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