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So this is the secret of trading that no one tells you about. They try to say, here’s the secret hack of proven eight number traders, blah, blah, blah, blah, blah. Here’s this little known thing, blah, blah, blah, and that’s all to hook you in to try to sell you something in my humble opinion, and look, if they’re successful at it, more power to ’em. I’m happy when people, it’s good for the industry. Pensions, endowments, foundations. They need talented people to run the money because there’s millions of people who are counting on our ability to manage the risk. So get out of the retail mindset of like you’re just trading your money. Think about developing a skill that you can use, trade other people’s money and further enrich everybody, including yourself. You’re the asset here. If you can’t control yourself, you can’t control the risk, right?
As I like to say, if you don’t manage the risk it manages you. You need to have a plan first. You can’t shoot from the hip if you have no experience. Everything looks good because the flashing lights make you triggered and induce you to do stupid things with your money. If you use a price-based strategy just to start, you can start to have discipline. That discipline can give you confidence. That confidence can lead to your p and l, and you are making money over time. And then the behavior supports, right? The results. The results support the behavior. The behavior supports the results. There are only a finite amount of tools out there or trading rules that for you to follow. The goal is to find the combination that works best for you. But at the beginning, don’t worry about making a lot of money. In fact, in my experience, you don’t want to make a lot of money fast.
Then you fall into this full sense of confidence that you actually know what you’re doing, and then you start to overtrade or trade too big. I’ve seen it happen so many times. I know people who did buy Bitcoin at 10 bucks and lost it all. It’s the way it goes. It’s the natural order of things. If you don’t like the feelings around discipline, you’re going to certainly start to feel feelings around regrets, and once the money’s gone, you can’t really get it back. It’s not the same. So the secret is learn yourself. What makes you tick? Why do you do what you do? You can’t sell that because no one says that, right? If I put that in a trading headline or on a blog post or what have you, no one would click it because it doesn’t talk about what the opportunity is. And that’s where people’s intentions and energies go is they want, show me opportunities. Why do you think they sign up for these alerts? Here’s what we’re buying this week. Here’s Jim Cramer’s action alerts. If he even still has it. I’m not making fun of Jim. But that’s what people do, is they don’t want to go through the hard work that you have to do to culture the Pearl, to calibrate your system with what you know how to do as a market overlay. That’s the rub. There aren’t hot tips. They don’t exist. And even if you came across something, use or

Dissemination of material, non-public information will get you in jail. So that’s not even worth it either. So the key to doing this very, very well is to study yourself. Once you know who you are, what feelings you want to feel, what feelings you don’t want to feel coming up with the trading strategy is easy. So many of you start wrongly, and I’m sorry about that. I know how you’re marketed to what else. You’re supposed to think that you need to go out and study all these strategies. I’ve said it before on the show. If you’re new to the show, thanks for being here. If you don’t know who you are, it doesn’t really matter what you know, because that’s going to affect you in your relationships. It’s going to affect you in your nine to five or whatever. If you’re a professional, those emotional models show up everywhere.
I was willing to take chances. I feel the fear. I don’t let it get in the way of my decision making though. How do I do that? Well, I have to temper the amount of risk that I take. So in that case, being impulsive actually helps me to the extent that I can keep my position sizes small. When I was starting, I’m not impulsive now, but I was willing to try everything Baskin. Robin has 31 flavors. I’m going to try every one to figure out. I know I like chocolate, so that’s easy. I could always come back to that, right? I remember when Pian and Cream, one of their flavors had come out. It’s probably early to mid eighties, and I was like, well, I know I’m going to go have chocolate, but lemme try something new. Turns out I liked it. You got to try new things. Learn about yourself. It’s the quickest way to get to success Trader mindset, which includes psychology, situational intelligence, emotional intelligence, knowing when to sit on your hands, knowing when to avoid being in the market, because it doesn’t require you to be in the market every day, even if you’re a scalper, even if you’re a day trader, you’ll learn these things the hard way. The secret is you need to be a master at knowing yourself. The trading stuff is absolutely easy.

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Which would you rather have? The pain of discipline or the pain of regret, right? Because if you don’t have a plan that you’re executing day after day after day, if you don’t have the patience to sit on your hands and wait for that one setup, chances are you’re going to have one or the other. The fear might keep you out of winning trades, in which case you’re going to lead to regret. So now you can connect those two emotions. I have fear, and when I don’t take the actions that I know I should take, I end up with regrets. How do you win with that model? What’s the next feeling for you that might be the payoff? Do you get to bond with other people and connect? They get to hear you out. You get to talk so you feel understood. Because if intentions equal results, then I would say your job in life is to feel understood.
Why risk money to get to that feeling when you can go join a men’s or a women’s group, go join a book club wine tasting group, and you can talk all your deepest thoughts and make those important personal connections with other people. You don’t need to use the market as that mechanism. You see what I’m saying? So it gets kind of deep and if you don’t have the discipline, you’re going to get the results that look like they’re undisciplined. It’s like the person who’s eating 4,000 calories every day and go into the gym thinking that that’s going to lead. You ever watch that person overeat and then they’d go and they’d do sit-ups thinking that’s what’s going to get you your abs when everybody, including my dead grandmother, know that your abs are created in the kitchen. So I think discipline’s important. I think attitude and having a good attitude is also very important.
That’s not the first time I’ve said that, but look, if you want to dance one sooner or later you got to pay the fiddler. And at the end of the day, if you don’t have a set trading strategy that you can replicate day after day consistently, you’re going to live in the world of either regrets or the pain of the discipline. For me, I was lucky. I had great discipline. Why? Like we talked about earlier this week, I had been working since I was 12, and I knew I didn’t like the feeling of not having money in my pocket to go do stuff with my friends or whatever it was at the time. I was really into fishing. I would go the lake that I had and some of the reservoirs and the ponds around. So again, what does this have to do with trading? Nothing, but it has everything. So I used to like to fish because I had a fishing license.
There might’ve been a window where I was exempt, but nonetheless, I was able to go to the reservoir and fish for rainbows and brownies in the lake at the bottom of the hill, they were stocked with everything from perch to crappies to large mouth bass, and then some of the other, there were ponds and little lakes in upstate New York that you had to climb over trees and stuff to get to. They were stocked with fish, but they were hard to get to and they weren’t really, it’s not like they were unknown. Somebody knew that they were there, but they weren’t fished. So you could go in there and find 14, 15 inch large mouth bass. So I really loved that. But in order to do that, I needed a tackle box. I needed those long pliers where you could reach into the fish’s mouth and get the hook out. I would use lures and spoons, real worms. We could dig up our own worms and bring our own bait.
I eventually had a rowboat with oars, with a life jacket, all that stuff cost money, not necessarily a lot of money, but those are the things that I wanted and if I wanted them and to kind of continue that stuff, then I wanted a car, right? I knew I was the baby in my neighborhood. Everybody that was in my neighborhood that I was friends with were between two and five years older than me. So I started becoming a teenager. They had their own cars, and it was fun because they could come pick me out. All of a sudden we got pocket full of cash. We can go wherever we want. And it’s just fun to have liquidity at that point. Whether you’re playing Mrs. PackMan or getting a slice of pizza, doing whatever it is that you were doing. You could just afford to go see a film, blah, blah, blah. I had to fund that all myself for the most part. Not to say my parents didn’t help me, sure they did, but I just always felt like it was on me to provide for myself something that I still feel to this day. I don’t want to rely on anybody else. I carve it out of stone. I do it all myself. And then I kept scaling up the story, eventually built out the landscaping, then I went to school and did this and that.
And I remember thinking like, man, I don’t really want to go to work. I don’t like that feeling. I’d much rather go with my girlfriend to Jones Beach or something like that in Long Island or the Jersey Shore to Lake, spring Lake. But I also knew that there were decisions to make. And so the way I looked at making the decisions, I would look at the emotional intelligence of it. And again, like I said, I was born this way, so I’m damn lucky I know it. But I would say, okay, what do I want to do? Do I want to miss a day or perhaps the weekend at the golf course knowing that the caddy master knows I’m not there, knowing that that’s going to affect whether I go out during the week because he takes care of the people that take care of him, especially on the weekends.
Do I want that type of retribution? So I thought about, okay, what about the pleasure of going and doing this thing versus all the other feelings that I know I’m going to have to feel afterwards? And then that became part of my equation. So when I came to trade, I would say, okay, I could do the undisciplined thing right now because it feels good now, which is say take a winning trade off just because it’s Friday and for some reason only bad things happen over the weekend. It’s the truth. Only bad things can happen. It can never close Friday and open up stronger on Monday, which I don’t know why people think what they think, but again, it’s this Johnny Cochrane logic. And so I would look at the feelings that I wanted to feel based on the results that I knew that were possible, and then that’s how I made my decision. If I went out with my friends and had a couple more guinnesses than I should have, I still said like, I can’t miss work the next day. I can’t miss my commitments the next day. Then it makes it even worse.
And again, I was lucky I had good parents. They taught me the art of follow up. How do you follow up with people? How do you communicate? How do you manage other people’s expectations? That’s a huge part of being in business, letting people know what to expect by when. And if you said you’re going to get something to me by Wednesday and you need an extra day, don’t call me Wednesday afternoon when it’s already few hours passed. When I’m looking for it, I understand shit happens, but don’t put me in a bad spot. So for everybody who works for the channel that does a lot of the production things, the thumbnails or what have you, there’s some very clear boundaries about what’s expected of them, and we spend a lot of time going over that so that they understand what they need to do by when. There’s a lot of talented people out there. So the communication is key. So what are the feelings that you want to feel if you go for the instant gratification? You’re like, yeah, I’m going to just take this chance. I can’t afford to miss another one. I’m in a drawdown. I’m losing money. I got to earn it all back. I got to do it. Now,
Is that really practical? So when I speak about this as a lesson, what you can kind of do is don’t write out a business plan and don’t even necessarily write out a trading plan. And this is number one bullshit. Think about if you’re going to look at your journal, I don’t care about the setup and the position sizing and your entry and then how you adjusted all this and that or what have you. That’s the iceberg part that we can see. What I like to journal about is the stuff you can’t see. Write down what were the feelings that you were feeling when you were at each of those inflection points? Why did you do what you did? Why did you put the trade on in the first place? Did it meet the price-based breakout or criteria that I told you about a day or two ago? And if it didn’t and you put the trade on anyway, why did you do that? What feelings were you expecting to feel or what feelings were you hoping to feel? When you can get into this type of calculus, you can start to be your own best coach and break down your behavior. What is it that you’re chasing? What feeling is it that you’re in right now that you just can’t possibly live with anymore? That’s forcing you to do really stupid shit with your money?
Trading isn’t about getting a sniper like entry, but it is about laying in wait and waiting for the exact best time to put the trade on. And at the beginning, if you don’t have a purely mechanized, purely 100% systematic set of trading rules, what you can do is sit on your hands and just wait for that one setup. Look across dozens of instruments. I don’t care if you’re buying five shares, it doesn’t matter to me. Don’t pigeonhole yourself into thinking that because you have less than 10 K in the market that all you can trade are the micro contracts. They all look the same anyway. So what edge do you think you’re going to get by going, okay, it’s not in the MQs. Let me look at the einy. Okay, it’s not there. Let me look at Russell 2K. Like you should know. You should know better in many ways. So expand your thinking. And if you don’t want to do that, write down in your journal why. What is the feeling of that? Why can’t you be open-minded? Where else are you doing that in your life? Because this could be habitual, and in this case, you could be your own worst enemy.
And the goal here is personal growth and to have a good life within which trading is just one part of it, and it becomes a funding source where you’re like tab a slot beat trades on. I put my stops. I can walk away. That’s what my day looks like. Someone asked me on the channel, Hey, how many trades have you done on average per month over the last four years? I’m like, it’s not a stupid question, but it doesn’t mean anything. The data point, it’s a curiosity. I’m not really into the voyeurism, so chances are I don’t answer it anyway, but it’s not a data point that I would keep because it has nothing to do with profitability. Your job is to find your setup and put the trade on. If it shows up once a month across a hundred different instruments, then you put the trade on knowing that it’s a probabilistic outcome. If you have 45 setups, hopefully you have 45 entries. Again, prob probabilistic outcomes. What does it look like? Hard to predict. You can only just talk about it on average. But if that setup for you has positive expected value there at the beginning of your career is your trading edge, and it’s up for you to kind of come up with that.
So you don’t need a coach, sure, we can help you accelerate that. We can help you make better decisions, but to me, it’s not necessarily rocket science. You can do that on your own. And those types of setups, if they work, they don’t typically work Monday and not Tuesday. It takes a long time for them to not necessarily work or even to have the expected value of the trade changed so much that it might be not worth your while depending on what your goals are. We do goal setting in week number one. Why else would you trade if you don’t know what the hell you’re doing it for? It would make no sense to me. And the answer is not to become a millionaire. This is empty. This is not the goal. There has to be something about the money that you need or that you want something that you could do with it. Maybe it’s make other investments. Maybe it’s the feelings that you think you want to have of financial independence, feelings that you don’t have now, feelings that you can anticipate that might be good feelings.
It’s all very personal, but sooner or later, you’re going to have to come down to deal with doing things out of discipline, even if they don’t feel good in the moment of now, because the payoff in the future is going to be giving you the emotions that you want. Even if you lost money last month in the month of March, even if you’re down a little bit in April, you take solace in the fact that you followed your rules day after day after day. They have positive expected value. Yes, you’re going to have drawdowns from time to time. That’s the way it goes. You roll with the punches. The best you can do is follow your setups and put those trades on. You’re powerless over the results, so get over it. It’s not up to you. The best you can do is put the trade on and manage the risk. Honor your protective stops, because even if you’re down 5% and you might eventually be down 7%, so what? It’s only money. What the hell do you care? You are judged on your consistent behavior. Get out of the p and l land. All right? That’s going to help you grow enormously. It did me.

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I think you can see now that mindset in many ways is more important than strategy because look, there’s so many ways that you could blend colors, right? At the end of the day, if you don’t have any impulse control, oh, look at this. Here’s a comment. First of all, corruption V one who’s a subscriber. Thank you very much for writing in, has written two comments. One, I just found your channel, and I can already see that you are a complete legend. Of course. Thank you so much for your guidance. If I’m a legend, oh my gosh, thank you so much. I don’t feel like one that was for how to build confidence in your trading. Second comment, just moments ago came in when discomfort is the more beneficial choice. Again, that was last Friday’s episode. I know this sounds crazy, but following my rules is actually my discomfort.
That’s what I’ve been saying for the last whatever, five, six years. It is so hard not to take an impulse trade. So you have to think in that moment. Mindset is more important than strategy. This is a situation where without the strategy, perhaps everything looks really, really good. You know what I’m saying? And you need the impulse control. We talk about gratification. If you’re struggling with this, one of the things that you could do is start to look at price now as the indicator. Why do you get into a trade? What’s your entry signal? If you’re struggling to fight the impulses, set a rule that says, I need to enter If I’m bullish, a trade on a breakout that has a five period high. I have mixed emotions about this, admittedly, because I think when you’re looking at short-term data, it’s very, very random. And I know this type of strategy works in longer type frames, especially daily.
Typically, the longer the better, but you need to set up a rule around your entries so that it stops you, or at least gives you an intellectual understanding of how to stop taking flyers. Because if you have bad impulse control, you could be buying and selling anything on a whim. But if you put in a barrier to entry a speed bump, if you will, that says, okay, whatever it is that you’re looking at that you need to have right now, it needs to make a 10 bar high, 15 bar high, a three day high, something like that. Put some kind of governor on the price because again, we know that lower prices don’t mean better value, right? You’re not a CFA and after diversification momentum is your best friend. If you’re trying to buy momentum stalls because you’re trying to look smart or you think that lower prices bring in more value, you’re probably learning that the hard way, and

It’s not funny. There was a time where I thought that too. I had to test it and it didn’t work for me. But again, the feedback that I get via email and the comments on the site, it leads you to think that mindset is more important than strategy. Because if you had a strategy, here’s the thing, you know that somewhere out there, there’s an equation that has positive expected value. It already exists. The goal for you is to experiment to find which one, so that every day that you come into work and you boot up your machine and all your monitors, whatever you got going lights up. There’s only one trade, and that’s your setup.
Many of you go, I’m just going to go straight to the damn instrument like EINs, MNQ, Russell 2K, because that’s what I trade. I personally think that’s a mistake. If you’re just starting out, I think you need to be much more flexible and much more pluralistic in your universe of instruments because when you can isolate just one setup, whatever that setup may be, head and shoulders, up or down, cupping handles, I don’t care what the hell it is, pick one that resonates with you and then look to find that one setup across as many instruments as you can because there’s a reason why it shows up a lot.
If you go in to find just one instrument, like any of these Dow Mini’s, ES’s MNQ’s, this and that, you could put yourself into a spot where you’re forcing trades because you have the fear of missing out, especially if your buddy was short Nvidia on Friday or long puts and you missed out, and so now you’re pissed. You don’t even know why you’re pissed. You know how you get over that? Go make a big deal over that person. Congratulate them. Take ’em out for beer. Buy ’em lunch, because the goodness that you put out is going to come back to you. If you have animosity around somebody else’s success is a problem, right? It’s not coming from a place of abundance, and that’s a mode of thinking. And in my humble opinion, I had to learn this too, like envy kills. You have to celebrate the success in other people so that you can see it in yourself. It might not necessarily be one for one, but it’s pretty damn close in my book. So I always make a point of saying, man, you nailed that trade. I could be in a 4% drawdown, whatever it might be at some point in my career, and instead of, because it’s hard to be in a bad mood when you’re trying to celebrate somebody else’s success.
So mindset is more important than strategy. You need to be able to keep yourself on a leash. Want another perspective? Okay. Say you had a lot of money and you were looking for someone to help you manage risk in the markets, whether they were investors, investment fee for service, portfolio managers, or whether they were particular traders. If you looked at your behavior as a third party, would you hire yourself? And if you put in a rule, a speed bump on your buying, then you don’t start taking flight. You think too much. This is the problem with people who are super intellectual. They start bringing in new data every day, and that causes them to have reconsideration. Well, yesterday it wasn’t a trade, but this happened. And with no training, no CFA, no CMT, no degree in finance, no proprietary desk training, they’re going to try to incorporate that data on the fly and make a really important decision on it when they’re ill-equipped, they don’t have the training.
They don’t have a feel worse. Their risk management is all over the place. They one trade, they’re risking 5%. Another trade, they’re risking 1%, then the 5%, which they fell in love with because AI is going to the moon, it’s going to change the world. It’s down 7%, and they were reluctant to take the laws. They were so emotionally invested in the outcome of what that trade was going to mean for them, not just emotionally. So this is the model. When you get emotionally invested in the outcome of any particular trade, it’s a poster girl.
It becomes someone that you become infatuated with. So then what happens is the financial risk management side set sale, it’s going away. It doesn’t exist anymore, and your goal is to make sure that the emotional and psychological, and the financial risk management in and of itself is a unit. They’re spouses, they go together like peas and carrots. Forest gum said it’s pizza and coke, and one can’t become detached from the other. They are conjoined twins. So when you get emotionally invested, that’s why I say risk only, small bits of capital, so that when you become a bonehead or continue to be the bonehead that you always want it to be, and I’ve been there, you don’t do any lasting damage to your portfolio. What happens then? You’re down in a spot. You didn’t honor your stop. You might’ve done even worse and negotiated with your stop and lowered it, and you can’t kind of come to sell it because you know Monday it’s going to rally back up and be above where you got in the first place. And this is a strategy that’s going to kill people. Honestly, it’s worse than the worst disease that’s out there. This is what kills people financially, is they don’t have it in them. They don’t put the thought process in. So again, mindset is more important than strategy. If you’re following one particular setup and you use a price-based entry, that criteria has to exist before you want to put on that trade, despite how you feel, you might not want to put on the trade in fear of losing. You might want to put on the trade because you think it’s going to 10x your account. But if you use a consistent bed size and a price-based entry mechanism, it’ll save you, but you have to have the will to do it. I’m not saying don’t feel your feelings. That’s impossible to do. Just know that they sabotage your account and then what the hell it is that you’re doing. What are you doing this for? Is your goal to accelerate your cash and multiply it? Or is it to bitch and bellyache and be a victim? No one needs those people. There’s too many of ’em.

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The number one rule in trading is to keep your losses small. Once you do everything we spoke about yesterday and you find a set of rules or a trading system or a setup, one setup, you don’t need 85 of them with which you’re compatible, then by all means keep your losses small because what you don’t lose, you don’t have to earn back. That was always the way I looked at it is I thought about it like a competition and I’m in a sports game. If I’m down by four runs and I’ve got one more at bat in the bottom of the ninth inning, it’s like the score is against me, but time is also against me. When you start losing into 15 to 20% of your capital, you put a lot of pressure on your money to perform because if I take $1 to 80 cents, now I’m trading 80 cent dollars and I need to take 25% to get back to breakeven.
The money isn’t the real problem. It’s the pressure that you put on yourself to in turn put the pressure on the money. So what happens? You abandon your trading style. You try something new, you do flyers. Sounds sound familiar. I’ve been there. I’ve been there. I’m not selling you a system to cure it. Guess what? Because you are the system. Listen to this channel. Think of every episode as a little lesson to work on yourself. That’s what’s going to help you the most. There’s a finite amount of trading rules out there. The trick for you is to find the combination of them for your entries, your protective stops as your exits. Obviously your position sizing, which is subjective. Do you add to your winners yes or no? If so, how? And then how do you adjust your protective stops without using price targets knowing that the market is omnipotent and if you catch a wave, you should let it run for as long as possible because your goal is to make money not feel good about yourself by posting up a winning trade that gets old quickly.
Now, some of you, depending on where you are in your trading evolution, might have a different number one, but ultimately I know this and everyone in Market Wizards or whomever has said this till they’re blue in the face, and that is you need to keep your losses small. Man, I can’t tell you suppose your offense is struggling, but you’re keeping your losses small. Look, imagine trading one 10th of 1%. Again, I’m talking to beginners and I’m not talking to the folks who are already doing it. If that’s you, go away. This is not the channel for you. This channel is written and composed of content that’s helping the 19 out of the 20 people that are struggling. I don’t care how well you’re doing it, if you’re already doing it well, this channel’s not for you, so don’t be smug because I just delete that bullshit anyway. I don’t care. This is for the people who are struggling.

Say you’re wrong 20 times in a row, you still have 98% of your capital. You could sleep at night and say, hey, I can take confidence and solace in the fact and build confidence in myself that I’m in the game. I’m doing it. I’m risking real money. I’m not paper trading. I have real risk here. This is real money that I had to earn, and that’s going to do more for you in terms of calibrating your makeup, your system, you as the system with your trading rules and your relationship with the uncertainty that comes with trading and the probabilistic outcomes from the markets. It’s really that easy. People tend to make it more complicated. So at that stage, again, you can always scale up. I know you’re not going to get anywhere, but the point of trading is to not lose. Eventually, yes, you have to make money, but that’s at a different stage. That’s junior and senior year of high school. When you’re a freshman and sophomore, your goal is to try to figure out what the hell works, what’s compatible, what you think.
What do you think you can execute day after day after day after day without thinking about it, even if you had very, very strong feelings, you put your bis stop orders in accordingly because you know it’s probabilistic and you know that six times out of 10 you’re going to lose. That might suck, but you still put your orders in. That’s where you’re trying to get because if you’re a person who’s insecure, every entry is going to feel bad for you. It’s going to give you trepidation. Doesn’t matter if it’s a pullback to a certain moving average or down to support. Doesn’t matter if it’s a two day breakout, a two bar breakout or a 55 day breakout. You’re going to have that same, I lacks a sense of security. If you have moving averages, you’ll find a reason to not trust those.
Now, if you’re on the other side and you’re a risk lover, you have to tone it down a bit because everything’s going to look great. Every person’s going to look attractive. Every stock is going to look like there’s an opportunity, and that’s just not practical. So to me, it’s like if you’re just starting out, keep your losses small so that this way you don’t blow up your account and find yourself in a 30, 40% drawdown where it makes a tough situation worse when you’re despondent because you have no confidence at that point, then you have regrets, and you might even have animosity. Why? Because you bought some guy’s AI bullshit and you trusted them thinking that you could buy your way out of your emotional discomfort. Shake your head this way folks a couple times. Feel the feelings because you cannot, cannot buy your way out of discomfort. There is no set of trading rules that you can buy from another person that’s going to allay or ask wage any of these bad feelings that you have in your body. Then ask yourself this question.

Why do you have bad feelings or feelings that you think you don’t like? Is it because you don’t know your ass from a hole in the ground about what you’re doing? So what do you think you’re supposed to be born with knowing how to trade? It’s an acquired skill and it’s experiential. It’s not intellectual. You have to do it. It’s going to take time as long as you stick with it. Persistence and determination has made more millionaires than some of these day trading rules. I’ll tell you that right now, that there was an overlap in that is probably the reason for success. But in any endeavor in life, someone left a nice comment too. I might as well give him a shout out.
It’s from headwind on a video called The Most Powerful Mindset for success. Gheadwind said, Mike, your speeches go far beyond trading. Man, great episode. Thank your headwind. And that’s true, but so much of this stuff is about life. If you’ve listened to this show, if you’re new here, first of all, thank you for being here. I’ve struggled quite a bit. I wrote about that in the book called The Inner Voice of Trading. You can get the audio book version for free. The link is in the description of this very video in every damn video. Exactly because you get it for free and you find that since we are emotional beings, doesn’t mean we’re acting out of emotion. But if you’re not catatonic like Robert De Niro was in the movie awakenings as a human being, you are an emotional being. You might be born with the ability to keep everything in control like I was, and it’s just dumb ass luck. Good for you. But for a lot of people, especially if they’re highly intellectual, they take losing money as a personal failure and they see it as that they are failures. It’s not just that the trading setup lost money, which could be just dumb randomness, right? If you do a thousand trades, 600 of them are going to lose. It’s hard for intellectual people to understand the difference between accuracy versus mathematical expectation, but I’ve seen more people who had really a lot of talent just have a very reckless understanding of risk management, and they had a lot of promise, but they lost so much money, they became discouraged and they quit. And those people are walking around like drones now in careers they don’t want to be in because they have to be in them. They got to make money and they blew their chance, and whatever trading capital or corpus they had for their account came and went because they didn’t measure twice and cut once. So yes, I think there are probably several factors that might be number one in terms of rules for success in trading, but I think the one that comes down, two affecting everybody, people who have a billion in assets to someone who’s got $10K trying to figure it out, it’s to keep your losses small because when you do that, you can dig out of your drawdown faster. And two, the losses are so insubstantial, unsubstantial that you don’t freak yourself out emotionally and you have to manage both your emotional drawdown as well as your financial drawdown. Remember, again, at the beginning, don’t tell me stuff I already know. You’re risking one 10th of 1%. I understand that there’s not a lot of money to be made, but at the beginning you’re not doing it. You’re doing it to test the waters. You as a tryout, you’re trying to make the team so that you can determine what’s best for you. The p and l is incidental. What you’re trying to do is find a way to behave consistently so that over a longer period of time, hundreds of trades, you can see that you have a certain type of an edge.
You have positive expected value when you do a certain set of rules or take a certain amount of steps in conjunction with one another, and that leads to net of all your losers more money than you had when you started. That’s your trading edge. Once you’ve isolated that, then by all means you can scale and get back or go to a point once and for all where you’re at the threshold of your tolerance for risk at the beginning. You don’t have to worry about making or losing money. And as much as that, you’re trying to get the data to find out what works for you. What can you do all the time? One thing, don’t worry about, I have my opening range trade, then I have my lunch hour trade, and then I have my closing range trade. It’s too much to try to get good at, and you could be discouraged. And again, going back to yesterday, you want the mental edge focus. Focus on one thing and just realize like it’s going to take time. You’re not going to get there tomorrow. I wish you could, but I do these videos to help you understand the mental game of it.

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So the mental edge of trading, as I’ve said before, I think you are the asset. For whatever reason, the marketers want to sell you that there’s some kind of magic formula to trading, and there’s really not. In a very general way, there’s three ways to enter. You can buy pullbacks or momentum stalls. Not my favorite style, but for some reason people think that there’s better value in lower prices. There’s not. You can buy breakouts, which is more my style, or you can use moving average crossovers or this and that, right? So there’s several ways to figure that out and you conjugate that with your temperament and your personality. That’s why I say typically your trading style is your personality. So what happens when you can’t make money? If trading is 80% psychological and emotional, you can say that you’re a four to one favorite in being the problem, meaning the individual.
Now, someone left a comment. I did a video the other day and someone left a great comment. It was on Friday’s episode, so the last one that you saw when discomfort is the more beneficial choice, and it spoke about instant gratification or delayed gratification. If you want to again go back and read it, there’s something called the marshmallow study, and it talked about what happened to the people who wanted instant gratification versus the group of people who wanted delayed gratification. And they studied those. They did what’s called a longitudinal study and stayed with those folks over the next 40 years and the results were really, really amazing.
Anyway, someone left a comment saying, this is really good. Actually, you’re making it clear how the trader can be the edge, not just the strategy. Thank you for leaving the comment. I would absolutely say that you’re the asset to the strategy. It’s just like saying, for example, if you can envision a carpenter and you think of a Phillips head screw a flathead screw, is it the screwdriver that helps make the house or is it the vision of the architect and the carpenter? When you’re a trader, you’re the architect of your own plan really, because it’s up to you. You can be a discretionary trader, you can shoot from the hip, you can do something that’s completely systematized and do it that way. My take is to find something that works really, really good for your personality and stick with it and don’t be afraid to lose the mental edge of it in terms of the trading is really what you bring to the table.
How do you deal with adversity? I know a lot of smart folks, both from the school that I went to and from other top 20 colleges and they had trust accounts their families came from means they really knew how to play the student game pretty well, and they lived very, very comfortable lives. And I saw the head guy from Nvidia talking about this. I think he was mentioning Stanford grads. He talked about character. Now, I’m not going to make any big sweeping judgements. I don’t have the study in front of me, but you have to remember, by the time I got to Wall Street, I had been working for other people for 10 years, and you might say, yay, but you were 12. You were pushing a lawnmower in your hometown when the roads were dirt roads and because of the tire tracks, there was a strip of grass growing down the middle of the street.
It was definitely Tom Sawyer, Huck Finn, kind of podunk stuff. But those people were salt of the earth and they helped shape me to become who I am today. But going up and knocking on the door and saying, hi, Mrs. Edwards, hi Mrs. Albrecht. Hi Mrs. So-and-So would you like me to cut your grass and having them look you in the eye and say, no, thank you. I have somebody already. My son’s going to do it. That builds character. I have to get the strength to ask them for the business, and that’s something that you’re going to do in life.
You’re going to have to ask the employer if you’re in an interview, you have to ask for the job. You just can’t be sitting back saying, I have all these offers. You’re going to come to me, show me what you have shows. No humility. I would never hire somebody like that who wasn’t interested, right? We’re not hiring. So that’s not the issue. But in those moments when I did, I always was looking for somebody who had an edge, and that edge is character. They showed me that they wanted it more. So when you think about the mental legend and around trading, it comes around character and how much can you deal with adversity? Where in your life did you have to deal with adversity? And I don’t necessarily mean like you’re looking for a date this coming Saturday night and someone cancels Friday morning. That’s a drag.
It’s not terrible adversity though, right? Big deal. Find somebody else. You know what I’m saying? So where did you really have to struggle in your life when the outcome was uncertain and you couldn’t use family connections or other types of resources that heretofore had been your go-to type of ethos and way of doing things? For me, I had to carve it all out of stone because I didn’t have any of that traditional family connections. I’m not a nepo baby. I had to do it all by myself and it sucked. There’s no other way to say it. It sucked, which is the reason why I do this show is because it sucked so bad. I remember literally being on my knees saying, God help me because if I have the chance and if I do ever get successful at this, I’ll reciprocate and pay it forward and help people who I’ll never even meet for free.
So I’m not a retail trader, but I do have some similarities and there’s enough overlap that we share a similar struggle in that we all are playing a game of probabilistic outcomes and we have to go about our day each way despite how different our clients might be. For the majority of you watching, you’re probably your own client. And again, if you have like a hundred K or whatever, that’s just where you’re at, it’s okay, you’ll grow it. But your needs, your emotional needs and your financial needs are very, very different from someone who’s running money who can grow his own money as well as get a two and 20 in sfi. Give you an example real quick about the mental edge. If you’re just growing your own money, you want to make a thousand percent a year, maybe a thousand percent a month because you’re tired of being broke like I was.
But when you use other people’s money and you can garner incentive fees, and you even have like say you have 5 million and you did 20% rate of return over the course of the year, 20% might not excite you. I don’t know because I don’t know you, but that would be a million dollars of growth. Say you had a hundred thousand dollars of your own account and you traded 5 million at client funds, you made 20%, you made a million dollars. If you’re working with two in 20 20% incentive fee, you just made $200,000 for yourself. So now your own trading account was a hundred thousand and you brought in $200,000 in incentive fees, which you could really use however you want. For me, it went into my trading account. So the idea, when you look at the folks who have made billions and billions of dollars, whether it’s Paul Tudor Jones or Bruce Kaner, good examples, Ken Griffin, they weren’t just trading their own accounts going hell bent for election again, that to me is a retail trader mindset.
On the institutional side, you’re using other people’s money and that takes the pressure off you to make money. For sure. If you don’t make money, you’re not really getting paid, but you don’t have to shoot for a thousand percent rates of return at that point. And the way Bruce Kaner traded at Commodities Corporation and what he did at Caxton starting in 1983, were worlds apart because at that point, when you’re trading other people’s money and you’re trading 5 0 1 C money, not prop trading money, and in terms of endowments and foundations, the risk profile is very, very different. And so the folks who are allocating look at you and say, okay, if you’re making a hundred percent plus a year, there’s two things that are going on. You were extremely lucky and being in the right place at the right time or you’re trading too big. And that’s why today if you try to seek allocations, the bigger allocators want to see your daily equity. They want to calculate what’s the volatility on your equity. And if it’s too big, this isn’t 1984.
So you have to think about where is your mental edge and what is it that you bring to the table when you’re trading? Because it really comes down to you. There’s only a couple of types of screwdrivers, there’s a couple of hammers, there’s a couple of saws, and it’s your job to mix and match the tools that you need so that you can execute. The screwdriver isn’t going to use itself. You have to figure out how to use it just like a trading tactic. What I find and why I find that retail traders are struggling so much is they’re all over the place. They have monkey mind. They fall victim to watching several of their heroes who are doing it and they’re like, okay, I’m going to try this one this way. Oh, that didn’t work, so lemme go try this guys this way. And they have no discipline yet.
They’re watching all the Jocko willing stuff. Again, you get paid to execute, not know stuff. Sloganeering isn’t going to help you in your darkest moment, right? That’s the thing that I have with stoicism. I love reading that stuff. It’s great, it’s very valuable, but it really takes years to be able to use it because you have to infiltrate the habitual things that come, the habits that you’ve developed around managing money that could be triggered right from your subconscious. So I’d love to read Marcus Aurelius or tell you to go do that and you’ll fix yourself. And I think it eventually, it could definitely add to part of your mental trading edge. But in the moment of knowing when to add and remove risk, it’s just you and your higher power and you need to know what you’re doing it for.
Are you doing it for instant gratification or are you doing it for delayed gratification and bigger sums of money? Because you have to remember, people who buy and hold the s and p, this is going to hit you across the face. It’s not meant to. But think about it. If 19 out of 20 short-term traders fail, that could be folks who are trading two minute bars swing trading, and I know people who could do it well up to say, three day swing trades. Anything in that short term period of time, you need to have a feel. It’s not just the tactics at that point. You need to have something that you bring from you as a person that has nothing to do with trading almost where you have a feel and you can use your instincts if you don’t have those instincts or if you can’t develop those instincts, it’d be very hard for you to trade the short term.
I know because I’ve tried everything under the sun, every different combination that’s out there. And it’s disingenuous for anyone to tell you that you can buy a short term day trading system and make it work because if it doesn’t feel good, you are not going to do it. You’re not going to do it. You don’t have it in you. And it doesn’t mean you’re a bad person. It just means you need to think about it. Folks, what really differentiates trading anymore, it’s your holding period. Because if you think that there are fractals and you believe in that, you could trade breakouts with ticks, one minute bars, five minute bars, 30 minute bars, day trading bars, swing trading bars, whatever those timeframes are for you. So really when you think about differentiating between traders, it really comes down to their holding periods. And that really comes down to one decision is can you take some risk home overnight or over the weekend? And that’s emotional because you could always find a way to represent that risk in your portfolio. So when I say to you, develop your trading mental edge, I’m not saying buy more books, right? And I’ve had Sean McLaughlin on the show, he’s a friend of mine. I really kind of just have my friends on. I’ve had Brian Shannon twice, another good guy and good friend of mine. I know they’re legit and I know they’re not selling schlock.
The trading success comes down to you as the person you need to make your mind up that you’re going to do it despite how you might feel. And if you’re sucking wind in the short end of the duration and the short end of the holding period, trade smaller and hold it longer. Because as I was going to say before, I didn’t get to it. I know people who buy and hold the s and p 500 mutual fund and they outperform people who try to day trade the SPY, and that’s got to be humiliating. So you have to close that emotional gap. Now, granted, those are what’s an investor, a trader, without an exit strategy, it doesn’t mean they’re any better than you, but ultimately they get results. So you can make that comparison between investors because at the end of the day, we’re talking about growing your capital.
So how do you do that? You have to make up in your mind that you’re going to take the actions that are necessary for you to create the alpha, despite how you feel, Mike, I’m scared, okay? I’ve been there too, even as a pro, because I don’t want to do anything to harm the client. They’re trusting me, and I’ve always thought trader portfolio manager, whatever role I was playing, I am a fiduciary. At least that was my mindset. And that their capital, which was very hard to accumulate, is going to be treated like a newborn child.
So you have to understand that if you’re struggling, it’s not about taking a new class, it’s not joining a new discord. It’s not buying more books or going to wherever you’re going to go to learn the how to game. The hardest part of this business is mastering yourself, and that could have been because you have a shitty attitude. It could be because you have bad discipline. It could be because you’re a victim. It might be tied into, like I said, from the Nvidia guys, that you have to go through arduous times to develop more character so that you’ll have the staying power and what I call the sticktoitiveness to be in this business. Because for everything that you may like or not like about me, I’ve paid my dues. I got kicked in the face for four, four and a half years to try to figure it out.
No one could take that away from me. I did the damn work. You see what I’m saying? I didn’t let the failure and the losing of the money, money that I didn’t really have lose psych me out. I had very, very strong feelings. Remember, a 500 point dollars move was a 10% hit to my account, but I figured out how to make it work so that I could make my account grow one day. I’ll tell you the story, it’s too long for here, but I had to make up in my mind, basically, I knew I needed to give myself some breathing room, even if I was up 20% from five to six K, that’s a good number. A thousand dollars was monthly rent. So I wasn’t really looking at it that way, but I really needed to get, I figured 50 K. If I could get to 50 K, then I could have 25,000 for equity trading.
I have another 25,000 for futures margin, and I didn’t have to put on all the risk all at once. I could kind of piecemeal, plus I was using Reg T. They didn’t really have day trading, buying power. So I had the notional value and the implied leverage on the future side. Plus, I could really trade the 20 5K, like 50 K on the equity side. But I was smart to not use leverage on equity until I knew what I was doing and I could make my money. So I didn’t go, okay, 5K, 50 K, that’s a 10 x. I always looked at mathematics properties and said, well, what is the number 10? What are the factors? Well, it’s two times five. It’s two and a half times four. It’s 3.3, three times three. So what could I look at those in terms of the two, if that was the doubling of the account, what could I do to get there and think of it that way and take smaller steps?
Because then otherwise the 10 X was too overwhelming. If I took five to 10, then I could take 10 to 20 and then I could take 20 to 40. You see where I’m going with that? Because that was easier for me to digest and understand, but I had to take my temperament and take a big step back because if you think about trying to make 10 x, you put yourself in a spot where you have to swing for grand slams, and that puts you in a bad spot because then you lose money because of overtrading and you lose money from over-leverage. Anyway, this is an extension of Friday’s episode, which is called When Discomfort is the more Beneficial Choice. I would challenge you if you want to have exponential growth in your trading, then you need to go to the list up the feelings that you don’t want to feel and find a way to learn to live with them and be with those feelings. Like if you’re afraid to take risks, come overnight. Write out why. And I’m not asking you what you think about risk intellectually. I’m asking you to write your feelings down. You don’t have to share it with anybody. Why are you afraid to take risk home from Monday night to Tuesday morning? Why are you afraid to take risk home Friday night to Monday morning? If you know how to manage risk, what does that fear? Where’s that fear come from?
And if you’re honest with yourself, the answer to those questions could shed light onto your behavior. Behavior predicts where you end up, but you’re not going to be able to behave a certain way if you have all these feelings in the way that you’re unwilling to feel. I presume here, if you’re listening, the goal is to overcome this so that you can become a consistently profitable trader. If you can first do that on a very, very small scale, scaling up is the easy part, so you don’t have to do it for big money. Don’t trade for profits at the beginning to build your track record. Do it so that you can get your behavior down consistently. Once you can execute that, scaling up is the easy part. You see what I’m saying? Anyway, if you like this video, there’s more like it just right here.