So I want to address a reader question that came in. It’s like, well, when do you know to, where do you know to put your stops? When do you know when to do it? Well, obviously you put your stops in right away, but I think really the question is how do you know the difference between a pullback and a correction? That’s really the question because the math of entering your protective stops and then adjusting them higher is really all fourth grade math. At least it was in New York state. But what happens is people start looking at charts and they start trying to uptime and downtime is if that is going to give them information and listen to me very closely, you cannot prepare for a trade on the fly if the market is open and you’re trying to sit there making decisions, especially when you’re newer, you can trust that your instincts are going to betray you.
The more you can understand that. Now, take a week off from trading and just understand that you are the human being at this stage are the weakest part of your trading. So was I, right? So this is not a kick in the head that overthinking things at the exact wrong moment typically isn’t going to serve you. It will relieve you of the stress of having a trade on. But if that’s your approach, I would take some time off from trading and understanding that there’s a different way to look at risks. There’s good risks and there’s bad risks. What are bad risks? Risks associated with overtrading because commissions are free or nil, you’re doing 13 trades a day, too many. There’s not that many markets that are trending, and unless it’s at a bright spot where the things that you are in are really, really trending and you’re adding to your winners and adjusting your stops accordingly, there’s really not that many orders to have to enter.
So I don’t, there’s nothing really as far as I’m concerned, that you need to do to prepare on the fly or to try to make a decision on the fly. Everything that you need to know how to do, you can do the night before or worst case scenario. If you want to be less prepared for the day, do it the morning of. But I’m not a guy who’s trading news headlines. Even if I’m in a winner and a negative news headline comes out, I don’t adjust on the fly for that because I watch the price. How is everyone else behaving? Because I know what my risk is and I’m comfortable with what my risk is, whether it’s my initial one half or 1% or it’s one half of 1% after I have a big gain. I don’t sit there and try to interpret that information and start holding committee meetings and for the love of God, I don’t want to be on a headphone listening to other people talking about stuff.
I don’t need anyone else’s opinion because I’m comfortable with what the risks are. How long did it take me to get to that spot? Well, pretty damn quick actually, within a year. And I was a guy who was trying a lot of things because I knew I had to experiment with real money in order to figure out what was my process, what were my chops, chops like my trading chops, what were my techniques for artists, their gestural marks for Van Halen. You know what it sounds like when he’s playing, right? Same thing with the edge from U two or Andy Summers of the police or Alex Lifeson of Rush or Steven, how of yes, or Alan Holdsworth or my teacher Mike Stern. You listen to them, they’ll have signature sounds and that comes from doing a lot of playing with their guitars plugged in and the amps on.
And so likewise, you have to do the same thing. You have to trade with real money, figure out how risk feels for you, and get used to feeling good when you have risk on and the market’s moving in your favor. Okay? I got tired of taking small gains because it didn’t move the needle enough for me. So I used that real life experience to change my behavior because I needed to make more money. I couldn’t care about when I started. Total return on the s and p was 12 point a quarter percent, and it was about 10 for the DAO at the time. If I remember it’s going, there’s cobwebs up here.
And so I was thinking like, okay, what’s alpha versus beta? Well, beta could be market risk. I also kind of look at it as the return that you get with market risk. If you were to buy and hold something that’s very, very public, like say the s and p 500, the alpha part is what you can do from your own ingenuity as far as I would know, above and beyond buy and hold. That’s what is unique to you. That’s what you bring to the table as a trader, money manager, portfolio manager, whatever role you might be playing Prop trader, it doesn’t matter to me. Titles really don’t mean much. It’s all the same thing.
And making, say I outperformed the market and I did 15% when the market was doing 12 on average. Forget about even relative returns, you’re still losing money. Relative return would be like, well, the market was down 10, but I only lost three. Well, I don’t get paid for losing money. So that’s what brokers do at the wirehouse. It’s like, well, we outperform the market, our diversification, all that stuff matters. And it does kind of matter. Realizing that diversification is risk reduction, not risk management. So you say to yourself, well, 15% market did 12. Look at me.
That feels good for two minutes. Like a girl winking at you on the subway platform on your way home to see your wife. So that matters, like I said, for about seconds. And you realize 15% rate of return on a $5,000 account. I can’t really get a ticker tape parade for that in the Canyon of heroes in lower Manhattan that it’s not going to work. So I needed to think, I was talking about Tuesday. I needed to demand more from the marketplace, but I also knew that I had to do the work, which meant I had to do good analysis. I had to throw away things that don’t work point and figure charts. I had to stop trying to trade more frequently again because the commission structure and the bid asks, spreads were all in eighths and it was very expensive to trade. Short term. We had probably a quarter in the bides spread and at least an eighth markup on the way in and the same thing on the way out. So three eights twice means I needed 75 cents on a stock just to pay for the damn trade. So the short-term aspect of trading and even reading the tape, which I became very, very good at, was not my cost structure to my business was too high if I was working as a prop trader inside Bear Stearns, for example, different ball of wax.
But that wasn’t the case for me. So I had to find a methodology that worked and I had experimented with real money getting to the point where I was like, man, I don’t mean to sound greedy. That was the second stage was, I need to make more money, but I don’t want to be greedy. I don’t want to be reckless and I don’t want to make stupid decisions. But I really had to think 50 to a hundred percent rate of return to move the needle. Why? Well, because each and every week we got paid once a month. And so it was like, again, I had a couple hundred bucks in my pocket and two weeks left of the month, and I was really tired of that. So I said, well, which feeling do I want to get rid of? Do I want to still feel that feeling of being dead ass broke or do I want to feel the feeling of taking small wins and having those emotional wins but still no money? So you get to decide which feeling do you want to feel more frequently? Which one do you want to mute?
And I said, I can’t celebrate small wins because it’s not moving the needle for me, and I’m still having these two week issues coming into the end of the month. Again, this is going way back to when Adam met Eve and was looking at the apple, I suppose when I was starting out. And so I needed to find better behavior. That means I had to get used to stuff being very, very different quickly, and there’s no one to cry to. There was no there one to reach out to. It was me and my higher power, me and my maker and a couple park bench days and long walks through sheep’s meadow and the great lawn for play in Central Park in New York City. So I said, if I’m going to do this, it has to make sense for me financially.
It has to be worth the effort, it has to be worth the angst. All of that stuff has to pay off for me. So it wasn’t a big window that was maybe, I can’t remember exactly, but six months to a year. But I remember it being quick because I was like, I can’t afford to take small gains because it’s not moving the needle. IE my account balance enough. So I had to think bigger. I had to think about getting into moves that were going to sustain. At least they had the opportunity to sustain themselves. And if I got knocked out, I got knocked out, the only thing I could do was manage my risk in real time, and that was with my protective stop order.
And I didn’t fuss about slippage and skid and use limits or this and that or better because that again was fear-based and I didn’t care about slippage. If it was time to get out of the trade, the idea is to get out of the inventory. Don’t worry about the damn price at that point. Some of you try to get too cute with like, well, I can’t take the slippage and skid and I’m unwilling to sell it there. Well, good. That’s how you invite bigger losses. To me, putting limits on those types of things is you end up losing more when the thing goes down because now your limit can’t get struck because it’s way below or way above deal with the slippage and skid because that’s going to be a smaller number when your stop gets triggered and the order becomes a market is a market order. That’s how that works. When stops get elected, the order becomes a market order and you get filled next in line. So the slippage and any skid that you might have at that point is going to be minimal compared to whether you’re hanging on for dear life with another price qualifier where you need the price to be a certain level. If the market starts moving sharply against you, get the hell out. Just as an aside.
So again, going back to Tuesday’s lesson with today’s lesson, I needed to move the needle because I was tired of getting into this comfortable routine where I’d come in, boot up the machine, look at the things, do this and that. You can get into this rutt of behavior that makes you think you’re being productive, but you don’t have the results to show for it. These are the results right here. And I was very honest with myself in saying, I’m doing all this work, but it has to add up to something, and that means my account balance has to go up at a sharp angle. It has to go parabolic. That’s what I was demanding from the market because I was putting in the hours I was doing the work. Then I quickly understood that my behavior has to be aligned with what I’m thinking. And that happened very, very quickly.
It felt weird, but it all felt weird to me. I didn’t know I had no experience, so I had to be ready, willing, and able to invite all those emotions into my life. That’s how I got onto this. I always had a strong inner voice from when I was a young kid, but I always was reflecting like, why do I feel this way? Why do these feelings come up? Well, because they’re all new experiences and new experiences are always going to give you some type of emotional response. Sometimes they’re going to make you feel good, sometimes you’re going to be scared, sometimes you’re not going to know what to say. So you give it the catchall phrase, the cul-de-sac of all emotions. It feels weird, which is kind of a bullshit way of explaining things. And I wanted to have more integrity with myself, so I used much more colorful language language that’s not appropriate for mixed company.
So it wasn’t that I was hard on myself, I was just very honest and said, okay, how do I conjugate this behavior with what my goals are? And if there’s a variance there, it’s probably because of an emotion. And that’s where I started to think sometimes the feelings that I want to feel are on the other side of feelings that I’m feeling right now, and they’re really strong and they make me want to turn around and go this way because safety feels better. But safety means no risk. Reward comes with risks. So are you taking emotional risks? Because for the younger folks out there, if you are 24 to 34 and you’re trading and you’re afraid to lose money overnight over the weekend, I’ve got good news for you. The majority of the money that you’re going to make in your career are in the years before you, not behind you.
So whatever you lose in the market, you could still earn back. It’s time to let go. They say, let go and let God praise Jesus. So I needed to get comfortable with those uncomfortable feelings and say, this is what the pros do to make the money. Somehow they get comfortable. And I could remember being in trades, adjusting my stops, and literally I’d have to leave the office and go walk around the block to get out of the nervous energy, do whatever it takes. But I wasn’t going to undermine my own success by trying to overlay an emotional strategy to a good trade and knock me out of an otherwise good market that was making me money because I knew at the end of the day, all my activity had to go add up to me growing my account in a parabolic manner, and that’s what I demanded from the market.
I also had to demand that from myself. Those were some, I don’t want to say growing pains, but those were the things that, that was the hazing of it. That was the emotional hazing is you need to find a way to calibrate your system. This is my system with your behavior and what the market’s showing you. And all three of those things need to be aligned. Don’t get used to taking small gains. You’ll get way too comfortable and never make any money. And I didn’t care again about making 15%. If that’s the way the chips fell, then that’s the reality. But that wasn’t my goal making 15% when the s and p was doing 12 and a quarter on average. You have to think one, two, 300% and think that that’s possible. And if you aren’t trading short term and you have your numbers, you can calculate the expected value of a trade, then you can use Kelly criterion and kind of figure out how many trades do you have to put on in order for you to hit your goals.
You might come to the realization that what you’re doing feels good, even if you’re making money, but you’re not going to come close to hitting your goal. And in my mind’s eye, you might not even be getting paid what you deserve to be paid, but you will be rewarded by the universe commensurately, no one makes millions by taking the easy way out and by easy way out. I don’t just mean the physical activity, I mean the emotional way. It’s two payoffs to every trade. It’s true for everybody. Kovner, Paul Jones, everybody. There’s payoffs, no one’s immune. Anyway, I appreciate you all being here. Please like and subscribe as Ganja says. And if you haven’t already gotten a copy of the audio book version of The Inner Voice of Trading, you can get it at Martin Chronicle in the top right corner. It is for free. And that’s it. I’ll see you all here tomorrow.