Another silent killer for traders in the carbon monoxide that’s out there is people tweaking their rules on the fly. I can’t tell you how many emails I get from folks who are like, my first two trades were a loser, and then I tweaked my rules and I’m like, how would you know to tweak your rules just based on two data points? And even if you have 50:50 odds or 50/50 win to lose ratio, half the time you win, half the time you lose, you know, can calculate the frequency where you’re going to have say, four losers in a row. So why would that be a material data point for you to want to change your rules, right? It comes down to the statistics. You can figure out if you know what the expected value of a trade is, that’s technically what you make on average every time that you trade. So it incorporates and takes into account the fact that you’re going to lose money from time to time. I’m going to say this, if you’re upset about taking two losers in a row, you don’t have thick enough skin to be a traitor. All this is just straight up.
It says nothing about you as a human being unless of course you traded too big and now you’re down 50%. That’s something I’m not going to know the criteria, but if you’re doing, like we spoke about Monday, and you’re using same consistent bed sizes, you don’t care from one trade to the next because you know what the expected value is of your trade and you take solace in the process, not the result of any one particular trade or several of them against you, it doesn’t mean anything. You are putting importance on something that you don’t have to put importance to on losing trades. F*ck, do I care about losing money? Honestly, I’m just giving you context and perspective here because in order to obviously make the money that you want to make to change your life, which is the whole point of doing this, no one cares about 20%. You obviously have to add the risk, but you’re on a strict diet, so you know what risk is affordable. You know what risks you can digest, so to speak.
Now, if you’re learning this the hard way, you don’t have a back test and you’ve been winging it all along, now might be a good time to, again cut your bed size. Your bed size is determined by how much you can afford to lose, afford to lose financially, but also how much can you afford to lose mentally because you might not get to that loss all at once. It might come in stages. For me, someone asked, well, do you have different rated bed sizes based on the setup? And my answer was no. Not even today. I don’t have a favorite setup. They’re all my favorite setup. They all work, so that’s my favorite one. Yeah. Mike, what’s your favorite setup? The one that makes 5R, 4R, 3R, 2R, or 1R? The answer is “Yes,” they’re all my favorite because the R payoff is something that’s random.
There’s no guarantee that any of them are going to pay off. There’s no guarantee. Yes, they don’t turn on a dime, but things that I made big money on last month might not work the same way this month. That’s why I’m largely indifferent when I put the trades on. Two, my style is also very different in that I start super small. So today I lost like $200 bucks or whatever. It wasn’t even a rounding error. What do I care? I spent more on sushi dinner in as much that I pretty much got knocked out at break even. And so that’s like slippage and skid and commissions and everything like that. So to me it’s just like it’s not even aggravating. You have to put the trades on to be them. And in terms of what I thought was going to happen, the exact, it was basically two trades and both went completely opposite the way that they normally would have both trades, basically very strong countertrend reversals, and that’s going to happen from time to time.
It’s happened before. Been doing this for 36 years. It’s going to happen a million times. The dollar value, like I said, it doesn’t even matter. It could have been $2K and it doesn’t matter because I did the right thing, I followed my process. The fact that the trade didn’t work out is nothing I can control. So I don’t get emotionally invested in that because I know if I come back and do that next week, the week after, if I do it this summer, if I do it in Q4, the odds are in my favor that it’s going to pay off. So that’s what I take solace in is that I did the right thing, I kept my losses small and I moved like that. It’s even the dollar value. I shouldn’t even said anything so insignificant in the grand scheme of things.
My style would be, so again, this ties into don’t tweak your strategy on the fly. I’m not afraid to add 7, 8, 9, 10 times to a position, but I’ve got the math already worked out. That’s not me shooting from the fly saying this thing’s going to the moon, Alice, I’m going to sit here and just keep ramping up. I know how to do it. I know how to adjust. My protective stops along the way. And again, if I get knocked out, I don’t care. I want to be at my biggest by the time I get knocked out. Sometimes it doesn’t work out that way. It’s just the way it goes at the beginning. I have very small risk on maybe one 10th of 1%, but I’m quickly adding. People be like, yeah, but you can’t make any money with that. Well, of course if you’re just putting on one 10%, no, you’re not going to make any money.
But that’s not the end all. That’s the beginning. So this way, if I get whipped around, it’s not even paper cuts, it’s tiny. And that’s what happened today. It was just like, okay, I put a few pieces on. I had my other orders ready to go in the system. When the market worked against me, I got stopped. So all the other successive buy order entries that I had in above the market, by the end of the day, they were canceled because they were only good for the day. So they didn’t get filled. And I had four or five other orders on the same instrument, all staggered in at different levels. And it wasn’t meant to be nothing to fall to pieces on, I’ll get to come back tomorrow. Why? Well, I didn’t take a destabilizing loss and figure that out. Some of you might be feeling a lot of burn because you’re putting your cannon balling as I would say. It’s like you’re risking 1% and you put that 1% risk unit on right away, and when it doesn’t work out, you take it as an affront. And so I would say uhuh, again, I’m not looking to day trade, so this probably wouldn’t work for a good number of you. I understand that. But that’s something you have to figure out. What is your time worth?
For me, again, I would much rather do it my way. If you have an idea and you can backtest ahead of time, you should also be able to calculate therefore what’s the expected value of that trade that you’re trying to put on. The problem with most simulators admittedly, is that it doesn’t allow you to test at the portfolio level. So you’re relegated to have to do one instrument at a time. And I know a lot of day traders ought to just focus on doing one instrument and that’s it. But it is a different conversation. I don’t want to get too far off topic here, but if you have a goal to take X amount of money and to grow it to a certain amount of money, you can calculate the number of trades that you’re going to need to put on if you know what your expected value is.
And in “9 times out of 10,” when I speak with people, I know there’s that generalization, again, they don’t, there aren’t enough setups for that particular instrument for them to put on the number of trades that they need to put on because the setups just don’t show up that much. And that’s what runs into, that’s how people run into a lot of trouble is that they’re like, well, I need to put on more trades. My margin is low. I don’t have a big enough account. I can really only trade these tiny little mini micro contracts, so I have to find 45 different ways to put a trade on. The problem is that there’s probably only one, maybe two that you’re actually with. And this is again, the beginning of the end. And this is what brings on the struggle is that you’re trying to do too much, as opposed to saying, my account’s unfunded.
I need to grow my account. I need to add money from the outside. I’m not going to be able to grow it organically enough with the level that I have. And so then you get into, again, the topic today is tweaking your strategy where you’re like, I got to trade because if I don’t trade, I’m not making any money. And you’re not thinking about preserving your capital. You’re not thinking about the fact that so many of these trades are actually suboptimal to begin with. So if you know that all ahead of time, then you can have the solace of knowing what to do. That might show up only once or twice a week, but at least it’s your trade the rest of the time. You got to sit on your hands and wait. And if you don’t have enough money, I’m sorry that you’re the small banana, but if you have books in your house, sell ’em on eBay and add that money to your trading account. You have 17 pairs of designer sneakers. You need 2, a dark and a light one, sell the rest. You see what I’m saying? Like find the money. If it’s that important to you, you’ll do it. Otherwise, you’re just bitching all the time because that’s what you’re used to doing, but that is not going to get you the results that you want.
And I’ve just found that when I hear people talk about trading and trying new things on the fly when they’re in trader mode, not when they’re in, I’m back testing mode or I’m in experimentation mode, in which case it is legit. But when you’re in full on trader mode and you start tweaking things on the fly because you lost money on two or three trades, to me, that’s you’re destined for failure. And at that point, don’t be hard on yourself. Just stop. Save your cash, preserve your cash and say, I got to go back to the drawing board. And if that’s not working for you, email me. Some of the comments are too long for me. It’s TL;DR. They’re too long. Did not read. I can’t create a whole episode over a person’s situation, but if you email me, I can put a little thought into it.