When You Know You’re In The Zone

Everybody, it’s Michael Martin, happy Thursday. So I got a question that I get a lot through social media and they say, okay, something about your four years, it took you to make it. When did you know that you were onto something? And it’s a very interesting answer. It was partly because of the consistency of my behavior. It wasn’t necessarily because of my p and l, because I always, I knew how to make money. The problem was position sizing, knowing when to take losses, strategic use of protective stops, knowing when to take profits. That stuff comes with experience. So you can’t really read a book and say, here, do it my way, because it’s perfect, because it might not feel right for you. So you have to work your way into it or develop your own way. I developed my own way, but I think there was a mental trick that I used if I remember correctly, and that was when you’ve probably heard me say, we live in a paradigm of personal responsibility.
I always had a strong inner voice. I was just born that way. It’s the way it goes. Lucky me, but I think when it comes down to trading and having that sense of confidence, remember I’ve also kind of said, if you take an average person, but you inject them with a bunch of confidence, there’s really no stopping how well they can do because they’re in the groove. And that’s true. I think obviously in many areas of life, not just with trading, but when I accepted the fact that I was in control and that everything that happened in my account was my own doing, right, because that’s kind of how I lived my life. It hit me not a ton of bricks, but it made me, it was like two days of this big kind of ongoing aha moment where I understood that you can make money in this business.
I’ve witnessed other people doing it, and that I need to find the equation that’s right for me in order to persist and stay determined over time, even when I’m losing little nickels and dimes in drawdowns. And so in accepting that responsibility of my entire p and l, right? That is when the light bulb went off and that I knew that I was very, very close to figuring it out, and it injected me with a new sense of excitement about the process of making money by having your own buy and sell rules and your position sizing algorithm. Because at that point it was very empowering because it meant a few things. One, especially when you lose money, it was no one’s else’s fault. It was never the market’s fault. It was never whoever the Acts analyst was, it was usually the analysts effect equities more than they do futures. It wasn’t any f OMC meeting wasn’t the White House. It wasn’t the house or the Senate. It wasn’t some big short seller or market prognosticator who had said something on the television. I
Said, that’s the way the world works. The F O M C is going to have meetings and they’re going to make announcements. Analysts are going to upgrade and downgrade stuff. Other traders are going to move in and out of big positions. Of course, you have these outlier events too, like nine 11 for example. So then you have the economy, you have recession, you have boom times. The truth is you’re powerless over all of it. And so when you accept that and say, okay, that’s the game that I’m playing and I’m going to go basically try to do this endeavor, which is the equivalent to tap dancing in a minefield. You get what you get and you don’t get upset if you want to play victim, that will hold you back for as long as you play victim. It’s a type of mental cancer, so to speak, that I think stops you from moving forward because you feel like you’re not actually in control.
You’re kind of participating in something that you’re not actually responsible for. And this is a game of willingness. You have to be willing to put on the risk. You have to also understand that risk and reward are connected. Again, that depends on, well, they’re always connected, but what you get out of that situation, and that relationship has a lot to do with your position sizing. It really comes down to how much you make or lose comes down to your position sizing. Because if you trade bigger, you can have tighter spot distance between your entry and your protective stop. If you trade smaller, you can give it more room. So there’s an inverse relationship, but it’s a relationship nonetheless, and you get to pick that out. No one is forcing you to do anything. And so this is true whether we have Russia, Ukraine, we have people with strong opinions about red and blue in the United States, we’ve got, so in other words, what I’m saying is you might feel like you’re constantly under attack for your beliefs or for who you are as a person, but as a risk manager, all that stuff is just chatter.
It’s noise. It doesn’t really affect the signal. So you have to learn to disengage. That’s what I did. I to, I wouldn’t call myself a news junkie, but I was very up on world events. Now I kind of am, but ultimately I figure when I wake up any morning, anything can happen. So I don’t try to handicap what the energy reports are going to be on Wednesday and Thursday. I don’t care about the crush numbers for the bean market. I don’t care about earnings. We’re in the markets right now. We’re in earning season. A lot of people get hyped up and they try to trade earnings. It’s not my style. I don’t like making bets in the face of things that I can’t handicap. And although I have an amazing sense of intuition, I think if a person thinks they have a good sense of what a company is going to do, they might be kidding themselves because you really can’t tell unless you’ve spoken with the company.
Analysts can’t tell. They can take the guidance, but coming up with the number and then figuring out what that number’s going to mean to the marketplace versus what’s the whisper? What’s the estimated number, what’s the actual number? That’s, people tend to give themselves a little bit more credit for their sense of being able to predict things. And in my general thought is that people are not really good at prediction at all, and that’s coming from a guy who has an amazing sense of intuition. The point being though, the more responsibility you accept, the more empowering to me that it actually is. At least it was for me. You might feel differently. But the minute that I basically came up with the idea that I’m actually in control here, especially with the idea that I can limit my losses and that I’m not just putting on risk and becoming a victim of what circumstance, of whatever’s going to happen in the marketplace, I started to figure out, hey, I can put on this risk with a requisite amount of position size that’s appropriate for me, and I can determine ahead of time where I’m going to say, uncle, if it doesn’t go my way.
And knowing that I was in control of that process. And yes, it’s kind of discretionary in as much that you have to pick the instrument. You have to pick the position size. You have to pick the entry of where to add the risk for the first time. Where’s your protective stop? Where are you going to add if it moves in your favor, if that’s part of your process? Or where are you going to start to remove risk after you’ve had some unrealized gains and you want to realize them? I said, wow, this is a much more empowering process than I ever thought it was. If you read the books and you kind of grew up the way I did, the big thing in the eighties was the efficient market hypothesis, which when I read it was I never really believe I had to learn it for school.
But I’m sure you’ve been in that situation yourself where you’ve had to learn certain doctrines, read and write about it. But unfortunately, the way the schools work is you can’t come back and give it and disregard the theory, right? Because there’s a practical part of Michael Martin. There’s of course, the theoretical part. I understand. I understood what it meant, and I understand how the folks who were involved with that model are kind of reved revered, and so you know, have to pick your fights. But I kept saying to myself, well, what about the crowd? Because ultimately it’s what the crowd thinks, not what you think is intellectual or theoretical about a particular stock or instrument. So then I kind of married that disregarded, efficient market hypothesis, even maybe before I started to trade. And then I kind of said, well, what’s really important is crowd behavior. And that’s why I’ve recommended extraordinary popular delusions in the madness of crowds, because if you can understand how crowds work, the fundamentals are important long term. But if you’re a trader, a lot of
Times you just have to understand where’s the tide? What are the market forces and who’s in control of that instrument? So now I got a whole other sense of education in trying to determine who’s in control. Then I was lucky enough to have a mentor in Michael Marcus who was really, really, really good at that and understood that that’s really what moves markets is people’s perceptions of what the fundamentals are. Because everyone wants to sit down and be like, yeah, man, I just follow what barn buffet does. They follow the fundamentals, all this and that. And you say, oh, yeah, okay, cool. How much Berkshire do you own? Well, no one ever called me on my bullshit before. I don’t own any, but I want to be like him. Well, granted the guys in his nineties, I think if you’re bullish on Berkshire or you want to do it the Warren Buffet way by Berkshire, and then go find something really good to do with your time, because probably trying to emulate him and his access to information is not something that the casual investor at home can do.
Sorry, to burst anyone’s bubble. If that’s your goal and your dream, by all means, disregard everything that I say and go for it, because it’s really up to you. But from a practical standpoint, fundamentals do matter. Earnings matter, cost of borrowing, money matters because it affects right earnings. So you can have that debate, whether it’s earnings or interest rates that really move a company well, it depends if the company’s got to borrow money and what their cost to carry is. But then ultimately, it’s your job to understand momentum, and that momentum comes from crowd behavior. And so whatever you’re modeled, you need to understand, you might be super bullish on something because you even used the product or the service, but what matters is what is the 15 million other people who’ll be trading that name tomorrow going to do? Because no matter what, it’s like driving.
There’s certain times when you’re at an intersection and this and that, and you talk about right of way. Well, to me, the market always has the right of way because that’s what the crowd determines. Doesn’t matter what I think, doesn’t matter where I want to enter. And so this kind of gave me an inner calm in that I’ve got to develop my instincts and my skills around understanding how the crowd’s going to behave given the chart and given what the fundamental environment is, given what the overall environment is now in the marketplace right now, right? It’s Thursday, and we’re talking about there’s still fear around all these regional banks. What’s going to happen? Are they going to implode? What are people going to do around getting their own money out of their bigger banks? No one’s ever going to stand up and say, yeah, we’re not sure we’re going to make it through the summer.
I mean, that’s what they should do if they had integrity. But it’s up to you. It’s your responsibility. And I can’t count on anyone else to have integrity, and that’s not a sad state of affairs. It’s that I’ve gotten to the point where I don’t really count on anybody for anything. Yes, there are people who have helped me, but I also showed great interest. I also had great promise. I was highly of my background and the fact that I never, because so many people, if they went through what I went through, not to say that I’m God’s gift, but it’s very easy to become discouraged, right? Because I’m a goal setter. I’m a person who hits his goals, and it’s so messy. It never comes to pass. I hit my goals, but oftentimes how I got there never is how I started. So the path towards your goal can change, but the goal itself cannot.
And in that four something year window of where I was cut, cutting my teeth and sewing my oats, so to speak, one of the biggest thing was yes, I always had a good attitude. That is to important. And yes, of course, you know, need discipline, but persistence and determination, those are all four brothers and sisters of the same argument, attitude, discipline, discipline, persistence, and determination. Those are all super important. And when I determined and made up in my mind that I was going to actually take control, then the whole rest of the world didn’t matter. I didn’t care what anyone else did. All I had to do was modify and control my own behavior. And that the way that translated for me was, again, because there wasn’t the aftermarket, there wasn’t all this stuff you can do on discords and chat groups and whatever. It was basically you and the books that you had, the relationships that you had, and you could look at some charts and maybe see a few things on, I don’t even know what was a, I don’t remember what it was. Maybe it could have been Yahoo Finance or the Wall Street Journal at the time, the C-section of the paper had a lot of that type of information. Now it’s very different cause they don’t take up the physical space. They delegate that and they put that all online.
I didn’t use it, but a lot of folks used Investors Business daily as well. So I kind of learned how to read the tape. Again, things dollars were broken up into eight parts. So there it was easier to read the tape. If you had a level two, and you could also call people on the floor who kind of knew where there were sizable orders. They couldn’t tell you who the orders were from. But if I was stepping into a trade to buy 50 natural gas, they might say, okay, well there’s like 3000 contracts to go between five and 10 cents above the market there. So you might get in, but there’s a wall of selling pressure right above you. And that was regular. That was a regular chat. So when I took responsibility, it was actually very, very empowering because it precluded my ability to blame anybody else, especially from my failure. Then the trick was, as I was making money, of course I could look back in my failures and make sure that I didn’t become too full of hubris. You know what I mean? Because the minute you start thinking, you figured it out, that’s when you get taken out back and beaten. And I didn’t want that either. So I became super placated and said, okay, here’s what I’m willing to lose. I didn’t quite fully understand what my expected value of a trade was, because I was still sorting things out.
But I kept track of the data and then it empowered me to say like, okay, I am deliberately choosing to do this. Why would I blame the result on somebody else? So it didn’t logically, and I’m f I don’t know that I’m stoic. I’m just saying that when I went through that realization, I kind of remember where I was. I was walking around the lake and I was near the boathouse in Central Park, and I kept saying like, okay, I’m frustrated from having lost money. I’m frustrated because I’m getting, I got different results. I make money, I’d lose money. And then I was like, oh, okay. Well, I heard someone being interviewed, and I was like, well, that’s just the way it goes. In trading, you win, you win some, you lose some. The key is to not let your losers put you out of business.
But the second key then is to not let your users take out all your gains. And that was one of the first battles I had to come up with is that I was making money. The problem is I was reluctant to get rid of my losers much quicker. And so when I went back and I did some due diligence on my trading ledger, one of the first things I did was pick better stops on the chart and minimize my losses because I did make money. The problem was I was losing enough to kind of keep pace with the storm. So I was running to stand still as bono saying. So I was like, that’s stupid. I’m putting all this work in, but it’s my responsibility to learn this. So then I said, okay, I’m going to focus on my losses because my instincts get me into good trades to make the money, but they also keep me in my losing trades too long.
What is it that I’m reluctant to feel? And so you go through that whole thing about all the feelings that you have around losses. If you get knocked out, it comes back in your face, this and that. Then you come to realize I can’t manage risk based on what I think is going to happen tomorrow, the next day. If I’m in the risk, now I have a stop and that stop is written in stone and that’s it. I don’t negotiate with it. So that was a big aha. But it all came from yes, having a good attitude, having discipline, persistence, determination, but the big aha moment came for me, that really was the beginning of my going parabolic, was understanding that I’m responsible for everything. I don’t get to blame anybody. And maybe if you are struggling, that might be something for you to look at.
I don’t know. Anyway, it’s a great question. It’s a super deep concept. I’m sure I could go on and on and on with it. If you’d like the show, please like and subscribe, click the bell because we’ll alert you when new things are up. You have any questions or comments, please write ’em in. I don’t have all the answers. I just have my own subjective experience, which I’m trying to share with you all here for free. If you haven’t gotten a free copy of my book, the au, the Inner Voice of Trading, you can get the audio book version for free. Click the link below. Thanks for being here, folks. I’ll see you tomorrow.

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