There’s a couple of trading sayings out there that just drive me nuts. Most of them aren’t really true, but they sound really damn good. Like, “don’t worry about your winners. Your winners will always take care of themselves.” Well, that’s not the case. What happens when people start making money? In my experience, that’s when they start to freak out. Taking winners is oftentimes one of the hardest trades out there. If you don’t have a set bunch of rules that you follow, so we’ve gone over this a thousand times. You could trail with structure, you could trail with a percent stop. It’s really up to you. Some folks like to lighten their load as the thing moves up in their favor.
But the one that I’m talking about today that I think is even more important because your gains will only look like gains to the extent that you keep your losses small, is that “your first loss is your best loss.”
If you like me, were starting out pouring hours and hours into charts and trying to figure out where’s the best entry, what’s the best name? You’ve got limited capital. So there’s a huge amount of opportunity cost, right? If you’re putting on a certain trade and then you put the trade on and it starts working against you almost right away, and you’re standing there looking at the chart in real time in disbelief, what the hell’s going on here? And one of the ways that I improved my trading very, very greatly when I first started was to keep my losses small. As you remember, stocks were trading in eighths and the commissions were much, much higher. So I had to be very, very proactive. I could not sit in losing trades, and I stole a rule from a Greenberg who was the head of prop trading and the chairman of Bear Stearns, which were really, really good prop trading, a prop trading firm back in the day. And no matter what happened, he would say, whether it’s it’s General Electric, it could be the bluest of all blue chip stocks. If the position is down coming into Friday’s close, we trade it away. We never take losers home over the weekend. And so I started to think about that. Well, maybe I can anticipate my losers a little bit better, which kind of sounds weird. I have expertise in tax loss carry forwards, and so what I did was if I had a 1% stop say on my equity, I would never wait. If the trade was down like a half a percent to say three quarters of a percent, I wouldn’t wait for it to keep leaking until the stop finally got hit. If it started to show me a loss right away, I’d puke it out of the portfolio. My experience was that if I got the momentum right and the timing right, because right, you have good luck and bad luck, good timing, bad timing. As long as I could get the trade on at the right price and I would have the momentum win in my back, the thing would start making me money. But every once in a while, you just get one wrong and it sucks, but I didn’t have time to do. What happens when it happens? You get blasted, then you’re looking at the screen and you’re like, man, is this thing going to come back?
And now it’s sucking up all your mental energy. You can’t do anything else. You can’t think straight. You’re kind of frozen in disbelief. And this especially happens if you’re in a position and you’ve taken it home overnight and it’s acted sharply against you at the open, it could really stun you into not taking really good actions. So while I don’t really follow a lot of these trading sayings, because you have to live them to see if they actually make sense for you, that’s not a one size fits all. The one thing that I can say that’s absolutely true that will help you improve your trading performance overall and help you keep your losses smaller, is to understand that the first loss you take on a trade will be the best one if you sit and wait in it, and a 1R becomes a 2R becomes a 3R. Now you’re into hoping and wishing and waiting, and it’s a quick way to vaporize all your cash.
So I was on Friday with JC Parets and Spencer Israel for All-StarCcharts in their live morning show. And because of time constraints, we didn’t get to cover everything that I had put together, which is fine. That’s the way it goes. Conversations start happening and one thing leads to another, and I only had six slides to begin with, but we ended up having a really good conversation. It’s over. I’ll put a link to where you can catch the show, but I thought since I had the slides ready, maybe I’ll put ’em all together. Now before you get crazy, I’m not turning this show into something that we’re going to do for chart reading, so don’t get your hopes up. That’s what you can take the class if you want. So the first chart we have is this comes from MarketWatch. If you go to Google or whatever your favorite browser is and you type in say Nasdaq, short interest, there’ll be a few choices. One of them is MarketWatch. It used to be CBS MarketWatch, I don’t know who owns it anymore. But anyway, it’s free. That’s watch I put it up there. No, I don’t deal with conflicts of interest. And what you can see pretty much is the names are ranked by the right most column here. That’s what percent of the float has been borrowed for the purpose of selling short. Now, if you are in the future space, you don’t care about this because these are stocks. And two, the borrowing mechanism is very, very different. You actually have to locate the stock, borrow it, then sell it short because you’re borrowing something that doesn’t belong to you. One, the old saying goes, he who sells what isn’t his and buys it back or goes to prison. And so I’ve made some money the past couple of years on short squeezes. It’s something to happen in the commodity markets for sure, and with the leverage you can really make some good jack with the stocks. It’s a little bit different. Now, I will share with you the CFA types who evaluate these companies. They’re very, very smart people and the names that are on this list are probably here for a very good reason, fundamentally speaking. So this isn’t about calling anyone’s girlfriend ugly, but what you do notice from time to time is that the charts end up looking kind of bullish and obviously when you sell short, it’s a bearish. So now you have a divergence between fundamental analysis and the technical chart. And if you can find that they’re not necessarily even needles in the haystack, but if you can find one or two, it can really be quite something. So I’ll show you a few. I’ve made money with Crocs on this type of a trade in that would’ve been about April of 23, so a little bit about a year ago. And then I’ve been in and out of Carvana and the one I want to talk about today hasn’t moved yet, but it’s kind of a setup that you might be able to work into your own trading strategy. So what you’ll do is you’ll go through these one by one and look for a chart that’s on the daily and maybe the weekly bullish. Don’t try to intraday this thing here because again, these people are smart and they’re short for a reason. You can see Carvana’s still on the list. I’ll have that chart up. The one I want to talk about is B Riley, which if you look here, 11 out of 16 shares have been borrowed to sell short. That’s a big number. So let’s take a look at B Riley chart has been a stage three downtrend and certainly it’s not without volatility. Look at that big $5 bar, but now you’ve seen it’s consolidated with a little volatility selling off under 20 here. That’s the way it goes. And who knows, maybe this thing channels between 25 and 15 ongoing. But what I’m saying is, is that once you have that trend reversal where it trades through 25 up to 30 and it sticks, the shorts are going to start to feel the pain. And with 11 out of how many names 16 shares borrowed to sell short, you can find yourself in a situation where they’re all going to have to buy the thing back in with great speed. And it happened, like I said with a bunch of other names so far, and it doesn’t mean that the fundamental story necessarily has changed either. You can’t read into it. I’m just saying that if the trend is going up, the trend is going up that despite what the short sellers might think or feel, the bigger question you might want to even ask yourself is why is anyone, there’s a 75. So three out of four shares have been borrowed to sell short, the stock is at three bucks. What’s the expected value of the trade? Are you sitting in this short thinking that it’s going to go to zero? So there are ways to trade this poorly from a fundamental standpoint. Like if you looked at this chart and saw where it came from, it’s down 90%. So at that point you will have probably wanted to take your money off the table, but nonetheless, what you’d wait for is some type of trade with volume above 25 have its stick and see where it goes from there. There’ll be enough time for you to make some money so you don’t have to get to precision type of entries. Doesn’t necessarily matter. To give you context too, what happens when it does move? Do you feel like you’ve missed it? Here we’re looking at Carvana with the 200 day simple moving average that you can see here. And on the bottom you can see short interest in the number of shares that have been borrowed for the purpose of selling short. So you could see it reached a height of about 50 million, 53 I think was the actual number. And you can see the stock was under five bucks and it’s down from two 40. Another type of situation. Why are you still short after this big move? Did you finally get in short down here after you’ve missed the entire move? I have no idea. Now you can see patterns. Maybe this is head and shoulders down, I don’t know. I’m not a pattern guy. And you can see gaps. Gaps don’t always have to get filled. Maybe this one will, maybe it won’t. Who cares? It’s always a stupid argument. Why would you care if that shouldn’t stop you from putting a trade on if it’s moving? Nonetheless, you can see that despite the stock being up, what 15 fold, right? Look how much it’s gone 16 fold. If you look at the lows at five and the stock’s about 80, stock is up 16 times 16 fold and the short interest has gone down, but it’s still not enough. So in terms of like did you miss the trade or not? As far as short squeezes are concerned, my answer is absolutely not. This is more to this trade and I think the fundamentals are changing. I’m not Joe CFA, I’m not trying to be Peter Lynch, I’m just trying to be practical here because folks are like, man, look where it was. I’m going to anchor Now. If you put the one year chart up and you’d be like, look, here’s a January 23 year to date, maybe 15 month chart. You’re like, oh, it was here at the low and it’s here now. I’ve missed it. It’s in the top right corner. Look, this thing could just be getting started. There’s still how many we can see back here. Carvana, 35% of the stock is still short. The stock is up 50% year to date. So this is what I mean. If you know how to trade you, I don’t want to say that you’re going to go out and do this spiritually, but the shorts are going to get punished. And if B Riley breaks out like that, we can see that the stock’s already been up to, it’s been 60 bucks, right? So there’s room to go here for the stock to get back to where it was on its heyday. This one here, you’re over your 200 day. So take a look at that. You might be able to the information as you can see, why is it like this? It’s because the information is only updated every two weeks. NASDAQ has a handful of names themselves, but I think you have to pay a premium. If you want to get the information for free, you can go to market watch, which is where this is from. This is Market Watch. I didn’t put it together, it’s not mine. And if you go look it up, you’ll probably see the same names because it won’t change until the end or whatever. Probably March 15th, they’ll update this to carry through the full month of February. It’s always two weeks behind and it reports in two week increments. So moving on, let’s take a look. In commodity land, we are looking at crude oil. Now heat and oil and gasoline. Again, these slides were put together to discuss with JC or Juan Carlos to his friends in the morning of March 8th on their live stock market show on their YouTube channel. And one of the things I would’ve said is, if you’re bullish or bearish on crude oil, take a look what’s happening in the strip or what we call term structure. Commodity is obviously very, very different from stocks in that if you’re looking at SMCI or Nvidia, or even Bitcoin for that matter, there’s only class of stock. So there’s not a lot to look at. You can uptime and downtime I suppose, but with futures, there are delivery months and those months are all correlated to the physical. Remember, it’s the physical market that moves first and the futures markets follows. It’s not the other way around. Most people look at futures, especially folks on the left want to say speculators have no business being in the thing. Well, the reason what we see here is a market in each three of these markets from crude, we have heat and oil. Here in the middle, the ticker is ho. And then you have RBO gasoline, right? That’s the base blend. I think it’s reformulated blend stock for oxygenated blending. And it was no lead started in I think 1983 and the market’s inverted, right? Each of these markets are inverted or considered to be in what we call contango. And that’s when the front months are higher in price than the successive months. So if you look here and these charts, these were printed out very late in the evening on Thursday, March 7th when I was putting them together for again jc. So you’ll see April expiration is higher than May, is higher than June, is higher than July. If you look at heat and oil, it’s the same type of a deal, right? June delivery is a full 10 cents below April at two 70. And if you look at gasoline, it’s the same thing. It doesn’t necessarily have to be by all that much, but you can see that the front months are higher in price than the successive months. So what that saying is, there’s a few things going on here. One is usually this is tied to a tightness in supply or some type of disruption. Now you could say, is it the Red Sea stuff? Is it the fear? I’m sure you could say that’s part of it, I don’t know. But the point being is there’s something going on with supply that cannot meet demand. And so the price is rising and the markets are telling you give us everything that you have supply wise right now. We’ll actually pay you more if you choose to put it in storage, we’re going to penalize you a dollar 25 right per barrel. You see? And that’s substantial because it’s a thousand barrels is the contract. So they’re saying demand is so tight, we’re willing to pay you more for it now than if you decide to put it in storage. The price is less. So this is another one of the, there’s really two functions of commodity futures. The first one is risk transference, right? It’s not a capital asset, it’s an insurance market. You’re selling or buying or selling fixed amount of a commodity of a specific grade, or perhaps several of them within reason, and they’re all listed on the exchange. If you go to cme group.com and look at nymex, it’ll tell you what’s deliverable against the contract. If you look at same thing with Chicago Board of Trade Beans, you’ll see what different grades of beans can be delivered and what you would add or remove from the price for that type of settlement depending on the grade of the physical. So again, when markets are tight, the cash market probably sells $80 or more than the futures market is the next highest, and then they go down successively. So people are willing to pay up to get what they need. They’re willing to pay a premium. Normally the markets are what we call carry charge markets where supply is meeting demand and each successive month is a little bit higher in price. So that kind of provokes a response of storage because you’ll get more money in the distant months than you will in the front months. So this is typically very bullish for any particular underlying, you’ll see this happen in physical commodities. I’ve seen it happen in natural gas. I’ve seen it happen in hogs. I’ve seen it happen in cotton. I mean I’ve seen it happen in almost every commodity. If you’ve been around long enough, you can see this happening where again, the physical market is what drives futures not the other way around. There has to be tightness in physical else. It wouldn’t make sense because only one to 2% of these contracts are actually getting delivered against most of them, even if they’re being used as hedges, are being offset beforehand. Now, if you scroll down, we’ll take a look and see, this is the April crude oil, and who knows, is it bullish? I don’t know. It looks like it wants to push up above 80. But you can look at the chart and kind of see for yourself. Now, this is the big contract. So you’d be looking at say, $2,000 of swing in your equity between 78 and 80, right? So it’s a thousand barrel contract. So every dollar moves a thousand dollars to your account. There might be smaller contracts. I don’t know about that because I don’t trade ’em. Same thing with heat and oil, gasoline. I think the heat and oil chart’s a little bit messier, but here’s April gas, and you can see it looks like it’s rallied off of 2 25. So you can look at the chart, at least you know that the fundamentals are behind you. Term structure is enormously important in the world of commodities, and it’s a huge asset for you to study because you don’t get that with stocks. You only have one class of stock that you can study that you can look at, and you’ll have to make ends meet with that. I think this is probably one of the reasons why people start uptime and downtime and they’re looking at 45 different one minute, three minute, five minute, 65 minute. That doesn’t help you if you can’t see it, in my opinion, on the weekly or worst case, the daily, then you can’t see it. There’s nothing there. And that’s true for scalpers. Try to make as much money as you possibly can. And to me, I’d rather not trade than have to put myself into a situation where I have to scalp. So let’s continue here. You can call these up light crude. So the difference between light crude and say London oil, north sea oil has to do, or sour has to do with the sulfur content because a lot of this comes down to when you refine stuff, what is the impact on the environment? So that’s all that means with the difference between light crude, sauer crude. It has to do with the percent of sulfur that’s in the crude oil itself before it becomes refined. Gasoline is a product, so the crude oil is refined into products, and there’s a whole slew of them, right? It’s heat and oil and gasoline that you can see that are very liquid, no pun intended. But then there’s also kerosene. There’s jet fuel lay, right? So there’s all of that stuff that goes down. Now, there’s another little trick I want to show you here, and this is the big natural gas. This is April delivery. It’s 10,000 BTU. So every penny is a hundred dollars move. And it might be big for some of you, I don’t know. You can see we certainly have had the market sell off with some corrective action in the middle here where there was a rally. Who knows if that was news, could have been war, I don’t remember. But there’s another thing that’s available to you in futures that is not available to you in stocks in the same manner, and that is where you’re able to buy one contract and sell another one against it, thereby creating a calendar spread. So if you thought, because there’s no markets can typically only trade to full carry when they’re in normal markets or carry charge markets, when the markets become inverted, there is no upper boundary as to how high may and go above June. So a lot of traders, instead of just buying May, thinking that it’s a bull market in crude, it very well may be, I don’t know, they’ll actually hedge themselves because spreads are hedges. They’ll buy the May and they’ll sell the June against it, thereby thinking that may will create distance between itself in June because there is no upper boundary right now. That looks like 59 cents on the screen between these two, but there’s no reason it can’t go to a dollar. And I’ve seen in some of these contracts where it can get very, very large. And so if you do have an opinion bullish, a bearish on, say, natural gas for example, this would’ve been three 20 to two 20. So that’s $10,000 move right here, right over, what is that? November 6th to the middle of December. So it’s about five weeks made 10 K per contract, and it wasn’t without some rumblings here. And then from, let’s call it the 15th through. So in another three weeks, it kind of rallied off the load. Call that two 10. So it went up 50 cents, so that’s 5K, and then it sold off two 60 to one 60, another 10 K on the way down. Now, that might be a little strong for some of your stomach linings out there. Now there’s probably a smaller contract you can look at, but what I like to do is say, okay, what’s right under everybody else’s nose is that people aren’t necessarily seeing that they might not be able to trade because they just don’t know about it. And that’s through a commodity spread. And so if you look here, what we’re looking at now is the march versus the April contract. And so if you remember, this was a $10,000 move coming down through here, and then it was a 5K move up here. But look at the difference in prices. Each penny is a hundred bucks. So if you look at this move here, it looks like it’s down or 2 cents below par, and then it rallied to five. So that’s only 800 bucks. So there’s a way that you can deliberately take the sting out of the trades if you are looking at the spreads and the relationships, because this is still a pretty damn good move. If you sold the breakdown here, you would’ve, this isn’t enough to really knock you out. It’s like 2 cents. Move sold the breakout at 20, it was straight down to minus 2 cents, so 22 cents or $2,200 per spread. And that all happened in it gives you some staying power too. You could have sold that breakout, call it halloweenish, and by the second week of December, you just kept making money, making money, making money, and it gives you some staying power. Why? Well, because you’re on both sides of the market, you’re simultaneously long and short a contract, two contracts that are highly locked into the physical contract, like they’re correlated to the physical, is what I was trying to say. Some people have a way with words and other people not have way. So you can make a bunch of money. When you look at the spreads with equities, you have to do what we call pairs trades, where you might say, buy one chip maker like Intel versus a MD or a MD against Nvidia. It doesn’t matter to me, but that’s typically what they do is they buy one, they buy the strongest horse in the barn, they sell the weakest name in the sector. Short this way, if there is corrective activity in the market or the sector, the short sale takes a little sting out of any corrective activity. I’d say the best person who, well, certainly one of the more popular people who’ve done this a lot over time would’ve been Julian Robertson of Tiger Management. So you could investigate this to see that it’s a good
Fit if you want to support the show. We cover all of this every week, both in the live group and in the recorded material that’s online for the online only program. There’s a whole plethora of this stuff up there because then we look into like, okay, well what’s your psychology here? Why would you get psyched out of a 2 cent move? You know what I’m saying? Or if you knew the thing could trend, why would you feel good about taking two or 3 cents out of the trade when you had a 25 cent move, right? So we talk about the psychology and why you do what you do. So that’s probably where I’m going to keep all this material, excuse me. And I keep feeding that beast. So every week there’s more material that gets up there. The more that I see the types of things that I look at, the trades that I’m putting on, I’m not a big braggart, as you can tell from my book. The book was just a whole slew of stuff that I failed at, even though during the window of time I was making fantastic amounts of money, especially after I got through my hazing period. So anyway, if you like this kind of stuff, you’ll see a lot of it there. It might be a good fit for you. I like to talk about the psychological because that’s really what’s driving everything. That’s the behavioral software. We can all look at charts. These charts are courtesy of bar chart. I have their permission to use them. That’s why I left the watermark on, I don’t have any financial relationships, but these are things that you could replicate on your own for free. You don’t need premium services to find all this stuff. And that’s kind of even how I traded. I remarked on the show as JC started poking fun at me, which he typically does, how many monitors you have, this and that. And I said, I have two mostly for producing content, though it’s not for trading, it’s for producing content that shows up on YouTube or in the lessons. And so I mentioned to him, I said, it’s interesting that you brought that up because in oh 5, 0 6 when China was buying everything under the sun, I had big positions in copper, gold and sugar. And I walk through this as a case study. Again, it’s online. I had a rollover account with like 50 K, and in nine months it was up to 280 k. So I have all the statements in the confirmations and the charts, and we go through all that stuff. But more importantly, what was I thinking? Why was I had positions where I was up 20, 30 k and I was taking it home every night in the sugar trade I had, the initial stakes were on before it really started moving for six weeks before it really broke out, above 12. Anyway, that’s neither here nor there. The point is that if you can’t marry the psychological up with the chart stuff, it falls flat really, because any idiot can read a chart at this point. You know what I’m saying? My dead grandmother has an opinion on Nvidia. So I don’t know that it doesn’t really help you to just talk about trading models unless you talk about what the emotional responses are likely to evoke from you while you’re in the trade, because I don’t advocate scalping or day trading. I want you to make real money and make as much money as you can. And we talked about this with jc. We talked about Pareto efficiency. How can you make the most amount of money for doing the least amount of work? What I don’t really get frustrated on other people’s behavior because I’m not codependent, but I feel like too many people are doing too much work for too little money. And when I have evidence that the market works out, at least on average, if you’re playing probabilities and odds, it doesn’t work out a hundred percent of the time, but the odds are in your favor. When you stick with your winners to make more money, you have to investigate your psychology as to why don’t you do that? What’s the power of the short-term win for you psychologically that robs you of more money in the future and worse that you’re okay with? Because the answer is that there’s no guarantees. That’s not the answer, because that’s armchair. Like, hey, nine times out of 10 breakouts, pull back. That’s not scientific. That’s armchair quarterback and bullshit. That’s never going to fly in my house. You’re going to have to do your homework and know what you’re talking about if you want to debate me on that. So know what the expected value of his trade is. And that’s a good starting point. Anyway, I thought this would be interesting to share with a wider crowd, but time constraints, like I said, weren’t, weren’t there. If you like this video, there’s a bunch more like it right here.
One quick tip to improve your trading ability is to stop studying charts and graphs and all that other stuff, commitments and traders, and study yourself. You can keep a journal, you can use post-it notes for all I care. You can use some online program, whatever works for you. It doesn’t matter to me. Keep notes of why you do what you do. What are you looking for out of each trade? Chances are, it’s not just the money. You want validation, right? You want to know that you’ve made it. Write down the feelings and the psychology that goes around with what you’re doing. Are you afraid of missing out? Why did you take the trade off when you did? What did you think was going to happen?
Most traders who are newer, overthinking exactly the wrong time, they don’t have the skill to use their intuition, and they think they’re going to bring an intellect to trading, and it’s not about that. It’s knowing how to gamble. At the end of the day, you need to know the probabilities and the statistics. What’s the expected value of the trade? And the only way you can get better at improving that is to study your own behavior around managing risk. You’re the asset here, not the ticker symbol.
Three reasons why newer traders get killed and never break out to become profitable traders. The first one is they don’t use protective stops. They think, well, this can’t possibly happen to me. What’s the worst that could happen? Then they get blasted back to the stone ages. As soon as you get your fill put in your protective stop, you’ll thank me for it later. Your gains are only going to look like gains to the extent that you keep your losers small.
Speaking of taking winners, that’s number two. Why people never get big – green on the screen, as soon as the thing goes green, they start taking winners too quickly. It’s a hair trigger response. Do you have a hair trigger response in other areas of your life? Make it last baby. Stay with your winners for as long as possible. It’s the only way you’re going to make real money. You’re going to make money much less frequently than you’re going to lose, so you might as well let your winners run. Get comfortable with the feelings that you have to feel while you’re in your winners. They’re not going to disappear, evaporate overnight.
Third reason why people get killed is their position sizing and is all over the place. You can’t bring your bias to trade because you love Bitcoin here or you love SMCI over here. You need to trade with a consistent bet size, and that shouldn’t be a number of shares or some tier stuff. You should use a fixed percentage of your capital. This way, your objective, because every trade represents, for example, one half of 1% or 1%. Whatever you’re comfortable with, keep it consistent, right? This is going to help you get consistent results, and that’s what you’re aiming for when you’re just starting.
Now, how do you fix this stuff. Well enter your protective stops as soon as possible. As soon as you get filled. No one wants to get stopped, but trust me, I’ve seen I trade commodity futures. I’ve seen markets run away against you very, very quickly. Put in your protective stops. You can complain when you’re in cash. Don’t sit there in disbelief when you’re getting blasted. Have your protective stop. Know what that is before you put the damn trade on and enter it as soon as you get filled. One thing that can help you with this too is don’t look at your P&L. Let the market go where it’s going to go. Taking winners, look to trade the reversal at the end of the move. The market will tell you when the move is over. Don’t think in terms of price targets. You don’t know enough to calculate price targets one. Two, human beings suck at prediction despite what they think they know, and three, use consistent bet sizes. It’s the quickest way to get consistent results.
You will get knocked out of trades when they’re in strongly trending markets. It’s just a fact of life. Why is that? Well, based on your position sizing algorithm, you might find that volatility can increase when you’re fully loaded. That might occur when you get into the trade. That might be your optimal risk unit. You stay with it. You might choose to add as the move continues, but one thing that does happen oftentimes most times is that the volatility is going to increase dramatically maybe between 25 and 50%. When that happens and you have your optimal position size on, you’re going to see your account balance moving in greater dollar signs. Then you might be comfortable with, even if you’re hell bent for election as a speculator trader, your number one job always is to protect your capital. Your job is to play superior defense, and you’ll oftentimes hear about traitors at my level and at the generation older than me where you looked at a certain move and they don’t talk about being in the move from the breakout from Victor talks about the gold moving up as much as it did when we came off the gold standard. They weren’t in that trade like for one continuous buy here and then hold it and sell it nine months later. They were in and out of that trend, right? You don’t know what the trend is going to look like until after the fact. It’s super easy to say it after the fact, but in the moment, you have to manage risk. You have to protect your capital. I talked to Michael Marcus about gold in the late seventies coming into 1980, and it was the same type of a thing. They were taking gigantic chunks, $50 to $100 moves, which was big in those days out of that market at a clip, and then finding another way to reenter the market. So it’s not likely that you’re going to be using that as a protective stop, like the trend being broken. That’s not practical. Two, in futures, if the move moves enough, you’re going to have to roll anyway, right? So how do you exit your winners? Well, you can use ATR or some other volatility measurement. You could and should be using or marrying that up with what is, what is the percentage of your account that you’re willing to risk on any one particular trade? That to me is bare minimum stuff. To me that’s like you don’t even put on a trade with real money until for sure that you’re going to be emotionally and financially okay? Losing that finite amount to capital, understanding that in some ways at the beginning in some way, that’s your tuition. Not in one particular trade, but in a string of them. So whatever you think you might want to risk on a per trade basis, my advice is this, and this isn’t being a judge using my judgment is cut it in half because you’re going to find new and improved ways to be wrong and to do stupid shit with your money. It’s just how it goes. There’s no judgment here, right? I’m not judging you, is what I’m saying. There are so many unknowns, right? If you don’t even know what your trading style is, you don’t know what’s before. You don’t even know what kind of mistakes you could make besides the obvious ones of typing in the wrong ticker, fat fingering a price, entering the wrong number of contracts. You think you’re immune to all of this. Guess what you’re going to find out. It happens to the best of them. So what I would do is I would risk even smaller amounts of capital because at the beginning, what you’re really just trying to do is to develop a feel, especially if you want to scalp day trade or swing trade in those environments, I think you need to have a feel for the market. It’s not just based on the technicals. Whereas with trend followers and position sizing, you’re not so concerned what happens at the beginning. It’s the beginning of a seven course meal and you’ve just sat down and unfolded your napkin and put it on your lap. That’s what your first position is for a scalper. That person’s in the trade and they’re looking to get out almost immediately where I’m like, Hey, we just got here. Why are we getting up? Where are you going? Right, the Maitre D hasn’t even come by with the wine list yet. We’re just getting started. So different strokes for different folks, right? I mean, that’s really what, interestingly enough, you can use the same entries, the scalper, the swing trader or the day trader, the swing trader, and the trend follower can all have the exact same entry. What really defines those people are their holding periods in many ways. For me, I’ve had some success at all of them, but I’ve made the most money holding onto my winners for as long as possible and then over time using and developing a very, very strong feel for the market to know when the getin was good, at which point you have to offset the risk and majority of it. I have experimented scaling in and scaling out, but what I realized was is that that really came down to regret. People kind of scale out of winners because they don’t want to sell it too soon and have the thing keep moving. There’s a practical side that says, yes, you can take some money off, raise your protective stock to break even, and now you’re free rolling, but then if the move keeps going, you have a suboptimal position size on financially. That didn’t work for me emotionally. It felt good on a whole bunch of levels. On a primal sense, as a trader speculator, you’re putting yourself deliberately in harm’s way, so you have to get used to that feeling that you’re taking on risk. Hopefully it’s a good risk, but risk is a lot like fire. Firemen don’t love fire. They’re just better equipped to deal with fire than you are. That’s kind of how I look at risk in the marketplace in many ways. I think I trade futures much more conservatively than some people trade bonds. Certainly investors have an open-ended sell strategy to me that in many ways you could argue that that’s reckless because no one can predict the future, and I started at a time when I watched IBM, which they called Big blue went from $140 to $40 a share, and that was the biggest of the bluest of all blue chips. It was the nickname had blue in it for the love of God, so no one, no name and no ticker is immune from a 50 to 90% pullback, right? Look what happened to Cisco after March 10th, 2000. The thing went from $90 to $7, right? It got blasted and it was called the backbone of the internet, so you need to learn how to manage risk. The only way to really do that and to calibrate that with your system is to do it with real money. At the beginning, you don’t know anything, so I would suggest cutting what you think you should use in half because no one cares anyway. It’s not like you’re going to be sharing this stuff through social media or posting your trade confirmations on Facebook. Who would do that, right? That’s stupid, so keep your business to yourself. No one needs to know what you’re doing and this way when you take a kick in the head, you don’t have to go back and save face. Two, if you only put your winners up there, no one’s going to trust you, so keep your business to yourself. You don’t have to talk about it to anybody. Just go do what you do and at the beginning, risk very, very small bits of capital until you think you have a feel. If you never developed a feel, then there’s a few choices. One, you could stop trading because you don’t have a feel or two, you might say, you know what? I don’t have a feel, but I do know that there’s a systematic approach to trying things and I’m going to go investigate. Looking at hiring a coder or going out and buying one of the more sumer style trading engines out there like mechanica or trading blocks and getting a data feed and just setting up an algorithm and following those rules religiously, those can work too. The choice is really yours. I’m not here to tell you what’s best. You’re only going to know from the experimentation part, but as far as exiting winners, when you have a mechanized system, those rules are hard and fast. There’s nothing to negotiate about when you’re doing it. As a discretionary chart reader, I can see why you fall to pieces because you don’t know what tool to use. Should I bring a knife, a sword? Should I use a gun? Should I use juujitsu? What do I do here? And you haven’t been in the situation enough time to know what the right one is, right? Ultimately, you figure out the right one is one by which you’re both emotionally and financially. Okay? Getting out of the trade, you’ve made some money, right? You probably didn’t get out at the very top. That’s typically how it goes. You’re not going to top ticket if you wait for the trend to be broken. There’s a couple of things you need to consider for one is where is the trend line? Because drawing a line by clicking on some icon on your charting package and anchoring it to a low and then doing this and then creating another one, this just creates more confusion. There should be pretty much one trend line. If you want to be super objective about it, you can use some type of a moving average. A lot of folks use the 20 day, not 20 period, the 20 day exponential moving average for futures. You can use anchored vwo. That’s a good one too because it takes into account price, time, and volume. I would look at that one for stocks and futures. Many equity traders look to have the 200 below, the 50, below the 20 and then have the price above all of that, and then they start to look for breakdowns and the thing rolling over. That’s a little sophisticated for the new person. Even if you are intellectually inclined, that’s a lot to kind of bring in and put into practice at the earliest stage, but again, who am I to say go out and experiment and try and see, but I think if we go back to whatever it was, Monday’s episode, today being Wednesday, your goal is to play superior defense, but with the simplest model possible. It’s funny because last week we had leaper and one of the jokes that I make is you can have so many overlays and rules that have to all be true at the same time that you get a trade signal every leap year basically, which means it’s very difficult to trade. Then there’s too many things to think about when you don’t have the experience to do so, and that can cause, again, emotional errors, judge versus judgment. You beat yourself up, especially if you’re really intellectual. You’re like, I should know this. Well, the intellectual side of trading is the easy part. The execution part is much harder. That’s why people say truly that trading can be taught. It can be, but that doesn’t mean that you can do trading. You see, and some of you might be still wrestling with that, look over my shoulder, come into my live trading room. Oh my God, what a, come on. Again, discords and telegrams, they’re for people who want to bond and be in part of a group. I think learn what you need to learn for a month or two and then be done with it. See what you can apply. See what feels good for your emotional constitution and for your personality. If nothing, at least you only are only at a couple hundred bucks. Support and resistance is another way to look at if something’s going to roll over. Sometimes a name after it puts in a high will channel sideways and create a base inside of that stage two up trend. You’ll have to get good at understanding that, knowing if it’s a fake out or is the move going to resume. Sometimes the moves, sometimes there aren’t four or five basis in a stage two breakout. Sometimes there’s just one, and that’s just the way it is. It’s life on life’s terms, but it’s only going to come through a lot of experience, practicality of being on the job where you’re going to learn all of this just like I did. I wanted to fail fast, but then I was able to make those decisions quick to make sure, okay, if I was looking at trading those four different asset classes, foreign exchange options, equities and commodity futures, I had to think about that as a portfolio management and say, okay, these two asset classes aren’t really helping our equity grow, so I’m going to cut those out, reallocate those funds to the two winners, which is effectively what I did. The one winner first was commodity futures. Then the next was adding back equity. As my account grew, and again for my style of trading, there just wasn’t that many opportunities. As you understand, when you look at dailies and weeklies, most markets are not trending. They’re suboptimal. So your job is to say, okay, I’m looking at this one. It’s a blue chip name. Everyone seems to like it, but for my trading style, it has to ripen on the vinyl a little bit more, so that can go. It’s either a hard no right now or it goes on the maybe list. The maybe list is not your watch list. Your watch list is what can you take action on in the next day or two, right? So again, your job is to disqualify stuff. Same thing with taking your winners eventually is you have to figure out what’s the best strategy for you when you put on the trade. You probably have to think of your protective stop. You can use the ATR for your position sizing, in which case you can use that same ATR then as the distance between your entry and your protective stop. But if you’re using tiers, you have to figure out another way to divide up your capital, and that too at the beginning is completely guesswork. If you set up a rule for yourself where you’re like, I don’t want to lose more than 2% a week than where those 200 basis points go, how much were you going to allocate on any one particular trade? If you’re doing five trades a day, you don’t have a whole lot of room to be wrong, and then how much room are you giving it 20 basis points? I don’t know. That’s what makes it super hard, especially for the short-termers, just that you’re looking at a lot of noise. The short-term data are very random, and I think you put a lot of credence into short-term data. Now, look, if you’ve been trained, I’m not talking to you, I’m talking to the folks that are the ones that are writing me saying, I did turn my 401k into a 201k, and I wish I had seen your show two years ago, right? That’s the audience here. I don’t care about the folks that have made it. You don’t need this show if you’re here, thanks, but you’re already successful, so good for you anyway. By the time you wait for the trend to change a lot of reversal traders, we use some type of 1.2 or 1.5 or 1.8 times a certain moving average, and they’ll buy the crossover, and then when the price crosses below the thing, they’ll go from net long to net short, so there’s another way to do it. I don’t want to get into talking about trading systems specifically here in the for pay content, and that’s not really what this show is about, but it comes down to experimentation. I know a lot of different people use the ATR or they use majority of ’em, use percent of their overall capital. Then once they start making money and they let the move occur over days and weeks, and maybe in some circumstances like months like you’ve seen in the cocoa market, like you’ve seen in Nvidia or SMCI where the moves have taken longer periods of time, those are names where you wanted to stay in them and let them unfold while you’re long because then you’re just ringing the cash register every single day without having to kind of come back and turn trading into a blue collar job. That’s not, you really want to keep this white collar regardless of what your dress code is, and for me, that means doing as infrequent amount of transactions as possible just because you have money and day trading, buying power, multiple screens and your hotkeys all set up. To me, that doesn’t necessarily mean that you should be cranking and banging out trading wood, as we used to say, because all the trade orders on the floor were written on pieces of paper. You’d write your order, they’d get filled, you’d put your badge in it and you’d scale it to the middle. For some guy sitting there with ski goggles, they wouldn’t get hit in the face with a corner on one of these cardboard cards and they’d put that in and they’d put it on the ticker tape. So if someone did a lot of trades, there’d be a stack of paper of cards and they’d say, oh, the guy’s big, he’s trading wood. Really look at those trades and see how you can minimize them. How can you optimize your process to increase and trade the higher the expected value of a trade? So I think if you’re looking for the trend to be broken, you might be leaving too much money on the table. Again, that has a lot to do with what your position sizing is. If you’re trading small enough, you can catch the bigger moves, wait for the trend to be broken. You’ll probably be okay if you’re adding to your winners and putting more substantial size on, not from a margin to equity standpoint, but just in terms of what your portfolio, what we call portfolio heat and your risk and a half a percent on a per trade basis, and you’re adding 3, 4, 5 different times. Now you’ve got over 2% portfolio heat going on for that particular name and your portfolio at any given time, and that’s with the ATR being a constant. If the ATR increases, like I said, between 25 and 50%, you might find yourself, again, depending on what your risk unit is, that all of a sudden there’s an enormous amount of volatility in your portfolio, and if you’ve got the stomach for that, I do, then good for you. You can probably withstand it. Some of you can’t though. So a lot of times what you can do before the trend is even over if there’s an inverse relationship between the volatility of the instrument and the number of contracts or shares in that risk unit, so if you see using the at r as an example, if the ATR goes from 15 to 20 and you still have the same piece on, you might need to cut your position so that the dollar value still kind of equates. So you can do the math, but there’s an inverse relationship there if you want to kind of keep constant risk on and constant sanity, really that has to do with how you’re built. Some people aren’t affected by it. I myself am not, but that’s not the only way. You see, and going back to the original point here is that even in some of those bigger moves coming through the seventies and the moves that I was in, it’s okay to be and see in a strongly trended market to kind of get in and get out. You don’t know when the trend is going to end because oftentimes the price moves first, the fundamentals follow, and you just don’t really know, so you have to kind of, sometimes you get, it’s not like you’re getting head faked out, but if you’re thinking about a prudent person, you have to protect your capital first to how do you handle exits? Me, myself, I tend to puke out the whole thing at once. When the party’s over, everyone has to leave at the same time. I don’t want you coming back in for one for the road or for a cup of coffee. I can scale in for sure, but when the move is over, it makes no sense for me to hold onto anything at that point. Why? Because typically it’s only going to decrease my equity.