even though they’re in first place by a small margin, they’re playing more like a Wild Card team. They just collapsed. So even it happens in other walks of life is what I’m trying to tell you is that you cannot infer how well something’s going to go and then use it to predict how the rest of the year’s going to go. And in the case of the Yankees, it’s a complete 180 degree turn. So likewise with your trading, absolutely celebrate your success for sure, but just keep in mind that it’s very easy to start losing money. So what I would do is stick to your discipline, make sure you know what you can lose on any one part particular trade…and honor your stops…

…don’t negotiate with them and stay focused on the now all you can do is manage risk in the ever evolving moment of right now, it’s very difficult to start getting ahead of yourself and thinking that you’re going to be managing risk or trading bigger. You don’t want that type of risk to get into your system to be like, “Hey man, I’m onto something…” because in the short run, you don’t know if it’s skill or luck. You’ll take both. So will I, but if you don’t have 10 or 20 years of trading experience, you don’t have a lot to go on and you might be getting a little bit ahead of yourself. If you start to think like, well, I’ve been doing this now 18 months, I’m up 50% again, by all means, enjoy it and keep doing what you’re doing, but don’t forget your “job #1” is to place superior defense. If you start trading larger, start taking flyers, start thinking that you’re onto something. Start shooting from the hip trading from your gut. You know, this is when you start to open yourself up to giving back some of those gains. And so think about it ahead of time. You’re up 50%. Your behavior changes. You finish the year up 30%, you still up, but what happens to your mindset at that point?

So stick to your rules and keep doing what you’re doing. Of course, focus on entering your stops and playing superior defense. Worst thing you could do is start changing your behavior and get more aggressive because you want to get to that annualized number more sooner than later, just focus on your process. That’s all you can do.

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