Hey guys. Welcome back to the weekly segment that Mike and I do where we go over topics, questions, and comments that you guys have, and see if we can give a little bit of insight on that. Today we have a question from the comments, and it says, being new to this game, I always wonder what are the avenues I should go deeper into? You say indicators are a no-no. Then what are you basing an entry on new, weekly or monthly high consolidation, low or high, et cetera. Before we get into that though, I wanted to say thank you guys for all the supports and for all the support. We really appreciate the comments. Make sure you guys like and subscribe. Click the notifications bell, all comments, help the algorithm, and you may have your questions answered in the next video, like today’s topic.
Yeah, yeah, because it’s good feedback. If we’re saying something or I say something that’s not entirely clear or that would prompt a person to do follow up, then by all means let’s keep it as a, I’d like to think it as an ongoing dialogue with everybody. Kind of like a conversation. So the question was, what do I base my entries on? Yeah. Or something.
Yeah. Oh,
Right. So the thing about indicators, if you’re newer to the game, you don’t use indicators for bi signals or cell signals. What you would use an indicator for, and the only reason I say it this way is because I have a simulator that’s super expensive and I test the indicators against price, volume, open interest in this and that, and none of them is very, it’s not predictive. So I find that indicators are some things that newer traders go to because they don’t want to feel the uncertainty around trading. So they figure if they put indicators on top of their chart as well as looking for patterns, they’ll give them more sense of surety. But that doesn’t exist. So you just have to go to the source of what the issue is, which is to feel the uncertainty around putting on risk in your portfolio. So depending on a person’s timeframe, if they’re looking at intraday stuff at one minute bars, I’m probably not a lot of help for them other than to share with them that one minute bars are very random in terms of data.
And two, if you’re looking for 5 cent moves, I think you should set your sites higher, right? Because some of the moves are very pronounced, and so I wouldn’t look at risking a penny to make 5 cents, which yes, I know is an asymmetric return. There’s so much more money on the table than trying to make nickels and dimes basically. And so that’s what I’ve advocated is that it’s hard enough, especially in this market, right? We’re in earning season, I don’t know about you, but we’ve been, we’re not dying, but it’s like debt losses by a million paper cuts. You know what I mean? There’s no follow through for the most part. Everything is down. People are scared. You still have to put your trades on, but nobody is immune. Now, when I get knocked out of a trade, as you know, I tend to add to my winners.
I start small. I never put on my optimal position, which is just my style. Some of you, it’s risk on risk off. You’ve got your one R stop, you’ve got your say you’re two, you’re three, your four R, whatever that number is in terms of your upside. I do things very differently in that I anticipate moves that are more like 50 to a hundred dollars in stocks and several dollars for x, for example, in the commodity space. So with that in mind, I can take my time to scale in. I don’t always get it right in terms of anticipating the move, but at least, excuse me, I’m there. I’m there. And I oftentimes will have my optimal size on by the time that the thing actually moves. My intuition plays a big role in choosing both the instruments and the entry points. I’m following the crowd at a poker table, you can’t just play your cards, you have to play the people across the table from you.
So there’s a lot of that. What’s the crowd doing right now? The tape seems a little heavy. People are spooked, but that’s just the nature of the market that we’re in right now. It’s not for always. It’s not forever. So I guess the question I put back to the person who wrote the question is what do you think the indicator was supposed to tell you? We know what the definition is. Anybody could look it up online of any particular indicator, but it doesn’t, to me, the indicators aren’t risk on risk off indicators. They’re just there to kind of confirm what you can already see in the price. So what you’d want to look for would be price movement, and then conjugate that with volume because institutions leave footprints. Good spot to start would be to go back and look at the show that I did with Brian Shannon. That would be a good type of a show to look at and talk about volume and how important that is at what price is.
There’s a million ways I can go with this. Of course, whoever asked the question can go simulate themselves and just kind of see what’s the efficacy of the indicator that they’re looking at. But I think the main thing here is what I heard in the question is that indicators aren’t green light, red light. The price is right. You’re using the price to enter, not the indicator. The indicator, especially if it uses price as an input, can only really help you confirm what I think you can already see in the chart right now, if you’re using stocks, by all means, you want to look at something that is for sure valuable relative strength and what the measurement is of that, higher the better. But that just puts the stock on your radar. You don’t buy something because it hits 98 in terms of relative strength, for example.
Same with a dx on the future side, you’re never going to see a strongly traded, excuse me, a strongly trending commodity that doesn’t have a high X rating. So waiting for some kind of pullback in a D X or some kind of upper threshold. It’s not the point. It just simply tells you the pulse of what’s going on in the market. So what you can do if you’re looking for more pronounced moves and you’re not doing shorter term things like I think day trading, intraday stuff, maybe even swing trading is know where you are in the weekly in the monthlys. Because in my opinion, when you’re looking at something like monthlys, the data are much less random. You’re dealing with every trading day in the month in one bar. So one or two aberrations on a particular day kind of get neutralized by all the other days.
In other words, the data is much more meaningful. So if you can see something that looks like it’s going to start to break out on the weekly or the monthlys, now at least you know what you should be looking for in the dailies, and then you could sniper down, even though I don’t like looking at that, using that particular term, because it evokes certain things about needing for accuracy, which you don’t need relative accuracy, but you don’t have to be a scout sniper. So I think this is getting to the heart of the question, there’s a lot of ways to go with it. But ultimately, as I’ve said before, whatever you use, you have to make sure that you’re actually putting on trades because you’re not going to, sitting and ideating on potential trades by looking at indicators doesn’t really help you conjugate your emotional constitution with what’s going on in the marketplace and how you add or remove risk.
I think if someone said something about a specific indicator, it would be better. There are a few that are measurements. I don’t look at them in indi as indicators like rsi. To me, that’s not an indicator. It’s just simply a measurement of stock’s strength compared to the overall market. Same with adx on futures. You can look at, again, objective things that you can use that will give you forced objectivity. I suppose if you look at the volume, the volume number is the volume. You can’t really negotiate it with it if you want it to understand, for example, what’s the daily volatility of a particular instrument. You can objectively use say average true range, for example, and give you an idea of what the dollar swing is going to be on that instrument, especially if you’re doing things the way I do it, which is taking risk home overnight and over the weekend.
So you want to have an idea, is it predictive? Not in the least, but it does give you an idea like a back test, what the general tone of things are, and that can help you with position sizing, right? The more volatile the name, the smaller the position, knowing if you have a fixed amount of your portfolio as a percentage of your assets under management, that you’re willing to risk on any one particular trade. The first thing you have to do is obviously figure out what number that is for you. Maybe on a hundred thousand account you’re risking say 200, 250 bucks, which would be one fourth of 1%. This way you could be wrong four times in a row and still have 99% of your capital. So it doesn’t destabilize you by putting on too much risk. You might be saying, well, Mike, that’s too small.
I’m going to get knocked out. And the goal to me is to play superior defense. So I don’t feel like you need an indicator to help you with that because you can calculate your entry to your exit. Where’s your protective stop multiplied by the number of shares that you have. So buy 20 shares and risk $25 doesn’t matter to me, but I wouldn’t worry about the upside as I would focus on making sure you keep your losses small. And going back to the question, I don’t think there’s really any indicator that can tell you that the crash is coming. You can have an idea by looking at the tape and seeing is there any follow-through on the particular names. Obviously that’s something you’d be more concerned with, I think if you were short term trading. But only because I’ve tested everything under the sun to see if there was any efficacy. I have found that they were good for discretionary traders in helping you see if there’s actually a confirmation. So most of those in indicators will confirm something that you’re in already, but by the time you knew for sure you’d already missed the trade. You see what I’m saying? So indicators aren’t used for trade signals. They’re used to confirm them if you use them at all. I don’t use them.
Interesting. I had a follow up question on that. You know, were talking about the market and how it’s kind of death by a thousand paper cuts right now. Yeah. And I know a lot of what you talk about is mindset based, and I find a lot of your information really valuable and applying it in a lot of different facets. But how do you shift your perspective and kind of change your paradigm when it’s a bad market? I know that’s not really an ideal term, but how do you change your mindset and stay positive through the whole thing?
So that’s a great question. My mindset’s the same all the time, and I’ve got knocked out of my last six trades. That’s just the way that it works. And I don’t care. You have to put the risk on to be in the trades in the first place. But again, for my style, which is terribly small building into really big positions, I don’t mind whether I’m early or not because I’ve done it long enough to know that this is going to happen from time to time. Again, there’s no real damage to my equity because I trade super small at the beginning. Cause I’m looking for more pronounced moves. It’s not everyone’s style. I think where other folks would be getting out, taking their profits, I’m still looking to add more to get to my optimal position. So again, different strokes for different folks, I just realized that this isn’t a sprint, it’s a marathon. If I don’t, there are certain types of things in life, whether for poker tournaments or track meets where there are qualifying events. I’m already qualified, so I don’t need to qualify anything about myself and my behavior. I know what I’m doing. I know who I am both to myself. I know who I am to the community. I’m starting, obviously when I get more feedback, I learn even more about what I mean to the community.
But to me, it’s like I, me, Brandon, I do the same thing basically every day. I know what’s on my wishlist. I know how to put in my orders, the things that I do for downtime. Like this past Sunday, I went to Grand la, and so the Basquiat installment, he’s one of my favorite artists, and I just zoned out and meditated there. I had seen a lot of his work in New York City when I was younger in New York. The drinking age was 18 at the time. And the driver’s licenses, interesting story because I used to see him in Warhol and Bianca Jagger and a boy, George. I’d see them. There was a club in Lower Manhattan on Hudson Street, I believe it was called The Area, and it was the funnest place to go. It was a freak show and it was quite eye-opening for a guy who was teenager.
Anyway, there were no picture IDs that were laminated with pictures or whatever your driver’s license or what you would use as Id didn’t look terribly unlike what your car registration would look like, except the paper was green and it was a little smaller. And I’m not saying I did this, but a person could scratch out with a pin a digit because they were those computer kind of printout numbers. But a person could scratch off that ink and then get a big super fine black point. Again, I’m just telling you what I’ve heard other people do, right? In the new, I knew a guy and maybe exactly I, and then write in the new number to make you look as over age. I started shaving in eighth grade, so I looked a little older. So by the time I was like 15, 16, I could pass as 18.
And so I’d have the id. Anyway, I was in these clubs and it was great to see the culture of what they did in their downtime because I actually learned what to do in my own downtime by watching other successful people like you can’t be on all the time. And I would seize Jean Michelle. I’d see Andy Warhol, not that we were buddies, I don’t think I said a single word to them, but they were out in that community because that’s in and around where they lived. And I spent a lot of time down there doing what young people do, going out for a drink, dancing, trying to meet women and this and that. And so that was probably one of the better clubs that I can remember. I’m not a big club guy, but back then that was what you did. And it was called Area and it was really good.
I think there’s a book about it. They ran themed, the internal part of the club, they ran themes. So every time that you went to the club, it would be a whole other place. But anyway, we’re getting off topic. So I kind of do the same thing day after day for downtime. I train jiujitsu, I paint, I play guitar. I go for hikes once in a while, go to the beach or take day trips and go away for the weekend or do something like that. And that doesn’t really change regardless of what’s going on in the marketplace, because I don’t, I think we talked in Monday’s episode, I don’t personify my p and l. It is what it is. Just like I don’t wake up and see it’s overcast and get upset because it’s not a clear blue sky. It’s just the way things unfold.
So I think last, excuse me, week, we talked about what traders do. I think in their downtime was I think that was what the title was. And so that’s what I would go back and look at that episode and find things that are interesting to you in your life that are fun, or things that can actually keep your mind off the market. I think especially right now if you’re struggling because things aren’t following through and momentum in many ways isn’t there, of course there’s probably five names that are out there, whatever that people are trading very well, more power to ’em. I’m just saying that market breadth, if you look at the overall market, some overhang here. So it’s a little tougher to be long these days, but you still have to just follow your system and put the trades on because you don’t know when it’s going to turn. You can’t predict it.
So when I think about that happening, I’ve already made that adjustment decades ago, and I take it in stride. And in fact, I take solace in the fact that I trade small at the beginning because when I’m wrong six times, it literally isn’t even a rounding error as far as my equity is concerned. So I just don’t even care. I know that might sound like I don’t understand it. He’s losing money. Well, I’m not really losing money. I certainly didn’t make any. But again, the p and l part is, again, according to my style, it’s, it’s not even really a rounding error. So I kind of take it all in stride, but I built my rules to fit my personality, right? Cause I didn’t want to get all worked up. I didn’t want to be like, yeah, man, going to be president of the United States.
Not that I ever want to do that because the things are good and then be down in selling and overcast in my brain because the markets aren’t amenable to my trading style. When I look, I think in the Monday’s episode, I said something, no, it wasn’t Monday’s episode, but it was last week. Maybe it was Monday’s episode. But I remember saying something like, I’m not struggling. It’s the market that’s struggling, right? Because I’m executing everything that I set out to execute, so there’s no struggle there. I put on the trades that I want it to be in. I put in my protective stops exactly where they should have been. So to me, there’s no struggle because I’m powerless over the results. And so why would I get all upset if I put on a trade and I lost money? What the hell did I think was going to happen in the beginning anyway?
Even if you have coin tossed odds, right? Half the time, you’re going to be wrong. So why would I be upset if I know that ahead of time, unless I’m a drama queen, which I’m not. There was probably times where I never really was a drama queen. I was frustrated, but I never liked what it looked like when other people became drama queens and kind of put on shows for everybody because it showed me that they lack discipline and internal control. And that just spins you out into, well, I guess that’s the expression you get spun out. And I never liked what that looked like. So I’ve made a promise to myself that I was never going to freak out. Certainly publicly, privately, I suppose you can be frustrated, but that’s just the way that the world works. And the way I balance that part out in my brain was that there were times in the mid 2000, in the mid two thousands, or the mid s for my friends in the uk and China was buying every commodity on planet Earth.
And so it was fishing for bluefish in Long Island Sound. You could take a bait list, hook and throw it in the water and the fish will just bite it because that’s, they’re running hot. That’s the way that it works. And in those markets, we were pulling out 20 cent clips in copper, 50, $60 clips in gold. We were taking, again, five. Well, the sugar was more of a longer term trade, but everything was going berserk, and you were in the right place at the right time just by putting your orders in. So I look at the trades today in this week and last week is the same as that in that I can’t predict what’s going to happen. I don’t know who’s going to be buying what, and all I can do is put in my orders and stay out of the results. So again, I want you to detach from your p and l because it doesn’t mean if you’re losing money, it doesn’t mean you’re an idiot.
It just means the market is not amenable to your particular trading style. What you do want to do is stick to your guns though. Don’t start trying to beat Paul Tuda Jones and trade seven different ways. If you’re just starting, even pros who have million, several million line of credit, stick to your knitting dance with the girl who brought you. Don’t start trying to do other stuff because the market sucks. Right now we’re like, well, I’m going to buy stuff and now I’m going to sell straddles or broken leg strategies and options. If that’s not your main Batten ball, then don’t get into it right now. What you should do is take five days off and go play golf in Puerto Rico or do something, go get the hell out of town because that’s going to help you not be stupid. And I’m always looking for crutches like that to say, okay, well, why is my, I kind of slang call it stinking thinking. It’s like, okay, I could sit here and be frustrated, but that doesn’t really serve me. So what do I get out of it? If we’re all pleasure seekers and I get frustrated, how can I use that emotion to help me? So I just look back at the charts and do a postmortem and say, okay, well what did I do if I did anything wrong? Where did it go wrong here? Because losing money isn’t necessarily a mistake, it’s just one of the potential outcomes of putting on a trade.
So if that’s the case, what the hell are you getting upset about? I know where you get upset. It’s because you’re newer in the business and you haven’t been validated. And so you feel I’m, and I’m going to say you’re incorrect. You feel that winning trades validate you and that losing trades invalidate you, and that’s absolutely incorrect. What you want to look at is, did you put on the trades that you intended to put on? And if you did that and you entered your stops, not mental stops, but you put in your protective stops, that’s the best that you can do. And that’s your behavior. That’s what you should focus on, the outcome you’re powerless over.
And to me, a trader is someone who manages risk. That’s what they do. They add risk and they remove risk. Now, granted, over time, you need to know, does your model have positive expected value? Can you actually make money doing that? Which if you haven’t simulated, which many people have in either because they don’t want to do it, they’re too lazy, it takes what they think too, too much time. And admittedly, it doesn’t necessarily predict anything. But in my experience, when you back test and you use very, very specific rules and the forced objectivity of using a trading simulator, models don’t typically turn on a dime and reverse. So if you have something with positive expected value, and the number is say over one, it might go from 1.2 to 1.1 or 1.2 to 1.3. But in my experience, when you back test a simple set of rules over 10, 20 years, 10 minimum 20 better, there’s an ebb and a flow that goes with it.
I have never tested anything where it went from 1.5 expected value to minus 0.8. Now in short little windows of time, you can have just like coin tosses, right? If you toss the coin a million times, the probability of a head or tail coming up is 50%. Well, you can calculate over enough how many flips it would take if you wanted to see a run of say, 10 tails coming up at the same time. You can figure that out. And if you do enough trades, just by good luck, bad luck. You’re going to have winning streaks and losing streaks. But they don’t say anything as far as I’m concerned about you as a person or your trading ability. What I would look at if I was hiring people is what was their behavior? If they lost money, did they haircut their capital to trade smaller in order to better dig out of the drawdown, or did they increase their position sizes?
Right? Because that to me is much more telling than the actual p and l itself. But people get all worked up in this, especially guys because they get insecure. They want to be able to say that they’re a profitable trader, but it takes a lot of time to get there. That’s why I think a lot of folks can’t make it in the business is because they just don’t have what it takes emotionally. And I don’t mean to sound that way or call someone’s girlfriend ugly, because it doesn’t mean they’re bad people. But if they’re thin skin, this is a business that’s going to beat your ass purple every day. And I’d be lying if I told you that wasn’t the case. So if you’re offended by stuff easily, if you’re, you know, wilt, or if you have strong opinions or you think that your feelings about politics and the rest of the world are facts, there’s some growing pains in ahead of you, right?
Let’s talk about indicators, because this market doesn’t care who you are. Doesn’t care. If you went to Avon Old Farm and then Columbia got a cfa, you have an mba, you can have a quantitative degree in applied finance. No one cares. That’s all really for yourself, your own edification and my humble opinion, no one’s immune. And so if you know that coming into it that you have to accept that as possible outcomes. Again, going back to the question about indicators, there’s nothing that’s going to in, there’s no external solution for your internal issues, is what I’m trying to say in a long-winded way. So when you laying on indicators, to me, it tells you where your mindset is, is that you’re insecure and you don’t like uncertainty. But that’s where the money’s at, because risk and reward go together in life and in the markets. If you don’t take risks, you’re not going to have any growing pains. You’re not going to move yourself forward.
If you don’t put on risk in your portfolio, you don’t give yourself the chance to win. So I’m not trying to be some kind of philosopher here, but I think that’s common sense in many ways. Does that risk and reward go together in life? And so the uncertainty part is how you get paid. The more the uncertainty, the more alpha you should be able to create. Obviously you need to know what you’re doing. You need to have expected values, and you can simulate that. There’s simulators that you can use for free. There are some that are better than others. The better ones, of course, come at a premium. And so you have to figure if this is going to be a business, is that an investment that you want to make? In my opinion, that answer is yes, but some people are like, nah, I don’t.
It’s not worth it to me. So when I look at the emotional equation of that, it tells you more about the person too. They’d rather live with the uncertainty and then bitch and belly ache about it than actually going out buying the simulator, subscribing into a data feed and getting down to brass tax and doing some back testing to at least have an idea. So it tells me again, there are probably budget constraints. But then again, if you’re trading with 5k, you know, have to understand that that’s underfunded. You’re underfunded. There’s not a lot you can do with 5k, but by all means have added, I’m not going to be a dream killer for anybody, because no matter what your trading style is with, especially in futures, the margins can tie up a lot of cash very, very quickly. And obviously with stocks, you don’t have any day trading buying power.
Not that you’d want to use that anyway, but I think simulation, look, pilots do simulation when they’re learning to fly. They put in hours, they get instrument rated. So you have to put your time in too. Just looking at charts and trying to trade a pattern because someone else has done it. What’s the expected value of that trade? That’s the question I would be asking more than is a certain chart pattern bullish or bearish? I’d want to know what’s in it for me? What’s my risk adjusted return? How much do I have to put up in order to make what? And what’s the frequency that that happens? So going back to the mindset, this already, I’ve had all those years and years and years of debating this in my brain and living through it in different types of market environments and watching things that I thought never could happen happen. But ultimately, somehow all of that filters down and affects your position sizing because that’s kind of, that to me, more dictates what you make and what you lose probably more. So it’s debatable, but I think that’s probably even more important than your exits or your entries. Yeah. Does that answer the question, you think?
Yeah, no, I think you touched on a lot of really important points, and I kind of want to talk about some of them in potentially another episode in a longer form, specifically about the internal struggle because I have some thoughts on that as well. But I think that’s a good point to wrap today’s episode. Thank you guys for watching. We really appreciate all the support. Again, make sure you like, subscribe, press the notifications bell, please comment because we will answer your comments and questions in another video potentially if we think we have something to add to that. And yeah, thank you guys so much. Appreciate all the support.
Thanks everyone.
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