What Happens To Your Trading When You’re In Fear

Hi everybody. It’s Michael Martin. That’s me. That’s why you’re here. Thanks for showing up. So continuing our conversation. I got to thinking about fear and why you want to process your feelings on fear post-haste, like right away. Because what happens is when you think of emotional investments as well as your financial investments through your trading and otherwise, right? You don’t want to let fear get ahead of steam. You see meaning you can’t let it continue and build up. So what if you’re feeling fear about something? Process those feelings right away because you don’t want them, you don’t want it to carry forward into the next day, the next trading session, the next week, the next month. Because again, you get what you think about. It’s very uncanny. And if you’re in fear and you’re fearing fear, you’re being fearful, you might find yourself in a spot where you’re missing opportunities.
So the opportunity cost associated with fear can put you on the sidelines right? Now, humans are bad at prediction. So typically when you’re in a drawdown, you might find yourself taking a haircut on your capital, which means if you haven’t heard that expression before, haircuts just mean fantasy land. Hypothetical drawdown. What do I mean by that? What do I mean by that? So say you’re, you have start a certain trading period, the month of May. You had a hundred percent of your capital marked to the market coming into that month, which just means whatever your starting balance was for the beginning of the month and after the first several weeks, you found yourself down five, 10%. So now you have 90 cent dollars based on what you had at the beginning of the month, right? That’s the kind of language that I use. Another way of saying is you have 90 cents on the dollar from where you started.
Nothing bad about a 10% drawdown, it’s livable. But once you go beyond 10%, and I’ve talked about this in other episodes, the numbers kind of get worse, right? What’s the difference between 10 and 11? Not a lot, but what’s the difference between 10 and 12 or 12 to 15? It actually starts to get worse as far as I’m concerned, because then you put so much more pressure on that money i e u to kind of get back to where you once were. So again, I’ll talk about how I’ve modified my system to accommodate all of that myself and still be able to trade. So the haircut would be say that you had a hundred percent, a hundred, a hundred cent dollars. You’re starting capital at the beginning of the month of May, which is the month we’re in now, in case you’re watching this in November of 23, and you find yourself kind of coming into the mid midpoint of the month and you’re down five to 10%. So keep the math easy. Let’s say that by May 15th, you’re at 90% of your starting capital that you had at the beginning of the month. So 10% in two weeks might shake you don’t increase your position size. It’s the worst thing to do.
What you may consider doing if your style is not amenable with what the market’s showing you. And there’s an episode actually on that. What happens if you’re out of sorts with the market and it’s kind of choppy when you’re a breakout trader or you know, have a breakout, then the momentum stalls and you kind of get stuck and there’s no real follow through. But to your credit, you stay with the trades and you get sc, you get stopped. So a couple things you can do. One is you can look at the value of time stops, right? If you’re in a trade for 1, 2, 3 days and you’re normally a swing trader and you’re at a break even, maybe you’re take off the risk because it hasn’t moved, the momentum is stalled. So going back to the haircut part, if you’re at 90 cent dollars, what a lot of traders do is they try to assume then that they actually have much less money.
So they maybe trade as if you had a million dollars, you drew it down to 900 K, they might position size now based on 600 K, because now one half of 1% of that number is what? Three K, right? As opposed to one half of 1% of 900,000, which would be 4,500. So you’re cutting your position size by a third when you do that. And so when you trade smaller and you get knocked out, when the markets are not amenable, you lose less money. That’s the whole point of it. Stay true to your system because behavior predicts where you end up. But getting so much in fear where it shuts you down, kind of locks you into that number. Then what happens? Oh my God, I can’t, this sucks. And you’re now, you’re locked into this lose losing frame of mind, which is breaking rule number one of Michael Martin’s mental attitude is that you have to have a good attitude.
We’ll send people, like I said, we’ll send people home. Don’t come to the office with a pissy attitude. I don’t want to hear about it. If you don’t like trading, find another profession. But I have no time for people going boohoo, because the markets aren’t good. Don’t, don’t trade. This is a way of life. It’s life on life’s terms. Get a sponsor. So what you don’t want to do is shut yourself down from trading, because if you’ve taken, say, six losers in a row, you don’t know that the seventh one isn’t going to work out and kind of bring you back to break even. You might not gain all your money back on that one trade, but if you’re trading small enough, it could happen. If you trade one 10th of 1% and you’ve lost 60 tenths of 1% on a trade, it’s possible that the seventh trade can come back and bring and earn all that money back, which again is one of the benefits of keeping losses small, is that you don’t have to do a lot of recovery. My initial losses are so small as a
Percentage that it’s like something landing in your hair that you can’t feel, and then the wind blows it away. You don’t even know it was ever there in the first place. So it’s not as if we don’t know where our stops are, of course, it’s just that there is no loss unless there’s an act of God in everything else being equal or satir parais. As economists say, no one trade is ever going to put me anywhere near being in the neighborhood of shutting myself down emotionally, right? Psychologically or even financially, because it’s just not worth it. And the same should be something that you concern yourself with, is feel the feelings of your fear and you can be bummed about your drawdown. But there are enough tools that we’ve spoken about on this show that can help you both financially and emotionally stay with the program because you only lose really when you quit.
And I don’t want to sound this way, but I’m going to say it bluntly. You’re not smart enough to know when the next winning streak is going to start, right? I mean, we talked about faith and fear, both our beliefs in unknowns and some things that are not tangible. So why would you choose fear over faith in yourself when you’re newer? I get it might be harder because you don’t have any real track record yet, you see, so I get that. But just realize that even the best people, bill Dunn, who’s the legend guy, I know personally before he, I still know him, but he’s since retired at Dunn Capital, I’m sure I haven’t seen, and I very rarely look at other trader’s results, but I remember speaking with him and saying, he’s him saying something to the effect he had three years in a row, and he’s purely systematized mechanically.
He doesn’t do any discretionary trading, not a chart reader. Again, he’s retired now, but I’m sure he had, if I remember correctly, three years in a row where he was down 15% each year. So you compound that to see, you know what you down 50%, right? And that’s somebody who’s been trading futures since 74. So if you find yourself in a 5% drawdown and you’re feeling bad like your dog ran away from home, get over it. It’s 5%. The key is don’t let the stuff change your behavior because again, behavior predicts where you end up. Best way to have good behavior is have a good attitude, trade smaller, but stay in the game. You have to beat the fear. You can’t shut yourself down. And if you’re newer and you’re kind of winging it because you’re really trying to figure out what’s good for you, that’s fine too. Cut it down to one share or one micro contract, but keep moving, keep punching, keep moving forward. Process the fear immediately. Don’t let that thing grow and compound because it’ll get so bad that you’ll be second guessing yourself on every
Trade, and you’ll be ready to put a trade and you’ll be like, yeah, do you like sugar here? I was thinking about it, but I’m not sure I’m down a lot of money. I’ve lost on the last four ones. What do you think? Are there any websites that I could look at? And so when you get into that headset, it’s you. You’ve let it go too far. You really need to stay on top of all your feelings and process them. And I would say the same thing for greed. Enjoy your success. You have to, right? We’ll talk about that actually tomorrow, cause I don’t want to blather on. But appreciate y’all being here. Please like and subscribe if you have any comments, like things that you’ve experienced and things that you did that were, especially if they were a success, you don’t have to confess your sins here because we’re no different from one another.
We’re human beings. Share one of the techniques or one of the tactics that you did when you were in fear and or in drawdown, right? Because most people don’t have fear of winning. That’s a unique emotional constitution. But I appreciate everyone being here. Thanks so much. Please subscribe to the show. Send me what you think about each episode. It really means a lot to me. Lets me know what you really care about and I keep creating more content around the things that resonate with you the most. Thanks for being here, and I’ll see you tomorrow with Gaja.

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