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What are say five golden tips I wish I knew when I started that. I kind of had to find out the hard way. I want to give you what I think there’s probably 35 right or 7x because five goes into 35 7 times. There’s probably seven times more because it’s all nuanced and it really depends on your style and your asset class. But before I get there, that’s what means. I have to make a point. I got an email from an email subscriber who’s downloaded the audiobook version of The Inner Voice of Trading, which you can get for free. The link’s in the description. His name’s Ron. I don’t want to give you his last name because he didn’t give me permission to read this. So I just want to say it’s from Ron. You have really provoked me to change my thought process as to why I have not been consistent in the market.
It seems clear now that the mental game is my weakest link. Your videos seem to be talking directly to me. Thanks very much for saying that. Sometimes feels like you hit me right between the eyes, not trying to thank you for your direct non-sugar coated information. So this actually speaks to why I even do the show. You remember when I started, there was no one really to help me. There was no smart phones, there was no wireless technology to speak of that. Those big ass Gordon Gecko phones cost $1,000 – had 30 minutes of talk time and cost $1/minute to use. And there were books and people and I mean, I felt so isolated. I feel isolated

Shit, man, help me, help me please. I’m starving. It’s cold.

And I said, well fuck it. I’m going to make it in spite of all this bullshit, right? Things going against you. That famous guy, he’s in the Navy, I can’t remember his name. He says, “good.” That’s how I’ve already approached my life from day one. I knew I was on my own. I didn’t come from any type of a background, which you would’ve said that kid’s going to be a star trader someday. I had the emotional makeup, which I was born with and I’m very, very lucky. If you don’t have it, the odds are against you. You have to develop mental toughness and that’s the hardest part. So when people say, I’m going to give you the list of the five golden rules, they say anyone can trade. I don’t agree with that. I don’t mean to on this Thursday. I don’t want to burst anyone’s bubble, but I just don’t think trading’s for everybody. I think despite what you can learn, anyone can learn it. That’s true. You could even look over my shoulder. That’s a marketing tactic, right? “Come look over my shoulder,” “join my Discord.” But that’s not going to help you if you don’t have the right emotional constitution to want to take risks to want to invite losses, to invite losing money. And for those of you that have big communities, whether it’s in person or online, the humiliation that goes with being wrong more frequently than you’re right.
This is why I say if you’re going to try to skew the odds and make it, you really have to focus. You have to be a leader. You have to be decisive. You have to focus. You have to realize tomorrow’s another day and that you also have to realize that you can’t get your way just because you want something and you want it now it’s life on life’s terms. It’s a 12-step process. You have to be sober around what you’re doing and you have to do that knowing that there are other people who are always going to be better than you, and they’re making it look easy.
And that’s just the way that it goes. It’s really your personal space. It’s your personal journey to kind of figure out how do you want to get this done. So when I think about, I mean I have 50 things written down that could be golden. These are subjective because they apply to me and what did I have to kind of go through? Remember I was trying to trade immediately with limited cash. I was trying to trade. Any timeframe could be scalping in one or two minute bars to trend following across four asset classes. Obviously looking back, that’s a recipe for disaster. But the first thing that I’ll say is that you should all be doing, let’s not even say that you’re starting out, but you haven’t developed the consistency which leads to profitability because thoughts, feelings, actions, actions, behavior, behavior predicts where you end up.
So if you’re in the grind and you’re in day one and day five, to me, you’re still starting out because you haven’t found the combination that works yet. So even with five years of trying to figure it out, I appreciate your determination, but I also understand that you might be having a very difficult time because you haven’t figured it out. The key to having sustainability, and this is number one, is to trade small. Don’t worry about making money. Your job should always be to play superior defense because your winners, like I said in yesterday’s episode, will eventually pay for all the losers and then some, it’ll pay for your experimentation. But don’t get excited about taking small gains. Get excited about taking small losses and learning how to play superior defense. Really what gives you the staying power as opposed to wanting to be having to fund your account frequently because you keep losing money.
Don’t worry about getting to your optimal bed size. Get to learn how to do a process day after day after day. Scaling up is the easy part because you’re not going to go from trading 1 or 2 MNQs or whatever to having to get filled on 150 contracts going from one to two to three to four to five, which is really how you should do it is easy to do the market ample liquidity for that. Second thing is to be get locked into saying, I got to master the MNQs, and that’s all I’m going to look at is the stock index futures. Why? Well, stock index futures as a group, doesn’t matter whether it’s Russell 2K, the E-Mini or the Nasdaq, they’re all highly correlated and chances are, if you look at those overlays, unless you’re trying to trade spreads long, one short the other, they all very much look the same.
Price points are different. Margins might be different, but there’s a way of looking at it where it doesn’t matter which one you’re looking at because they all kind of look the same. So if there’s no trade set up on one or if one’s not in an uptrend, it’s very difficult to find another one that might be a better trade. So that’s why I’m saying be promiscuous. Look through other asset classes. Look, if you’re looking at say the grains, look at the metals, look at the softs, look at the currencies. Be open-minded. You could always trade small. If you can’t get it done in futures in the minis of the micros, then you could trade 5 of the closest related. If you can’t trade Comex gold, then look at the mini gold. If you can’t trade the mini gold, then look at trading shares of GLD because your goal is to learn the process, not worry about necessarily making a lot of money.
You want to get your process down. In fact, when in the coaching, the goal setting isn’t like, I want to make 16% a week. I want to make 100% a year. I want to be in a trading competition. The goal is to find the process with which you’re compatible that you can replicate day after day after day. Because with expected values, that is now your combination to be able to print money. You’re not going to do it over. You’re not necessarily going to be able to do it day after day after day, but you’ll be able to do it enough over a long period of time when you can trade, when you have an edge and a trading edge, at least a simple definition of that is you are having a set of rules that when you enact on them in the marketplace, it has positive expected value. You’re not going to make money every trade, but over hundreds of thousands of trades it should work. So again, “thoughts, feelings, actions.” Number three, you can think and have opinions on Bitcoin, Nvidia, this and that.
Ultimately you are making money is going to come down to behavior. If you’re missing trades, set alerts, then that’s just to say, okay, ready. As they say on your mark, get set go. The get set part is the alert. The go part is you are putting a stop order in above or below the marketplace so that when it trades at or through that level, you’ll add or remove the risk to your portfolio according to whatever your strategy is. For four, Brian, Shannon and I are kind of famous for saying this in different ways. Brian says, “only price pays.” I agree with that a hundred percent. Love Brian. My way of saying the same thing from before I even knew Brian was on Wall Street. “Only price will tell you the truth.” We’re not CFAs here. We’re not talking valuations and P/E multiples and Efficient Market Hypothesis, which is epic bullshit anyway.
If you are bullish for one particular reason and the price is going against you, not just on the day but the week, what have you, the price is telling you the truth because it’s the sum total of what everyone else is thinking. So you might have a very good reason why you feel bullish on something, but if everybody else is doing the opposite trade and or they’re showing up with inventory for sale with the auction process, the prices have to drop in order for the market to clear. You’re on the wrong side of the trade. So while I guess you can have a bullish thought process, don’t be long. Now, again, I don’t want to get into it. It’s illogical for me. If you’re telling me you’re bullish but you don’t have a position on, you have a conflict going on that we would have to work out in the coaching process. But trust me when I tell you, this is why I say, and you can go look up the video, why you want to be buying when there’s other buyers. In that case, you want to be with that herd mentality. They might have fundamental investor style reasons why they’re in that particular trade, which have nothing to do with why you are in it, but you can ride their coattails and be supported by them, especially if they’re institutions.
So let the price tell you what everyone else is thinking. That’s how you decipher the price. It doesn’t have anything to do with the fundamental value. And if you’re a trader, be mindful that you’re using investor chat market caps, trillion dollars, that doesn’t matter. Nosebleed valuations, that’s investor talk. That’s for people who are trying to sound smart. It’s irrelevant in trader speak. Price, earnings multiples, forward earnings, market cap doesn’t matter. Does not matter. What matters is we make our money on position sizing and then you need to calculate however you do that. What is the distance between your entry and your protective stop? Three things that you need to know, but in terms of direction, price will tell you the truth.
Your job is to play defense. The price as it goes against you. If your long is telling you that it’s the wrong time, you might have bad luck. Maybe your analysis is bad, but you have to listen to the price. You have to do what you’re told. If you think you’re going to stand up in the face of that, you’re going to lose a lot of money and then you’re going to be angry and you’re going to get into all different types of destructive behavior. And the last thing I want to say that you might not expect me to say is once you develop a skill and you can create alpha, you can outperform buy and hold with less risk. That might mean you get even market like returns, but you have only a fraction of the drawdown that’s very valuable to people. Don’t underestimate how valuable that might be When I was starting out, the total return on the s and p, and this isn’t the point.
The point is because I get sidetracked, I get excited about this stuff. I so want you to win. Use other people’s money. Number five, as soon as you possibly can, go to Martin. It’s not on YouTube, but there are audio podcast episodes on Spotify where if you go to martin chronicle.com and you search about finding backers, finding investor raising money, there’s a whole bunch of audio recorded episodes that you can find on Spotify or Apple Podcasts or Google Podcasts. I forget what they’re all called anymore because they change, but it’s not on YouTube. It’s the audio version. So before you go searching on YouTube for these episodes, they were before I started doing the video ones here on YouTube, there’s a whole how do you do it.
Now I will say don’t ask friends and family. You have to be afraid of the person that you’re asking money from. Do not trade your retirement money under any circumstances and do not trade friends and family for a lot of reasons. You want to make your mistakes with other people if that’s going to happen. And two, you don’t want to have to be talking about the markets all the time 24/7 because the people you chose to solicit always want to talk about the markets. I don’t like talking about the markets. I don’t meet with people to chat about and go meet for a coffee and chat about gold. It doesn’t do anything for me. I know what I’m doing. And two, don’t take this the wrong way. I don’t care what anyone thinks about any other particular trading strategy or instrument. That’s how independent I am.
I wouldn’t meet Victor Sperandeo who I know and love as a family member to go talk about the markets. It’s just not what I do. You want to talk about baseball? Now? You got me warmed up. But ultimately, someone who I don’t know says, let’s go to a ball game. I’m not doing it. Why? Because they want to pump me for free information and it turns into a coaching lesson, and I don’t want to do it. Don’t mean to sound that way, but that’s what ends up happening. There’s always a subtext to what’s going on. So using other people’s money, why? Well, look, if you learn how to trade the way I’m trying to teach you how to trade, that’s valuable for everybody, not just yourself. Remember, I started thinking I forgot what day it was. Might’ve been Wednesday, might’ve been Monday. I can’t remember what day is today. For the love of God, think about creating generational wealth that could affect your behavior today and stop you from being an idiot, right? So when you use other people’s money, now you can earn incentive fees.
It depends on your client agreement. But again, go listen to those because I’m not going to rehash it here. Go do your own homework. At the end of the day, if you had say a hundred thousand of your own money and you grew it 20%, you get all that money, now you have $120k, you earn $20k. If you had a million dollars from a bunch of other people who you could run in a separate managed account type of style, and you were up because you put on the same trades on 20%, now those accounts are up to $1.2 million. You created $200,000 in realized and or unrealized gains collectively in the way money management works, you are entitled to a piece of those profits. Now, it’s all negotiable. It’s all over the place. There are, when I was coming up, the standard was 2 and 20, but the numbers, excuse me, are really what you negotiate.
“Two and 20” means 2% management fee, 20% incentive fee. So if you put that even that standard number on a million dollars of third party capital, you’ll have $20,000 in management fees that can go to help pay your bills and 20% incentive fees. So say that could be 20% of $200k another $40k. So you did $20k on your money, you did another $20k in management fees, that’s $40k. Then you did another $40k as your stake in the gains that you created for other people. So now you are up fourfold in terms of your net worth. You went from just doing $20k on your a hundred to pulling down another $60k – $20,000 in management fees, 2% on a million, and 20% of the $200k is another $40k. So you add another $60k that brings your total return for the same trades to $80,000.
You did four times better using other people’s money. How do you think Paul Tudor Jones became a billionaire? He could sure grow his own money. Not a problem. Now I think Tudor is, and I’m not soliciting for Tudor however they make their money is fine with me, but I think they are like 3 and 24 – 3% management fee, 24% incentive fee. It gets a little sophisticated. What I used to do is if I had the two and 20 on the million, I always remembered that the high watermark was the million, right? So if you did 20% a year, that’s $5k a quarter. So your million goes to $995k. I never took an incentive fee on that first $5,000. I’d say, okay, let the client earn back through capital gains back to the million. Then I’ll participate above the million, there’s a million ways to do it. Renaissance, I think is 5 and 45. That’s Jim Simons. So you can get creative. Don’t give the house away. You could also say 0 and 10 if you don’t need the money or you don’t have an office and you really don’t have expenses. Maybe you’re working from home, you’ve got your monitors. You don’t even need a management fee.
But that’s the quickest way to roll and grow your capital. If you have a strategy that works. So think big, because now not only is your trading account, a hundred goes to $120k, say over the first quarter. Maybe it’s over the course of the year, it doesn’t really matter. But now you’ve got another $60k coming in over the course of the year. So now your trading corpus went from a hundred thousand. You added $20k on your own activity, but another $60k came in because you had $20,000 in management fees on the million and another $40k in incentive fees on your performance for your client funds. Now again, we’re not talking taxes and all that kind of stuff, but you could have as much as $180,000 in your account
Right now. A 10% move in your account brings you about to $200k. So now your account size is just about doubled. So as you want to accumulate wealth and you have a skill that someone else can find valuable, you can get that from using other people’s money. Again, I can’t get into it right now because I’ve covered it till I’m blue in the face. Sometimes I consult on the stuff. There’s a lot of free stuff at MartinKronicle.com.

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The one thing I do to check myself and to keep myself in line is to look at my habits, right? Because the habits reflect my behavior and my behavior predicts where I end up. So one way that you can completely steal this from me is go to school on yourself. It’s a saying that they have in golf, actually go to school. So what I do on any given week, I don’t necessarily look at the results, right? Because you can play a poker hand of aces really, really well and you’re going to get your aces cracked. You can’t look back and say that you did the wrong thing just because you lost the hand, as frustrating as it might be. So what I do to keep myself in check is I say, okay, are my habits today kind of parallel or congruent with the vision that I have for myself in the future?
Now, the future for you can be next week, next month, next year. It probably comes down to returns, but returns are a function of also like your behavior. Why? Well, if you think about it, whether you’re scalping or whether you’re position trading and regardless of your asset class and holding period, the winning trades are there. It’s up for you to kind of use your metal detector, so to speak and find them, and what I have found is that the reason why most people are struggling is not because of the how-to part of trading, right? I even found that out from myself. There was a world of information. I kept feeding my brain thinking that that was the solution, but it’s actually not. You find yourself in that spot when you’re dying for reassurances, and guess what? There aren’t any. There aren’t any reassurances. This is probabilistic, and that’s the feeling tone of what I mean when I say that.
I wish I could tell you that if you put tab A into slot B, the result would be exactly guaranteed and predictable every single time, but it doesn’t work that way. You have to get used to living with the uncertainty and unfortunately, that’s what makes people freak out and stop their habits not being able to deal with the unpredictability and the uncertainty. Whereas if you do more traditional professions, you can have a vision for that. You can see what the outcome is. If you go to school, you get an MBA, someone becomes a CPA or an attorney. That type of lifestyle is pretty predictable, especially the paycheck part. With trading, it’s very, very difficult because you don’t know when your winning streaks are going to show up. You don’t know when your losing streaks are going to show up. So you have to put yourself in the mindset that regardless of the outcome, I know my system has positive expected value. That’s my edge, and I’m only going to trade when I have my edge. I know when I do that. I know at some point in the future I don’t know when, but I do know that and I trust I that at some point in the future my dreams will come true. I’ve seen that enough in my life in everything that I’ve done, not just around trading, is you have to have the vision first. If you have the vision first, you can work backwards and get to the behavior part once you know who you are and what makes you tick. To me, finding the right trading methodology is then the easy part because those are finite when you think about it. And what do I mean by that? So just on the back of a napkin, there’s really when you slice it and dice it, what four asset classes. There’s interbank, foreign exchange, there’s commodity future contracts, there’s options on equities and futures, which include futures on currencies, and then there’s stocks. Right now, I suppose you could throw in rights and warrants, but to me, I don’t really look at those because they work more like options.
So at the end of the day, then what do you have? You have holding periods. So when you think about that and you start to come up with the combinations of are you going to scalp this? Are you going to position trade that? Are you going to trend? Follow this. Even with that, you have scalping. Then you have, we could call it swing trading or day trading. We have scalping, which is a really short window of time, could be seconds to minutes play with me here. Could be longer. Of course, you can define it the way you want to. I’m just giving you an example. Then you have day trading, which might be a longer period of time within the day longer than the scalp. The next step would be some type of a swing trade, which could be one day, three day, four day, even five days.
It really depends who you speak with. And then you would get into say, position trading slash short, intermediate or longer term trend following position trading. And then at the other far end you have investing, which is kind of putting on risk with an open-ended selling or upsetting risk strategy. So when you look at all of those asset classes and you say, okay, I have four asset classes and I have five or so ways to trade them over a certain time period, then there’s only so many combinations that you can come up with. That’s the good news. So for me, I’m like, okay, well I can quantify that. So now I just have to find for what I want my money to do for me, and what do I want to get out of trading? Do I want some kind of pleasure or how does that serve me in my life?
What’s the purpose of it? So once you get to that standpoint, you can figure out the right combination for you that should become habitual so that every single day you know how you’re going to trade and affect your edge because otherwise it wouldn’t make sense for you to put on a trade at all if you can’t affect your edge and an edge in, again, back of the napkin, kind of back of the envelope type of definition would be just in a situation where probabilistically that when you affect this setup or this chart pattern, whatever it might be, that there is a positive expected value. Now there’s a video on positive expected value. You can go look it up here on YouTube and there’s probably more resources At Martin Chronicle. It was hard for me. There was no cottage industry for helping people. The internet didn’t exist, and I know how hard it is.
I know how firsthand it is. In fact, I wrote a book about how hard it was. It’s called the Inner Voice of Trading. It’s got four and a half out of five stars. I give away the audio book version. You can get it for free, the links in the description. So don’t tell me how hard it is. I lived it and there weren’t the resources that there are today even on some of the things that I don’t necessarily poke fun of, but I want you to be conscious of telegrams and private Twitter channels, and of course we’ve got discords. My whole thing on the coaching and mentoring is like the same ethos that I have for doing any of these podcasts or these shows on video in that if I can’t say it in five minutes, then I really can’t say it. There’s really no reason why I would have to get to the bull pit like the monsignor at a church and preach the same damn thing day after day after day and you don’t get it.
You see what I’m saying? If I’m doing my job, which is to give back to the community, you shouldn’t have to pay me month after month after month to get the message. I should be able to communicate it to you in an effective and efficient way that you can take it and put it to work. That’s the whole point. I’m not looking to get a teddy bear to hang onto every night to fall asleep. That’s not the right coaching and mentoring that you should be looking for. There should be a finite window of time, right? My thought process is that if this starts to look like therapy, something’s wrong because so much of this you can figure out on your own. You don’t need a therapist.
It’s pretty basic in that regard. So while I’m not calling anyone’s girlfriend ugly, you have to look at that relationship because the coaching and mentoring that I do is finite. It runs six to 12 weeks, and if you can’t get it by then, then you can’t get it because after 36 years, I know absolutely how to prescribe if I do enough listening to guarantee you results. If you don’t do the work, you’re not going to get anything. You have to be willing to accept the risk. Are you able? Of course you are, but you have to be willing to live with the uncertainty and to get comfortable just knowing that that’s the way it works. But if you don’t develop the habits to go back to the top of the conversation, the predictability goes out the window because you know that over time, if you tell me what you’re losing percent is, I can tell you the frequency or the probability with which you’ll have a losing streak.
I can also tell you how you’ll have a winning streak and you don’t even need me for that. You can do the math yourself. You can predict what it would be like to have three losers in a row. You can predict what’s the probability of you having say, five winners in a row. That’s not terribly sophisticated, but what I do know is that behavior predicts the outcome and until you align your daily habits, your daily behavior with what your vision is for the future, you’re going to be a mess because everything’s going to look good because so-and-so did it effectively. I might as well try it and here’s Tommy over here. He did this strategy, oh, I might as well try that again. It falls into the parameters of the different combinations you can get between asset classes and holding periods. You’re going to find that there’s probably a handful of people across any number of those combinations that are doing well. But whether or not that actually works for you is yet to be seen because you got to try it on for size and then do it consistently. The consistency is the magic potion here is can you dig in? Can you lock in?
That’s the hard part. Admittedly, I was all over the place. I wrote a book about it. Like I said, now, over that time, I had enormous amount of success, but the gloating of the success part doesn’t help you grow. Like who cares? Then I’m just another one of these 26-year-old guys saying, Hey, how AI is going to change the trading world and how you can make thousands of dollars in 10 minutes of work, which is a, come on. It’s the new snake oil stuff. The key if you want to really ramp up your success is work on your getting comfortable with the uncertainty.
That to me is where the rub is. The more you are willing to feel your feelings, all of your feelings, the greater that level of success you’re going to have sooner. So it doesn’t mean you have to be fearless. I don’t think there’s such a person who’s fearless. I think there’s people who feel fear, but are able to take the steps forward despite what they feel, right? If I’ve talked to the best salespeople that I know on Wall Street and they’re sitting with a billionaire prospect, it’s intimidating, but they don’t let that intimidation psych them out from going in and making the presentation. If that was the case, I wouldn’t have made any success. So that to me is really the toughest part of trading, and if a person is struggling, I’m going to bet dollars to donuts. That’s where it’s at. It’s ability for them to not accept because they want validation, they want reassurances, and those don’t really exist in this space.
The only thing you can do is look at your track record, and I don’t mean official track record. Just look at the results of your ongoing behavior, judge yourself on the consistency on the ability to do the same thing day after day after day. That to me is winning behavior, and that to me predicts favorable outcomes when I don’t know, because it all depends on your trading style, and then it all depends on is the market amenable for that particular trading style? Where people get into trouble is they try to do different several trading styles at the same time. The problem is all those trading styles have personalities unto themselves, and so you’re going to be schizophrenic in your brain here, multiple personality disorder. That can come over time for sure. You can train yourself to do it, but in my opinion, you have to start with one and do that consistently before you’re going to sit and try to do several different types of trading strategies so that you can be a person for all seasons, because that becomes very, very difficult.
Then when you’re looking at trying to decipher what’s going on in the marketplace and then decide what type of tool, again, I think you can do it, but I think it takes several years because you need to live through those market cycles and then make those adjustments. But if you want just to summarize everything, you need to make sure that you have the vision first for where you want to be and for where, and what and why, and how you want trading to serve you in your life. Then break it down to what your daily habit, your daily behavior could be, and summed up all of your behaviors in what we call a habit or habits where you can really start to predict your success is based on your daily habits. If you don’t have any, then you got to start over. Start with the end in mind, right?
I’m not the first person to say that work backwards to today and say, what’s the one thing that I can do that’s super simple that I could replicate day after day after day? Because until your behavior is kind of congruent with what your goal is and what your vision is for the future, I don’t think any lasting success is going to happen. You’ll get random bouts of it, and I’m sure it’ll make you feel good. My hat’s off to you because I’ll take good luck any day too. Why not? But if you want to actually be in control, then you need to have a definable trading edge.

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Trader mindset is the most important thing that you need besides having some type of skill to manage the risk. What traders are, they’re risk managers and you can really train your mind to make money. What do I mean by that? Well, when I went to Wall Street, I did make assumptions, and I’ve mentioned before a lot of them were completely wrong, but at the end of the day, my mindset was such that I know I could win at this. I saw who was doing it, I saw how well they were doing, and it was easy to emulate their behavior, at least from the outside. Then I needed to learn the inner game, and that’s where the money actually is made as far as I’m concerned, right? It’s widely understood that 80% or so of trading is about psychology. People will come out and say trading psychology doesn’t matter, but for those who, people who say that they were born with the right psychology, so it was never an issue for them.
Unfortunately, for the millions of other people who are going to try to trade, especially if they come from a very academic background, they’re going to find out that the level of failure on a per trade basis is very high. The frequency is very, very high, but as long as you don’t go on tilt, you can train yourself to understand the new math, and that’s the mathematics of expectation. That’s understanding that 60 70% of the trades that you put on are going to lose you money, and the ones that will make you money can make you money very quickly, and you can take scalps like we talked about yesterday, or you can learn to get comfortable taking overnight risk and over the weekend risk, and I have studies that show where you can actually make your money. The thing is, I think traders make things very, very difficult for themselves because they want to have the macho win, the emotional win I put on the trade, I carved it out of stone and I did all this work and this is how I got rewarded for the trade.
I’ve been there. I understand that it’s definitely a peacocking thing, but when you look at the results of buy and hold, which takes really no particular skill whatsoever, and you could make almost as much money, you don’t have the same emotional payoff because there’s nothing to brag about. You just put on a good trade, it made you money, you left it on for as long as possible and you took it off. So the emotional win for that type of trade is very, very different than someone who has four monitors. 18 indicators has real-time data, has a headset on, is listening to a squawk box. That’s a whole different type of emotional reward system that’s lost on me. I don’t need that stuff. I kind of think that it’s younger guy macho stuff, personally speaking, but I’ve had those types of trades where I’ve done sufficient work, put a trade on, used all my own ingenuity, used and relied on my own sense of

Timing and made a bunch of money and it felt very good. I felt self-actualized, but at the end of the day I had to start to think how much time do I want to actually put into this and how do I have a quality of life? It’s not written anywhere particular that you have to spend eight hours in front of the screen every day. That’s your choice that you choose to believe that. So this stuff gets kind of deep. In the meantime, you can train your mind to see other possibilities. That’s also up to you to be open-minded because I think this is, to me, the shorter term stuff is really built for younger folks who have unlimited energy and this and that, but I don’t know too many guys who are 70 years old that are scalping even though they might’ve done that because the need for the money isn’t there anymore. They’ve already made their tens of millions of dollars, so it doesn’t move the needle for them to sit and scalp unless they can see something from five miles away and they’re like, oh, yeah, that’s so obvious to me. Just going to go put on the trade and nail it because the old guys, yes, still got it. That kind of stuff. So as you age, you tend to have longer holding periods, not everybody, but that’s what my experience has suggested.
So be mindful of everything that you’re doing and all the choices that you’re making. You can understand. You can only see so much, but there’s a whole other world of trading that you might not see, and to me, if you’re going to be a pro, you want to investigate all of those channels to see what one’s the best fit, so you don’t have to necessarily marry the first girl you ask out on a date, so to speak. You should get to know the environment a little bit. Now, I trained my mind by not taking my losses personally. I knew that I had to be in it to win it. I knew I had to put on risk in order to make money, so I had to think what’s a good risk versus what’s a bad risk? I also kind of understood that sometimes in the short run, you’re shot by friendly fire.
You could have a really good trade, really good name, good fundamentals, which I think you should study. If you’re learning stocks, you should definitely learn fundamentals and not just rely on charts and level twos and come to understand that I’m going to have bad luck and bad timing on top of bad decision making, and then reconcile that with yourself early on and not beat yourself up over it and just understand that this is going to come over time. Baseball players, they’re going to strike out, they’re going to put trades on, excuse me. They’re going to get to bat, and they might not even be facing a good pitcher, but they still might get called out on strikes.

There be bad calls. They might swing at pitches that fool them that have late movement, and that doesn’t mean they can’t be hall of fame. So I trained my mind to make more money by not getting emotionally invested in any one particular trade. So pick the darlings of the day. You know what they are, MicroStrategy, SMCI, Nvidia, anything with AI attached to it. We’ve seen this before Bitcoin, remember this, what do you think are the names that people will make the most money on? Write the top three down. Then show me the list and I’m going to show you the top three names where people lose the most money on because if you don’t have a strategy and you get sucked over to the light like the moth, you’re going to get blasted. And if you know anything about history from ’82 to ’87 before the correction, we’re in a really big bull market, but most individual investors lost money because they had no sense of timing. They were trying to time the market without knowing how to do it, and you can do it. Most traders are time in the market every day, right?
Then same thing, if you watched what happened from ’95 to 2000 in the Dot Com era, the names that people made money on, it doesn’t matter. What was it? Cisco, Sun Microsystems, Vertical Net, CMGI, right? Siebel Systems, JDS Uniphase – for the Love of God, Global Crossing. You can list a number of those names, the top 10 holdings of that five-year window, but those were also the same names where people lost the most amount of money, so why was that? Well, they weren’t mentally prepared. They got in at a late stage. They were in a stage two breakout buying into the fifth base, very, very, just as it started to go to stage four breakdown. They tried to sell puts and they got exercised against, and it seemed so easy for everyone else to make money, but you have to train yourself what not to do. You can’t fall victim to every emotion that’s running through your body, and that takes time.
That’s not something that can be done in one day. You could learn scalping tactics. You could read an article and probably walk away with a couple of gems. You could learn the trend following methodology in the same amount of time, but in order to put it into practice and to make it your own and to do it and to do it and to own it, where it becomes second nature, which is where the magic happens, where you’re not second guessing yourself, you’re not trying to look at your discords and be like, oh, what is so-and-so hey, is this a good time to get in? You have to be independent. You have to be a leader. You have to take the action despite your fear and whatever else you might be feeling.

That all come that mental training takes a lot more time than the actual learning of the trading. The intellectual side’s, the easy part, as I’ve said before, if you don’t know who you are, it doesn’t matter what you know, don’t know what makes you tick, you see, and so you have to learn through real experience. This is an experiential process, not necessarily an intellectual or an academic one. That’s the easy part of trading, even the screening part. There’s all solutions for that. It’s very easy to find, so keep whatever you do, keep your mindset in such a spot where you have to think you’re a winner. If you say, why do I always lose? In my humble opinion, you get what you think about and you give that power. Words have power. I’ve said that before, and so I don’t give power to negative words.
I don’t say like, oh, I got stopped out again. That always happens to me. I don’t recognize it that way. I say something like, well, that’s the place where I was willing to transfer the risk to somebody else, and they were willing to take it on more power to them. I hope they do well because I know I’m winning. I didn’t necessarily win today, but I do. Winning things all based upon your behavior, not necessarily what, so you have to do everything in your power to stay in a good mindset, really. Thoughts, feelings, actions. You can think about what you want to do, then put yourself in that emotional state and then take the right actions. You might not make money today, and I let go of that too. I let go of saying, I need to have a green day every day. I don’t.
I just need to follow my rules, and I know when I do that, the math is in my favor when the winners show up, I don’t know. I’m powerless over that in the way I think in my paradigm, I’m responsible for everything, don’t get me wrong, but I don’t put that kind of pressure on myself where I have to have a green day every day, and especially if you’re starting out, I think that’s the wrong way to do it, but my coach and my mentor says, take $50 even, because at least it’s a win if that’s what you’re comfortable with, but then you have to add it all up and say, is it worth it for me to do that? I can share with you after a while, after you’ve done that for a month or two, you get tired of taking $50 wins.
You’re like, what am I doing this for? I’m running to stand still, you too, song. I’m running to stand still, and I didn’t want to do that. I needed to grow and amplify my cash in a big way because the $5k, $6k, whatever that I had in my account, I knew that that wasn’t, if I made even 20% on that, it’s a thousand dollars. That’s one month of student loans. That wasn’t going to move the needle for me, so I had to put myself in the mindset and make the determination that I’m going to make three, four, 500% of my cash on my account balance. That’s what I meant by that, right? Then you have to envision it and say, okay, well then what do I have to go through in order to get there? What kind of pullbacks and drawdowns do I need to go through?
It’s a lot different from scalping, but I knew the market would, if I caught the right moves at the right time, especially in futures, the market would do the work for me. Plus I had the leverage, so I was like, okay, if I put myself in the right place at the right time, the leverage and the market forces that are more powerful than I’ll ever be will put the wind at my back and move my account balance, and then I got used to that. I got used to that overnight risk. I got used to that over the weekend risk with futures positions, because when the moves happen in your favor, they tend to open up with you. Your long, they open higher.
It doesn’t have to be by a lot, but when the trends hit, they hit very, very well, and you can make more money from doing less work, which in my opinion is what you should be doing. You shouldn’t be ready, willing, and able to have to do all this extra work to reinvent yourself every day. That’s my take. You can make a lot of money by taking the risk home. Some of you like the feeling of being busy, so you feed that beast. I don’t like doing busy work. If I’m in winning trades, I like to stay with it, but that’s my mindset. Your mindset may be very, very different. You might like that. All that activity, you might be in a community of people and you’re kind of feeding off of that brotherhood. I’m a loner. I don’t want to hear from anybody, even my clients.
My first rule on the client agreement is don’t call me. Do not call me. I’m not looking to make friends. When you’re younger, you have to make those sacrifices and deal with the people calling you like, Hey, I see this is moving. How come we’re not in it? Or, oh, yeah, we’ve made a lot of money. We made 20,000 in each Bitcoin. How come we are not taking profits here? I don’t want to hear about that. I’m not Merrill Lynch. I’m not interested in having that kind of relationship with people. Again, mindset. I’m training myself to make money. I’m not training myself to take on your emotional bullshit. Watching the market because you’re bored stiff, doesn’t work that way. So think about where your emotions and your psychology come to play in every decision that you make in your analysis to your entry, to your position sizing, to how do you take your losses in a disciplined way, and then also how do you take your winners? Why do you take your winners when you do? And if you start to look at that, you can begin to see patterns, and then that’s when you can begin to make small emotional changes, and in my opinion, and when you’re ready, willing and able to do the work and make those emotional changes, that’s exactly when you’ll start to make more money.

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So contrary popular belief, I don’t really have a problem with scalping. I have a problem with the people who market scalping, right? Because scalping myself, right? We’re in that kind of market where there’s some gigantic moves. Look at any of the MSTR, SMCI, certainly Nvidia. You could look at Cocoa if you trade futures. Some of those moves are very, very pronounced. There’s obviously risk involved, but I don’t have a problem per se. Again, with scalping, I know people who can do it. I do believe you need to have an enormously great sense of timing. I think you can see it again and watch it and understand it intellectually, but that doesn’t necessarily mean that you can do it. And so when I see marketers putting out videos on how easy it is, I hope you understand. You probably felt it too. It’s just not the reality.
I know there are people who do it very, very well, but you have to understand that it’s widely understood that only five to 6% of the people who day trade make it from everyone who tries and within the day trading space. That doesn’t necessarily mean that those people can scalp either. Like it’s a very, very unique skill, and if you’re doing it and you’re making money, you’re making a living. That’s great. I think it’s disingenuous to tell folks who have $1,000 – $2,000 that they can scalp their way to financial freedom without adding money. Significant amounts like thousands and thousands of dollars to their account. “But Mike, I’m in this Discord where they’re all doing it,” and I’m like, in statistics, we call those survivors. We call those people survivors. You don’t see the people who didn’t make it. So you have to be practical.
You have to be objective. Even if you don’t want to. You can choose to believe what you want, but I’ve been around a long time and I’ve seen it. I’ve seen the folks who can do it, and so when I say a handful, it’s a figurative way of saying it, but percentage wise, even in the 5% of the people who make it, there’s a very small percentage of those folks can actually scalp. It takes a very, very unique feel for the market. You can develop it. You’ll have to try. You’ll have to experiment. You’ll have to risk real money.
Paper trading can help, but nothing feels as good overall when you’re doing it with real money and winning and losing because then you get to calibrate your system because again, not just, you’re going to need to be super accurate because with scalping, you’re talking about being in a position maybe for one to two minutes, and there’s a lot that go on. There’s order flow, right? You’re looking at level two. You’re looking at relative strength. You’re looking at volume. I have mixed emotions about it. Volume doesn’t equal liquidity, but if you see volume showing up on the tape for that instant and you have really, really good instincts, you can absolutely nail the trade very, very quickly. But my whole thing when I compare that, because when I do my scalping, the thing that I think about is timeframes. So if I see an opportunity to scalp something, I can look at that as a trade entry as people, we label it according to what our emotional needs are. To me, if you see some kind of a breakout price after consolidation or it’s retesting a certain level and you see volume showing up, you can say that that’s my scalp entry. But another person who’s sitting down the hall, perhaps at another firm can say, well, that’s my swing trade entry. That’s my entry that I’m going to have. I bought it on Wednesday. Let’s see if I can hold it. And if the move follows through to the end of the day, then that would be a day trade, not a scalp. If you hold it to Thursday, Friday, now we’re in a swing trade, you get the same entry.
If you’re a position or a trend follower, you can label it how you want. So there’s not any specific entries that I think if you’re looking to try to develop your craft, you could look at your scalp entry as the entry for a trend trade. Why do you have to label it a certain way? To me, when I look at all the different education stuff that’s out there, to me, any of those entry rules can apply to any number of holding periods. You choose emotionally to remove the risk when you do, and that’s a very personal decision for me. Like I said, when I was on with JC Parets and All Star Charts, it’s like I’m at the stage now where I know I have a great work ethic, but that doesn’t mean that I want to work like a dog every day.
You see, and I mentioned Pareto Efficiency. I want to, I want the most amount of output for the least amount of inputs, which is a fancy way of saying I want to make the most amount of money for doing the least amount of work. Now, I tend to do my work as my preparation the day before, typically the night before, and then I review in the morning, and that feels better for me emotionally than to have to do my preparation in the morning. Keep in mind, I’m in Los Angeles, so environment has a big part of my decision, right? I’m already up at 4:30-5:00 in the morning. I don’t want to have to do my biggest crunch work that early in the morning. I’d rather review the work that I did the day before and say, okay, how are things behaving overnight? Where can I step in?
Where do things look like they’re going to back off and I might need another day? Those decisions are much better for me again, in my environment. If you’re in New York City, you got all the time in the world to get to the office by six or seven in the morning for the opening bell, and some of you don’t even do any trades until 11 o’clock, right? You don’t trade in the first hour and a half. Let the market set up and tell you where the ranges are, right? That might be another way to do it. So for me, you have all the time. The time zone helps you.

For me, the time zone works better in the aftermarket in managing my risk that way. After the close closing bell, and then certainly as I come into the evening, as I was telling JC after 8, 9, 10, 11, 12 o’clock, midnight, I can see what’s happening in other parts of the world where it’s already too late for the folks on the east coast already probably in bed. But for me, if I’m up at 10 o’clock, it’s 1:00 AM in the east coast, I can see what’s happening in Asia in real time. So that gives me a bit of a tactical, or at least the situational advantage, is I can kind of see how things are following through. That helps a lot in currencies. It also happens in metals like gold and silver. You can see them start to trade overseas, and you can manage your positions accordingly. If those markets in the stock indices are starting to sell off, it could trickle over and creep into what’s happening with say, NASDAQ or S&P.
So I can initiate a position or better manage my risk by offsetting some of my risk for the things that I’m taking home overnight. But what I’m trying to say is if you’re going to try to develop a feel, it’s very, very, I think it’s a skill that can be evolved. It comes through an enormous amount of trial and error. Again, I have skill, but I was born with it, I believe, and I certainly worked hard to develop it. So on some level I can share with you that I’m lucky, but on another level, I can share with you that I did work hard to kind of hone that craft. Keep in mind, if you’re new to the show, all I did at the beginning was fail. I was underfunded. Everything that I thought I knew about Wall Street or thought what would happen for me when I got there was completely wrong, and I had to simplify and cut back.
I had to eliminate foreign exchange trading, interbank, foreign exchange, and options trading altogether, because when I looked at my behavior, I wasn’t getting any results. My stock trading was okay. I stuck with quality names, and I think I was probably in a bit of a bull market. My skill where I completely understood the market was in trading physical commodities. It seemed to come natural to me. So that’s what I focused on so that I could build a track record and more importantly, build my confidence because once you, even guys as dumb as the damn doorknob walking into your office, that person has confidence. They’re going to achieve a lot in life just because of moxie. So what I don’t like is when people try to tell you how easy it is and how much money you can make in such a short period of time with no experience and no money, it’s a come on. I don’t know. They might’ve had certain type of success in their career starting out, and they could be in the right place at the right time, but I don’t care if someone’s had six months of success with ai. That’s not enough time for me to trust it. I certainly wouldn’t put any money into any algorithmic trading using AI because I came up learning how to run my own systems and building my own models, and I’ve not completely sold on the whole AI is going to change the world thing. I think it’s going to do a lot in replacing jobs, and it could do a lot for client service for sure. That’s the evidence that I could see right now. But most of the traders that I know want to be more hands-on. Very few people want to delegate the decision-making to fully automated systems or even purely systematized trend following models. Most of those people are still even reading charts and figuring it out the day off. So there’s a lot that’s going to have to happen culturally, I think before the whole of Wall Street goes in hook line and sinker, and so you need to be careful, right?
Buyer beware. Caveat emptor. I know for sure that if you have the right emotional constitution and you know that you don’t freak out when you lose money, you do have a chance because that’s something that everyone has to do. Even the guys who are in market wizards had to pay some kind of, they all had to go through some type of emotional hazing to get into the trading frat, and they all had to lose gigantic sums of money, probably a lot more than you’ll ever have to lose, but don’t think for two seconds, just because some guy in marketing tells you how easy it is to do this and that you could make a lot of money and then go to cash, have no overnight risk. I know that sounds emotionally appealing, but it’s very, very, very difficult to do. I do it. It took me a long time to get there.
I know I have friends that do it, and they’re very, very good at it, but no one comes out of their mother’s womb necessarily. With that innate ability, it’s going to take you some time to learn your craft, and you have to think about the time and the money and the effort that you’re willing to spend in order to learn that, because too many people quit too soon. They don’t have the right expectations, right? Expectations have built in disappointments, so just know that it’s probably going to take you several years to really get where you want to be. I know you want to get there tomorrow, but it’s just like a relationship. They take time to evolve.

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Michael (00:00):
Hey everybody, it’s Michael Martin. Thanks for being here. Really excited because I get to chat for an hour with one of my really, really good buddies for a long time, probably 20 years. Sean McLaughlin, you probably know him as Chicago Sean. He works with all-star charts. How you doing today, buddy?

Sean (00:15):
I’m doing great man. The market is winding down for the day. It’s been a wild week here in my house. My wife just celebrated a big round number birthday. I threw a surprise party for her this weekend. We had people coming in from out of town. They finally just left yesterday, so the week is winding down.

Michael (00:34):
That’s right. When the party’s over, everyone has to go at the same time as I like to say, get out of my house. I want my space back.

Sean (00:43):
Yeah, exactly.

Michael (00:44):
Well, happy birthday to Mrs. Chicago. I hope she has a good many more big round numbers on her way. We like theta in this case, right?

Sean (00:57):
That’s right, that’s right.

Michael (01:00):
So speaking of the reason I don’t do interviews all the time is because I really like to think about the emotional and the psychological aspect of trading. But what happens is if you say one or two things about options, you get a thousand responses from people and although I can speak from my own experience, I thought what I would do today is bring in Sean, who’s a real options pro, get a different opinion. You can hear it from another angle and if that helps you, that helps you, it’s all for free. Sean, one of the things that I get, and I kind of razz people about it so they feel antagonized, but I want to have a little fun with people is this whole zero DTE thing. My take on it is that it’s a real trap for small retail traders and that they’re better off paying more money for time value, give themselves a chance to win. I know there’s training programs out there where you got a bunch of teachers and they can I’m sure help you if you’re lucky enough to have access to that, but the majority of people are doing it at home. They do it your DIYers, right? Do it yourself. So when you think about it and your rolling in all star charts, what’s your take on zero DTE? Call me an idiot if I’m wrong. I mean I don’t care. No, you’re

Sean (02:11):
Not an idiot. Look, it’s right that you’re asking about it because the volumes in zero DTE options are exploding. In fact, options expiring today and tomorrow, so like zero DT E and 1D TE are almost equal to all the rest of the options volume out there. So yeah, we should be talking about it. Now I take issue with people who think that the zero DTE options are a new way to make money. In my experience, and I can only speak from my experience, right Michael, but I’ve dabbled with them, I’ve dabbled with them a lot and I’ve had some success, but I have not come up with anything that’s unique or different in zero DTE. That’s certainly anything repeatable that I know I can rely on to make money every day. My thought on what’s going on with zero DTE options is they are great instruments for people and institutions I should say, who want to hedge event specific risks.

(03:15):
Something that’s very binary, very short term. They know there’s a big government report coming out the next morning or something like that. I think they’re great instruments for affordable hedging, but for people who are trading them purely as speculative instruments, they’re very challenging because if you’re buying them right then that means the clock is working so quickly against you. Your timing has got to be nearly impeccable if you’re buying these options. On the flip side, if you’re selling them, you’re taking on a lot of risk for very little reward. If a big move happens, if we have a big rip that you weren’t expecting for, even if you just stepped away to go make yourself a sandwich or something and you come back and the market ripped 20 points in your face, you’re taking on a lot of gamma risk for very little relative rewards. So for people who are coming at zero DTE options with a speculative mind, I don’t know, I haven’t found a way to make money with that consistently yet. But for people who want to use ’em for hedging, I think they’re fantastic. You can get very specific, very dialed in on these specific day you want that risk hedged for and you could do it, especially if it’s very short term, you could do it very relatively cheaply. So there’s my take.

Michael (04:43):
Yeah, I like what you said about hedging these binary events. Don’t forget if there are non-binary options, we have to refer to them as they them.

Sean (04:53):
That’s the environment we live in now. Yes, that’s

Michael (04:55):
The environment we live in. We have to refer to non-binary options as they them. So I admit I’ve tried them to just because I like to speak from an experiential standpoint because theories, who cares? It’s like belly buttons. Everyone’s got one and I don’t really mean belly button, but this is a rated PG show. I think my guess is that there are people who have smaller accounts and for some reason they have this enormous fear about the, but if they’re day trading and swing trading, my take is who cares about data at that point? If you think the instrument’s going to move sharply in the direction, if you’re long calls, you think the thing’s going to move up. What do you care about theta if the underlying is going to move 10 bucks? You know what I’m saying? To me it’s kind of irrelevant. You’re overthinking stuff.

Sean (05:42):
I get it. There’s an entire cottage industry of options practitioners who swear by only selling premium, and I have no problem with that selling premium. If that’s your bag, I know plenty of people who are very successful doing that. The issue is they’re doing it on longer timeframes. They’re selling premium in options that have six months or six weeks expiration, eight weeks expiration. They’re not doing it on an option that expires tomorrow, at least not the ones that are making any money consistently.

Michael (06:16):
And I speak to timing, I admit there’s probably like three dozen people out there who can do this, but for the shorter term stuff, man, your timing has to really be impeccable. So that’s my gripe about everyone trying to sell you swing trading and day trading programs is you can look over the shoulder and see what they’re doing and understand it intellectually, but in order to have the sense of timing that they have, that to me is a whole other skill and it almost has nothing to do with the puts in the calls part. You know what I’m saying? There are just people out there who have a really good sense of how things unfold and options can certainly be a way to capture that while minimizing the risk. And let’s not forget if some of the high flyers out there, everyone has an opinion now about Nvidia and how AI is going to change the world. You’re looking at 700 bucks a share. So yeah, you can buy a call as a surrogate I suppose, but to buy it for two days because the premium’s eight as opposed to 30 for one month’s expiration. I feel like people are kind of misled. And then what happens is you get this kind of, I call it Johnny Cochrane logic, right? If it doesn’t fit, you must have quit, right? Hey man, the glove never fit oj. He didn’t kill the girl. You know what I’m saying?

Sean (07:38):
Allegedly, he allegedly was involved in that.

Michael (07:42):
That’s right.

Sean (07:43):
Speaking as a Buffalo Bills fan, sorry, that’s a little close to home. The juice.

Michael (07:46):
I remember the juice when I was growing up, that was his nickname. So you hear someone say something over and over and over again and then you lose your critical thought and you just accept it as being God’s honest truth. So my whole thing is not only are the better traitors that I know, really contrarian, but they also question everything, especially in their own behavior. They don’t fall in love with their own reflection like narcissists and you really have to see the data, not necessarily the chart pattern. So thank you for that. It’s just look, so if you’re out there and you’re trading things that expire within the week, I hope you kill it, right? I’m not trying to call your girlfriend ugly, but you need to have a voice of reason. And that’s part of what I do here too because after 36 years I’ve seen and heard it all.

(08:33):
I am not saying that these people are snake oil salesmen, but when I scroll through my Instagram reels, I’m seeing and hearing stuff that is just laughable. It’s like a skit out of Saturday Night Live, and we’re going to see that because it’s an unregulated market, there’s no one to say, Hey, you have to have data to back up what you’re saying. People can say what they want. It doesn’t mean that it’s true. Right on. Let’s talk about risk management. So I tend to be a debit buyer myself. I’m like long calls, long calls, long puts. So I have an idea of what the worst case is. I almost never stick around if the thing is moving against me to let the whole thing go to zero, I’m kind of trading out of it. So what do you think someone who’s just starting out in options to do, should they take their risk unit and make that like a hundred percent of the premium or should they buy several multiples of that? So in other words, if they have a million dollars account or a hundred k, they want to risk 1000, do they put a thousand dollars in debit balance or can they put as much as 3, 4, 5 and then get stopped out at say 80% after they’ve risked their thousand? How do you look at that? Probably with respect to leverage, the

Sean (09:47):
Way I look at it is I like to always plan for the worst case scenario, and I have a perfect recent example of this, and this is in Snapchat. I had a position in Snapchat coming into the debacle that happened this week where the stock lost 30% overnight. I had a calendar spread on which we won’t get lost in the nuts and bolts of it, but just know that it’s a defined risks position. The debit that I paid when I put the spread on a month ago is the absolute most I could lose in a worst case scenario. And you know, after what happened this week, I was very happy knowing that my risk was defined and so I lost, I didn’t lose a hundred percent of my trade, but I lost probably 90%. But that’s fine because the position was sized in a way that had I suffered the full loss, it was a loss just like any other loss, totally acceptable within the realm of realm of what’s acceptable for my size account.

(10:45):
So I always approach risk management from the worst case scenario. When I’m doing option trades with defined risk, I want to know what that worst case is. And yes, to your point, I do use stops. I do get out with if a chart pattern is broken that I was leaning against, or if the spread or the option that I’m in loses a certain percentage of its value typically, but not always. Let’s just keep it simple. Let’s say I’m long a call if the chart isn’t necessarily broken, but it’s just going nowhere and my call that I bought for $5 is now trading at two 50, it’s lost half of its value. Generally I’ll cut my losses at that point, even if the chart still agrees with me. But again, I know what the worst case scenario is, it could be a zero and I’m fine with that. So that’s how I think about it. Mike, yeah, try to keep the worst case scenario in mind at all times.

Michael (11:43):
Okay, that’s a good answer. So I think the same way I think for certain positions where I try to have constant risk, I do know markets can gap when I’m trading well, I tend to trade more aggressively. That’s a discretionary element to my own practice, but the thing that I wrestle with is if you take in the series seven, they’ll say if you buy a thousand shares of an instrument, don’t buy more than 10 contracts and it looks good on paper. You don’t want to over-leverage your account. The thing is, is that you’re given away a lot with that type of model and what am I talking about? We’re talking about delta. Delta of any underlying is one, but if I’m buying something at the money, your delta’s going to be about 50. Obviously gamma’s going to be super high, but I think in terms of position sizing, I try to balance both the premium with also the delta because I know if I’ve got the calls and there’s a gigantic move, I’m not really going to participate in it all that much.

(12:53):
Although you can get, I’m sure the numbers, the delta’s going to increase the more in the money it goes, but that’s still a bit of a haircut that you have to take. So I always try to think, okay, balance, how much premium do I have at risk in terms of debit or net debit? I’m really not a net debit guy, meaning spreader or broken wings. But then I think about what am I getting? What is the bang for the buck that I’m getting? Do you look at deltas too when you are looking to establish whatever structure you’re going to put on?

Sean (13:24):
Yeah, certainly If there is a trade that I like, and again, let’s keep it simple with just simple long calls. If I look at that trade from the perspective of a stock trader and let’s say a thousand shares is my trade size, but I don’t want to tie up that much capital that would be required to buy a thousand shares of the stock, what I would often do is I would go into the options market and buy enough calls to target that delta. So in this case, if I wanted to have a thousand deltas, which is what a thousand shares would be, if I was long a thousand shares, that’s equivalent to a thousand deltas, I would buy, what is that 200 calls to target that same size? Am I doing my math or 20 calls?

Michael (14:17):
Trust

Sean (14:17):
It. At the end of the day, Michael, I’m fried. I can’t do the math in my head.

Michael (14:21):
I know you just had the birthday party and all those pain in the ass people at the house. I understand.

Sean (14:25):
But anyway, I would size my call position so that the delta would equal a similar sized stock position, but the benefit being I’m tying up less capital, I’m tying up less buying power so that I can maybe diversify my risk in another trade that is uncorrelated, right? People do that all the time. It’s something I will do from time to time, but what I’ll be mindful of is if I do that, I know that whatever premium I pay for those calls, that’s my max risk. So

(14:58):
If I’m putting myself in a situation where the max risk is larger than what I’m comfortable with and I have a decision to make, the decision is do I want this much leverage with calls? Can I maybe take a smaller position and I’ll get to that target delta eventually if the trade moves my way or do I get a little creative and maybe buy some hedges, maybe buy some out of the money puts just in case. I mean, there’s a lot of different ways, and you kind of hinted at the top of this call about how with options trading, there’s lots of different ways to skin the cat, and that’s both challenging and frustrating to people, but also a great opportunity. It’s challenging because a lot of people, especially people who come from the binary world of futures where you buy or sell and that’s it.

(15:48):
People don’t like that the answers are black and white, that they aren’t black and white. If X happens, you do Y in options. There’s different, there’s no right answer and people want right answers. People crave right answers, right? They want to do it right. Well, I’m sorry to tell you that if you’re bullish and I’m bullish on the same instrument, you and I could trade it with options in two completely different ways and we could both make money, we could both lose money or one could make and you lose. It’s like that frustrates people, but I like it.

Michael (16:20):
I like them because you can really carve out your risk and that to me is the nature of trading. It’s so not about entries. To me it’s all about position sizing more than anything. If you looked at my, I’m like the Jimmy Page of trade entries. I have really good licks, but I’m sloppy as hell. Whereas there’s other guitar players who can hit every note all the time, but Jimmy Page is all balls, and that’s kind of more my style of trading. So what I try to do is I try to carve out where’s the risk, where’s the upside? Unlike a lot of folks, I don’t really get out of bed if I can’t find something where at least looking on the chart I can see a five to one type of ratio. This way when it works out, my winners can pay for a whole bunch of losers, and like you said, sometimes they stall, so I do use time stops as well.

Sean (17:09):
Yeah, that’s actually something, I mean I’ve always been aware of time stops, but certainly in the past year I’ve made a much more concerted effort to focus on getting out of the trades that just aren’t working quickly. Now, I’m not being greedy, but I look back at my trades over the past, I dunno, four or five years that we’ve done stuff with all star charts and I’ve noticed Michael, that all of my biggest winners, the trades that really made my year every year those trades, not every time, but almost every time they started ripping right away, maybe not the minute I got into it, but within a day or two or certainly within a week, it started going my direction and never looked back.

(17:58):
And certainly I had trades that I sat in for six months and then finally worked for me and that’s great, but I adopted the mindset of if all my biggest trades that make my year are all trades that start working right away, then what am I doing sitting in all these trades that are tying up capital for weeks at a time, months at a time doing nothing? I would rather get out of those things a lot quicker at the risk of maybe getting out of a trade that would’ve worked eventually, but the numbers work in your favor when you do that.

Michael (18:29):
God has spoken these words, and I do that with futures, which allows me to trade with bigger size. I don’t look at myself as a day trader. I’m more position trading, but if I do put on a trade, I don’t want to see red and sometimes I’ll be like in, out, in, out, out just because I’d rather trade with the size, not that I’m trying to sit here, double click in my mouse all day, but I want to get in on the trade with the right timing, then have the thing move in my favor, I can then adjust my stops and it really helps me live in a very placated lifestyle in that regard. It looks sloppy as hell, a lot of false starts, but the key is to get the right amount of risk on at the exact right time, and I don’t have time, like you were saying, I don’t have time to sit there to wait.

(19:15):
I had some puts on Disney a while back and I literally got paid the last day and I was like, this is bullshit. I’m not doing this anymore and I made 20% on the actual trade, so whatever, if my risk unit was 1%, I cleared out 1.2 net of commissions. So it wasn’t even anything really to write home about, so it was more of an emotional win or like a theoretical win. It’s not win-win, certainly not one that I want to get involved in and replicate no money in it, but I think the key here is position sizing. Just to take an aside, I wrote about in the inner voice about the inner invoice of trading being long live cattle, feeder cattle. When mad cow hit the tape, hey,

Sean (19:59):
I don’t know, he was over my shoulder, but right on my bookshelf over there, I’ve got the inner voice of trading right there on my bookshelf.

Michael (20:06):
Thank you. Thank you, Sean. That’s very sweetie to say, but man, that was painful because obviously commodity futures are not options and you have unlimited loss potential regardless of whether you’re long or short. The key was position sizing and the thing was limit move against me like five days and that’s 1500 bucks a contract. You’re getting blasted, but the problem is is that people see that and now they extrapolate it and they see that’s why I’m not trading futures now. I’ve been trading futures for 36 years and I can think maybe including that one, maybe two or three total times where I had limit moves against me.

(20:50):
I think options provide a good vehicle for folks who are learning how to take risk home and take risk home overnight over the weekend. It gives you a little staying power. You already can define what your max loss is, right? So I think there is a bit of a misconception and a fundamental misunderstanding of risk. Risk in and of itself is not bad. It’s how you handle it. To be honest with you, and I make this joke when I speak publicly, I trade futures more conservatively than people buy and hold their 10 year treasury notes. You know what I mean? Those things are all over the place. They look like my uncle Vinny’s, EKG, after a big meatball parm and three liters of Coke. My future’s equity account when you trade your equity curve, so you can take and trade it a very aggressive or risky instrument, but trade it conservatively. I think that’s what Sean was saying. So do you ever find yourself, Sean, where you’re in a long call and a long put and you’re like, Hmm, the financing of this thing is a little rich for my account size, let me sell away some of the upside and create a spread or do you ever do that, like ratio spreads or back spreads? Oh,

Sean (22:04):
Absolutely. Once I’ve determined whether or not I’m bullish on a position or bearish on a stock or neutral on stock, once I’ve decided my directional bias, then the first thing I look at is where is the implied volatility in the options? Now for newbies out there who have no idea what I’m talking about, implied volatility is just a measure of the expensiveness of the options premium. When implied volatility is high, that means that you’re paying a lot more to say buy an at the money call versus when volatility is low, the premiums will be much cheaper, and so I want to know where the implied volatility is. I don’t care so much about the actual number that will pop up on my screen. The volatility is 0.8294. No, I don’t care about that. I just care about where is it now compared to where it’s been over the past six to 12 months. If it’s in the upper third of the range, then I know that volatility is high. In that case, I want to be putting on some kind of spread trade in most cases, or maybe I want to be selling premium just being naked puts or maybe a strangle.

(23:16):
On the flip side, if volatility is cheap, then that gives me a little bit more comfort to maybe just buy a straight call if I’m bullish or buy a straight put if I’m bearish. But implied volatility is number one A in the steps for me in determining what I’m going to do to express my thesis.

Michael (23:35):
Thanks for saying that. I mean with options, man, it’s like to me, futures are so clean. You have supply and demand. There’s no Abby, Joseph Cohen, there’s no fed banker, central banker. There’s no ax that can really tell you where beans or cocoa or sugar are going to go, and that to me is kind of disruptive because if you’re in those positions overnight over the weekend, I don’t any more than any type of trader who’s, whether it’s day trading one minute bars or position trading and holding things overnight like I do, no one likes surprises. I don’t want to wake up and find that somebody just upgraded or downgraded or that there’s even just bad news coming in and out of the company like Refco halted auditor, resigns, CFO was arrested. Man, that Refco thing hit me hard. They had actually allocated money to me, so once I saw that, I knew the gig was over.

Sean (24:41):
So let’s talk about, I ran a small commodities fund back in oh three to oh five, and I cleared through MF Global and I moved to another firm. Luckily, maybe six months before that whole thing blew up, I could have been ensnared in that as well.

Michael (24:59):
That was the John Carine bond trade thing.

Sean (25:01):
Yep, yep.

Michael (25:03):
Yeah, yeah. I was affected by both because when I started out and I went out on my own, I cleared EDNF man basically my whole career. So yeah, he ruined that company. I mean, that company went back to 1794 something. Yeah,

(25:20):
So let’s talk about when you are making money, right? There’s so many things to measure. You talked about implied volatility, you have historical volatility, and then you have a whole slew of Greeks, you have charm, you have all of this. If someone’s just starting out, this is overwhelming. There’s so many things to know, so many things like, Hey, my car won’t start. Well, what is it? Is the battery not charged? Do you not have enough fuel? Are the two battery connectors corroded? Where do you start to go through your checklist of what’s material or not? My take on things for any asset class is to really keep things simple. The simpler models are easiest to run. They can be profitable, and then when they start to break, you could at least see what the hell’s wrong with it and take a time out. What do you advise for the newer folks two years or so of experience who are looking at options and they overwhelmed with just the vocabulary of the damn things?

Sean (26:28):
That’s a good question, and I meet people who are new to trading all the time. I run a traders meetup group here in Colorado. We get together a couple times a month and we get new people all the time. And one of the things that’s always said, options when they hear that I tried options, it’s like, oh man, that’s complicated. And look, here’s the thing about options. Options can be very complicated. In fact, there are a lot of people, a lot of successful traders out there who run very complicated volatility skew strategies that you need like a PhD in math that even scratch the surface of what they’re doing that exists and it’s out there certainly, however, that is not how I trade. I don’t know if I’m smart because I keep it simple or if I’m stupid because I keep it simple, but either way, I like to keep it simple. And option trading can be very simple. If you’re willing to learn a couple terms that maybe you’re a little unfamiliar with, and you mentioned the Greeks. The Greeks, all they really do is they’re just measures that tell you how the speed of things are likely to change in the event that X, Y or Z happens.

(27:35):
I always tell people, if you’re new to options, don’t start getting into multi legged spreads and don’t be selling naked risks. These are things that you don’t understand and you don’t want to learn the hard way. What you want to do is kind of wade in either just be a straight buyer of calls when you’re bullish or be a straight buyer of puts when you’re bearish or a very common way, and I call this the gateway drug to options Trading is be a covered call writer. If you own stocks, sell covered calls against your stock and just see how that plays, see how that affects your return streams. See how those short options play against your long stock. That’s the easy way to get your feet wet covered call writing and just buying calls and buying puts. That’s it.

Michael (28:22):
I would concur, and I’ll say this out loud, I’m a guy who looks at the data. I started creating my own trading models using Lotus 1, 2, 3 and kind of writing macros around it, and it’s awfully difficult even to get good data on options to back test, right? I mean, so it’s very, very difficult. So paper trading, it’s not the same as long as there’s no real risk. You really need to feel the burn of making and losing money in order to get the education that you want. And I’ve said it as a guy who teaches traders of all levels, beginners through institutional people and family offices. The best teacher of trading is the actual trading itself. Absolutely. Because so much of you is part of your trading process, right? Sean just said before that he could be in a spread. I could be in a directional trade on the same underlying instrument, and we could both be right and make money. There’s really not only one good way, there’s the best way for you. That’s probably going to be a reflection of your personality. That’s typically how it goes.

Sean (29:25):
I’m glad you brought up back testing, if you don’t mind. I’d like to riff on that for a second. I riff

Michael (29:29):
Baby riff.

Sean (29:30):
I’m a big fan of back testing. I’m a big fan. When I traded commodities, like U trade commodities, I used to run back tests and I used to do trend following strategies and I wanted to run back tests as far back as I could go to see if what I’m doing has an edge that I can rely on. Big fan of it. However, in options trading as much as we want to backtest it is really problematic because even in the most liquid options markets like say like s and p options or TLT options, SPX options, things like that, even the most liquid options markets, you’re still looking at bid ask spreads that are very material. If you’re looking at an option that’s a fair value of two bucks, for example, yeah, the fair value, the option might be two bucks, but the bid might be a dollar 75 and the offer might be 2 25. That is a spread. You could drive a truck through and when you’re trying to backtest and say, oh, I would’ve gotten filled at $2, the fair value, that’s not how the real world works. If it’s a fast market and you need to get out, you’re hitting that bid and you’re getting out at a dollar 75, and that’s a big difference from $2 in percentage terms,

(30:43):
And you combine that over hundreds of thousands of trades, those differences are just going to put your numbers way out of whack. I mean, if someone out there has a good way of backtest options, I’m all ears. I would love to see it, but yeah, I don’t know how it works.

Michael (31:01):
Yeah, it’s got to be something that’s custom made because it’s just too difficult. But backtesting can reveal at least so you miss, right? Because two payoffs to every trade. There’s certainly the financial part, but then there’s the emotional and the psychological. When you’re trading with paper money or using a demo account, you might be frustrated, you can’t get the thing to work, but you’re not despondent. You lost actual money that you worked hard to get in the first place, right? So there’s a really big difference.

Sean (31:32):
Absolutely.

Michael (31:33):
Sean, how do you go about, if you have a bullish opinion on a certain thing and it’s showing up on the chart, how do you kind of determine what’s the best, right? Because you have futures, you have all these different expiration months, which we call the strip and term structure and options. You have $5, sometimes $10 increments in strikes. So is there a Greek or is there just a methodology? Is it a gut feel? What should someone look to if they were bullish on some underlying instrument, what call strikes should they look at if they were going to buy it?

Sean (32:11):
I am afraid I might give you an unsatisfactory answer here, Michael, but it’s all of the above. Remember earlier I mentioned how after I’ve decided my opinion on the stock or the underlying my bullish or my bearish, my neutral, after I’ve decided that, then very next thing I do is determine where the implied volatility is. When I’ve determined that implied volatility, that’s going to steer me into the direction of what strategy I’m going to use. So let’s just use some examples here. If volatility is low and I’m bullish, I tend to to really just keep it simple and buy calls, I mean I don’t need to get any more complicated than that. If calls are cheap, then just buy the calls so much easier. And generally speaking, if volatility is cheap and therefore calls are cheap, I will try to go further out in time because it’s more affordable to go further out in time.

(33:06):
I get more bang for the buck if I get it right. And a really big trend develops, so we’re in February right now as we’re talking, if volatility is scraping the lowest levels it’s been in for a year in a certain name, I might look out nine months, 12 months option strike just to give myself as much time for my thesis to play to work out and the strike that I select. Generally speaking, if I’m buying calls, I like to buy the 25 delta strike, so that’s going to be an out of the money call. It’s going to be above the current price level. There’s no magic in 25 delta. Michael, I get this question all the time. Why 25 delta? What back test tells you that that’s the best one? No, back test tells me it’s the best one. I like it because at 25 delta, to me, it’s the right mix of affordability and leverage. If I get it right,

(34:05):
Meanwhile cheap enough that if I get it wrong, it doesn’t hurt that much. I didn’t risk a whole lot of my capital. So that’s why I like the 25 delta love. If you like to buy the 30 delta, if you like to buy the 40 delta, fine, there’s no right answer. Everything in options trading is a trade off. If you want to make more money, you have a lower probability of success. If you want to have a high probability of success and win more often than you lose, you can do that too, but you’re not going to make as much money. There’s always a balance.

Michael (34:37):
I appreciate that. I appreciate the honest answer. I’ve vacillated between 25 and fifties in recent times. I’ve been buying a lot of at the money stuff just because the moves are so strong, which really kind of brings me to the next question is if you see a move, let’s take a move that a lot of folks probably would know in some of these AI stocks, Nvidia broke out over whatever it was 5 0 5 and at this time, what last night, it was up 7 0 8. So you’re in calls that are going either at the money, in the money very, very quickly or like you with 25 deltas, they’re eventually getting to be at the money. Then in the money, is there a best practice for know and when to roll, right? Because sometimes these moves, you have $30 move overnight, you can’t roll to the next strike. You’re oftentimes the rolling, you’re dealing, you might have 30, 40, $50 in between strikes. So do you enter spreads or do you attempt to offset the winner and then immediately go back to your next 25 delta? How does that work? Because also the volatility might’ve changed.

Sean (35:46):
Yeah, that’s a good question. And what I tend to do, and I’m not saying this is the best way or the only way, but what I tend to do in a situation like that where I’ve got a big winner, it’s going my way. Generally speaking, when I get into a trade, I have a plan. I know where I’m getting out, I know where my stop loss is. That’s the easier part. I also have a plan for if things go my way, I have a upside price target. It’s not a firm target. It’s more like an area usually. But in my mind, what I do is if I get to that price target where I’m sitting in a nice profit, a best practice that I will do often is I will sell or get out of a portion of my position that pays me back my original risk capital. So whatever I initially invested in dollar terms, I’ll sell enough to get that money back and then I’ll hold the rest. I like to call it a free ride, right? Hashtag free ride, I got a free ride on the rest. No matter what happens, I’ve got no risk in it. Trade, yes, I’m risking open profits, but I’ll risk open profits all day long, but I don’t want to risk my original capital.

Michael (36:58):
Yeah, I got you. I kind of borrow from my future trading strategy, which is I tend to be very stingy at the beginning and use lots of times stops, but then once I start making money, I quickly actually scale and buy more. It’s called the moron strategy.

Sean (37:12):
Just kidding. I like that.

(37:16):
Well, Michael, I’ve actually come around on this. I’ve changed my thinking in recent over really the past year, up until about a year ago, my best practice, and I was pretty firm on this, was if I had a position on and the spread or if it’s just a long call or a long put, if it doubled in money, then I would always sell half of my position and again, taking my original risk capital out and then let the rest ride and that’s fine and that works. But after reviewing a lot of my trades, I said, man, Sean, you’re really leaving a lot of money on the table. Why not let these things go to that price target you have in mind and then sell a little bit, maybe just 20% of your position or 10% of your position get paid back your original risk capital and you still got a large position to potentially go to the moon as the kids like to say, it only takes a couple moonshots to make your ear

Michael (38:16):
Trading is great. The outside of Jiujitsu, I don’t know of any other thing that could completely humble you. So I did a similar study and people like to say systems remove emotion or whatever. I mean they don’t know what they’re talking about. Bill Dunn who when he’s retired now, but he would talk about the emotions running through his body and that guy was purely systematic because I kind of journal everything When I think of where I’m emotionally, okay in I bought, say I bought with in the Nvidia stuff, those calls, the at the monies were like 20, $30 with 50 delta, but they go in the money so fast, you’re looking at five times your capital. And so emotionally you’re like, well, I got to protect my capital. I have to put in a stop. If the market’s going parabolic sooner or later it’s going to fall apart.

(39:07):
Parais don’t end all that well, and I don’t know exactly when, but there will be a mean reversion even if the move kind of continues. So you’re dealing with all this stuff in your head. It’s insanely difficult to backtest with options. So I looked and I found that when I feel emotionally I better take some money off the table. If I actually bought the underlying at that point, I would’ve made more money. Kind of like to your point, so your emotions can betray you and stop you from making more money, not just get you into bad trades. The emotional part can hijack your behavior every step of the way in your preparation to your order tickets, to your morning prep, to the execution, to what I call managing the trade. What do you do when you’re in the trade? To me, I immediately put in a protective stop and then I set alerts as it’s making me money. Sometimes I add more, but then I adjust my stops higher. So I like to keep the position might be bigger, but I like to keep as the saying in baseball is I want to steal second without taking my foot off first base. I try to keep a constant risk. I don’t want 10% of my capital going directionally, that’s not 10% of the premium. That’s the distance between where we are and where my stop is. You know what I’m saying? So it’s a little different, but it’s important. Go ahead.

Sean (40:33):
Oh, sorry. I had the good fortune when I first moved to Colorado a little over 11 years ago to strike up a friendship with someone that you may know. Peter Brandt commodity trade has been around a long time. He was featured in the most recent Market Wizards book that came out from Jack Schwager a couple of years ago. Peter lived here in Colorado. He’s since moved, but we got together a few times and one of the things that I learned from Peter the first time we hung out, which has always stuck with me because he’s been trading now for 50 years or something like that, and he’s done fantastically well. He is made many millions of dollars throughout his career, although you would never know, he is the most humble guy in person you would never know. But one of the things he said to me, Michael, he’s like, Sean, in all my years of trading, getting out of losing trades has never been hard for me.

(41:30):
I always have a plan. I always have a stop in. I take small losses all the damn time. He’s like, the hardest trades in the world for me are the trades that immediately go in my favor because every bone in my body has seen this movie before where the thing rips in my favor and then immediately rolls back over and stops me out. He’s like, so every bone in my body wants to take that profit and get out of that trade because I know it’s going to come back on me. But those trades, and this goes back to what I was saying before, those trades that start ripping immediately, those are always my biggest winners. That’s what my biggest winners look like. So I actually learned that from Peter. I’ve only finally started to implement that thinking into my trading. It only took 10 years after he first told me to finally let that sink in. But yeah, man, it’s the emotions you battle and it’s counterintuitive to somebody who’s new to trading or considering trading and has never traded before. It’s counterintuitive to be like, oh, a winning trade that’s hard and losers are easy. But yeah, the winning trades are the hardest trades to hold and certainly been my experience.

Michael (42:38):
Yeah, I feel the same way. And we teach to that too. You have to have a plan for when it doesn’t work. You have to have a plan. Like the old saying on the street is if the market gives you a gift, you have to take it. And there is partial wisdom in that. But I’ve gotten comments via email and comments on the blog on some of the videos where you could tell the guy has no experience or their armchair quarterback and they’re like, dude, every breakout has a pullback. And I’m like, no, it doesn’t grow some hair on your nuts before you start talking and telling me about trading. Sometimes these things go and they don’t stop. So to just say nine times out of 10, it’s like you need to do your history, you need to do your research and know what the hell you’re talking about. The most expensive trade to a person could be taking a winner too soon.

Sean (43:34):
Absolutely,

Michael (43:35):
Absolutely. Times. Have

Sean (43:36):
You seen that, Michael? We’ve seen that so many times,

Michael (43:39):
More times than I care to. I’ve had my share of gigantic winners. I tend to trade aggressively when things are going very well, but the ones that bother you are the moves that take off that you’re not participating in or the ones that you don’t have enough on and it’s like your trade. So you say, okay, well then how can you learn from that? How can I screen better? What was the catalyst that made this thing move? It wasn’t just a breakout to a new hive. Maybe there was a news event, which is kind of hard to predict. So you look at that, but you’re constantly evolving. You never stop learning. You’re always looking at your behavior and trying to ascertain, am I marrying my beliefs with my behavior? For me, behavior predicts where you end up in life. I don’t care what anyone really knows about a certain commodity or an asset class.

(44:31):
If you have trouble sleeping, trust me, I could tell you everything you need to know about the sugar market or yellow soybeans number two, but that doesn’t help me make money, right? That’s not a trading tactic. That’s a data point. Now, 30 years ago when the internet didn’t exist, if you had that type of information, it would mean something, but the whole encyclopedic knowledge now of any type of thing is always a Google search away. So I tend to look at behavior and what is it that I know how to do that I could execute, that I could kind of quantify or journal, and that might even be certain sensations or feelings that I get or hunches. I actually write that down, okay, where’s the hunch? Where did it come from? Was it a news thing? I’m not really big on tv. Did I notice something in the chart? Did really, really bearish news come out on the name or what people would think would be bearish news, but yet the price didn’t budge and it’s still inched a little higher. All that kind of information tells you a lot about what’s going on in the marketplace. So

Sean (45:32):
I think

Michael (45:33):
It’s

Sean (45:33):
Just listening to yourself and listening to your body. One thing I’ve learned about myself, Michael, over the years is, and I don’t know how it happens, but I’ll have a trade on or a position on or just overall portfolio positioning, and I’ll start noticing as I’m looking at my positions that I’m starting to get a little cold sweat going, and I can’t explain. I’m like, I’m not cold and I haven’t been exercising, but all of a sudden I get this cold sweat, and more often than not, that’s my subconscious telling me, Sean, you need to make a change here. You need to get this position off the books or something. It’s kind of amazing how that happens, and it took me a while to figure that out, but that’s one thing that I get. I mean, what was it? George Soros used to say that if his back started hurting, it was time to get out of a position.

Michael (46:15):
I was just thinking about that. Yeah,

Sean (46:16):
Kind of the same thing.

Michael (46:17):
Yeah, I mean, at first I thought you were talking about that Austin Cuban food that we had in Venice the last time you were in la. Oh, yeah,

Sean (46:24):
We got to go back to that because that was great.

Michael (46:27):
Yeah, name was, I think I actually interviewed, her name was, I want to say Flavia Simsa, who would talk about that. I think she was like George’s coach and Victor. When Victor was working at Quantum Fund with Jim Rogers and George, he would say the same kind of a thing. He would feel his body would get a sensation and his back would start to hurt, and that would like to be an entry point to his system.

Sean (46:58):
Speaking of Jim Rogers, by the way, Michael, shout out to Jim Rogers. I had the very, very good pleasure of getting to meet him in person this past summer. I did a trip to Southeast Asia. Me and my partner Steve Strasse, I went to Singapore and we just kind of cold emailed it. Jim Rogers, he didn’t know me, I didn’t know we’ve never met before. I cold emailed him and told him we were in town. We were interviewing traders for a documentary, and to his credit, he’s like, yeah, sure. Come on over. I’d love to meet you. And we ended up spending two days with Jim, had some coffee, had some great conversation, man, what a gem of a guy.

Michael (47:32):
Oh, a hundred percent. Actually, he used to live near Columbia in that big house in Morningside Heights, so I would see him occasionally in New York City when I was in school, and then later on I would catch up with him for lunch or something, coffee in Santa Monica, talk about the old times, talk about managing risk, and I’ve had some really good interviews with him. I probably should have him back on the show. I noticed one thing in my own behavior that he and I shared was that when we were wrong, we were oftentimes early. So we started talking about, well, how could I better position size? And that conversation actually led me to instead of going risk on risk off, why don’t I trade a smaller piece getting involved maybe one fifth my optimum size so that this way if I’m my accuracy is 40%, it’ll be paper cuts as opposed to something that’s more ego-driven, like a plunging.

(48:31):
I buy 150 New York gold contracts. Maybe you don’t have to buy them all at once. Buy three lots of 50, get a feel for the market, see if it’s going to move in your favor this way. Like you were saying, if the market moves against you, I don’t want to get nailed on my first piece, I mean on my entire or my optimal risk unit. I’ll just take a small paper cut on the first entry. So again, so that’s an emotional development for trading that we’re talking about. Anything you want to say about the movie now that you opened your big mouth, the documentary? When is it going to be out? When can we see it?

Sean (49:13):
We expect at least the first couple episodes to be out by April. I hesitate to make any promises. It’s out of my hands. It’s in the hands of the producers and the editors and the people that make movie magic, but I know we’re getting close. It’s slated to be eight episodes. We went to seven cities throughout Southeast Asia, interviewed all kinds of traders, and we visited some of the exchanges in these countries and it was a wonderful experience and hopefully we’ve got some great content out of it. We’ll see.

Michael (49:49):
Dude, I have no doubt it’s going to be great just who you are. You’re one of the good guys. So I have one question in closing before I also want to thank you. I know you’re not a guy who’s just sitting around watching reruns of baseball games like I do. You are very busy in everything that we’ve spoken about today. Are there any other misconceptions or things that many people misunderstand about options, especially if they’re kind of starting out?

Sean (50:20):
I think the biggest misconception about options is people who have no experience trading options just automatically assume that options are incredibly risky. Now I know where that comes from. I know that people see that you could buy a call option and be wrong and lose 100% of the premium, and that sounds scary, and that makes for a great headline and certainly a good tool to scare people. Yes,

Michael (50:47):
It’s a total loss.

Sean (50:50):
Or you hear about the people who sell naked options, naked calls on something that gaps a hundred percent against them or something like that. Yeah, those things happen, but those things also happen in the equity markets and they also happen in the futures markets, and they certainly happen in crypto. It’s not unique to options, but if people are willing to do the work and just do a little bit of reading or just ask the right questions of the right people, you can find out that options trading actually could be very conservative. We talked about the defined risk. You could define your risk to be however much is comfortable for you, right? Maybe you’re only comfortable risking a hundred dollars per trade, fine in the options market. You can craft trades that give you a possibility of winning, perhaps winning incredibly while still managing your downside and knowing how much you’re going to lose no matter what stock could go to zero. You could still know what your maximum risk is. So yes, I understand why people can think that options can be very risky and certainly if you’re doing it in certain ways it can be, but that’s not a blanket truth, right? Options definitely give you a much better ability to be more conservative. I know that sounds crazy to some people.

Michael (52:13):
Well, I think in the context, I don’t want to put words in your mouth, but I look at the same thing too. People say, you’re a commodity trader. It’s legalized gambling. You’re a risk lover. You love gambling. I was like, no, I really don’t Myself. I’ve played games of skill at casinos, poker games and blackjack and this and that. So when I think about losing your total investment, if I break up my money in 1 25 basis point increments, I have 400 chances to be wrong. So if I put down $2,500 for every million and I lose it, sure it’s a total loss, but I still have 99.75% of my starting capital. So for me, it’s the same thing. I don’t really have a loss. Even if I have 99% of my capital, I would still figuratively say I still have all my money. You know what I mean? Yes, for sure. It’s a loss, but we make and lose our money from our account balance, from our position sizing, and that to me is like where the best traders really have an exceptional understanding of risk and they know how to position size the entries and the exits, they can be super sloppy. Obviously you’re trading a tiny account, slippage and skid probably is more meaningful for you, but once you start making some money, that stuff becomes incidental.

(53:33):
It doesn’t mean anything.

Sean (53:35):
As much as everybody would love to just rid themselves of the scourge of losing trades, the fact of the matter is losing is a course of business. It’s an essential part of what we do. You will lose, and depending on what type of strategy you’re employing, you might lose frequently. I mean, you and I both know traders who are fantastically successful, who have a win rate of 30%, right.

Michael (54:00):
Make a huge living with 30% accuracy.

Sean (54:03):
Absolutely. Absolutely. So losing is a part of the game. We’re not going to get rid of it, but it’s how you lose that separates the winners from the losers.

Michael (54:13):
Well, you’re a winner man. I appreciate you being here and taking the time. We’re coming up on an hour. I definitely want to know more about the movie, when the time, make sure to help you promote it, and then we’ll have you back on the show in a couple months. Talk more about options. Maybe we’ll do a little something or it would be great if we did a live stream, we did a demo or a live stream on something. I’ve been kind of toying with that idea. You certainly would be at the top of the list for doing that thing. Thank you, Sean. I appreciate you being here. I appreciate all your wisdom.