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.