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Hi everybody. I’m Michael Martin. I’m a securities trader in Los Angeles. I trade stocks and futures and then options on both from time to time. So in a world that we live in where everyone’s making millions of dollars and there’s all these gurus talking about they’ve made X amount of money, I thought what I would do is offer a gesture of humility. Talk about one of my worst trading mistakes. It’s actually funny to think about now. It wasn’t so funny at the time. Now mind you, it wasn’t my biggest loss, but it was a mental error that got me thinking too. I was too relaxed, I was too casual and I ended up losing some money. Personally, I can set the story for you. I was trading wheat futures at the time, and this goes back to the early nineties, so I was just a couple years in the business.
I always was one to want to take risk home overnight over the weekend and coming into this window of time, we were in the end of June, the wheat contract had gone from four to four 40, so it was up 10% in a very short period of time. So of course I was happy. I mean, I’m generally placated no matter what happens, but the thing is, we were coming into 4th of July weekend and if I remember correctly, it was going to be a four day weekend. And normally, like I said, I really like to buy things Friday at Friday’s close. I like to take things home over the weekend. But for this period of time, again, I didn’t have a lot of experience. I was overthinking things. I was up 10% with obviously the leverage. So the account was burgeoning and a lot of clients in Chinatown, and so I remember the setup saying I probably should pair or take the trade off, but since I’m at the wirehouse, I hadn’t moved out on my own yet.
You can’t just make affect transactions in a client’s account. Everything. Either the client calls you and you have to market solicited, I mean unsolicited or you speaking with the client. It’s your idea. You have to market solicited. So there’s all this compliance that goes on. Nowadays we have full discretion, so as long as the client understands that we’re going to stay within our rules, we can buy and sell pretty much what we want as long as we adhere to this strict risk management guidelines that we promised them in the client agreement. So we had this week it was making a bunch of money. I was a little nervous over the four day weekend. I don’t know why I was, I should have just stopped and turned the screen off and gone for a walk like I normally did, but I figured, let me speak with the client. So I called the client on the phone, client’s on East Broadway in Chinatown, and I’m like, what do you feel? What are you comfortable with here? We could put in a protective stop, but that’s not going to mean anything. Over the weekend. We had futures, not options. And he’s like, you know what? You’re probably

Right. We should take it off. Let’s take it off. We’ll take our profits. But I think because the market’s moved too much, let’s go short. And I was like, go short. Maybe you got a point. Maybe there’s going to be a wave of profit taking because I can see things clearly. So we reversed course, we sold it, we took our profits. Who knows if it was the right call? Probably not, and we sold short. You had to mark the tickets in bushels at the time. So I think if I remember correctly, we sold 40,000 bushels, which is about eight contracts. So we sold eight contracts with a half an hour left in the trading day. This is me trying to get cute. So there’s a moral to this story, which I’ll get to at the end, and I should have just said to the client, I’m not comfortable doing it.
Let’s take everything. We’ll wrap it up, we’ll come back next week. But no, because I didn’t know what I wanted out of that phone call before I got on, I started letting the client come up with trading ideas, and that’s a tricky spot to be in because if the client comes up with an idea and you say, good, let’s do it, and they lose money, they’re like, why didn’t you stop me? What good are you? If they make money, they’re like, what do I need you for? You know what I mean? So you kind of lose either way. So I’m like, okay, we’ll take a smaller piece. The eight contracts were smaller than we would normally trade, and we went short half an hour left. It was going to be a quick little thing to take advantage of the fade. Now, I didn’t know about reversals as much as I do now, and there was no real reversal at that period of time.
I also didn’t have a lot of experience seeing how things can be really, really strong during the week and still close at the weekly high at Friday’s closed without looking like with the big green bar with virtually no wick. So we’re sitting there watching it again, we have a scalping, what you probably would know as a scalping position, I don’t really use this anymore. It’s either on either risk on or risk off, and nothing was happening. There was about 10 minutes left to trading and I called the client, I’ll call him Thomas, obviously he’s in Chinatown. His name wasn’t Thomas. So I called him up and I said, look, we got 10 minutes. I do not want to go home short with this. We’re not going to make or lose. It was probably one or 2 cents difference from where we had sold short and the traders calling me saying, what do you want to do here? So I had two phones going, one with the client, another one with the trading floor in Chicago, and he’s like, you know what? You’re right, just sell it. So I was like, okay, Frank, whatever your name, the trader, right? I’ll call him Frank. Frank, just sell it.
When you get a shopping delivery from Amazon Fresh or Whole Foods or Ralph’s or wherever you get your food, they don’t know what you have in inventory. If you say buy bread, buy milk, buy cereal, buy carrots, they’re just going to bring you what you order. So when I said into the trading phone, just sell the eight. That’s what the client said, which that’s not what he meant, right? He meant get out of the trade, but we were short. So I said, just sell it. He goes, okay, you’re done at 440, whatever the price was. And then I hung up the phones and it hit me a bolt of lightning like, oh my God, what the hell just happened? I saw that they would send you the execution on your screen, and then it said net position. So now I’m short 16 contracts with eight minutes to go before a four day weekend in a market that’s been going straight up all week.
I couldn’t just call the floor and reverse the trade because of compliance, so I had to run. I worked on third Avenue and the office was gigantic. It took up an entire city block, so I almost had to have a cab because I had to get to the operations booth on the caddy corner from where I was sitting. So no matter which way I was going to go, it was going to be a long way. So I remember I literally got up and I ran down to the branch manager’s office and hung a right. In the meantime, a new guy was walking through the front door. The doors were like mid-block, so to speak. We were on the 29th floor and the guy walked in and he had a big thing of papers, and I hit this guy like Lester Hayes or Jack Tatum, like a cornerback, cornerback blitz, and I took him out.
The papers went everywhere. I didn’t even have time to stop and say “I’m sorry,” because I had to get out of this trade and I’m going to tell you why in a couple minutes. It wasn’t just that. Now I doubled down on my short, so I get to the operat operations booth, and in those days you could still smoke in the city, and there was a woman sitting behind the glass and had to cut off glasses, and I’m banging on the thing frantically, I’ll call her Theresa, that’s not her name, and I was like, Theresa, I got to unwind this trade. I made a big trading error and she turned to me and she looked and she said, “booby, I’ll be with you in a minute. My daughter just broke up with her boyfriend” or something like that. So now I know why they call Depends, panties like the ultimate stop order, the bladder control, they work like a charm. I vacated my bowels right there on Third Avenue. So long story short, they did the right thing. They reversed the trade. We got out of everything. Then you got to go back and read the tape and say, okay, well look at the timestamp for the trade. What was the price? That’s what the client has to get. So if the price was different, I have to eat the error, right? That’s only fair, right? Then we have to offset the ones that the trade that we didn’t want to be in. So that also could be an error if it moved up. I’ve got to cover that. That goes into the branch error account. So I have two errors now that I got to take care of.

In the end, it was $1,250 about, if I remember, which was very painful at that time because if you remember, my account was underfunded. It might’ve been a lot of money for a newer trader. At the time, it was probably like $5 or $6k, and I was doing decent in commissions and fees to help pay my bills, which were hard, but that was a big hit to have to take. I had to call the client and tell ’em like, I made a mistake. They didn’t want to see you don’t want the paperwork to come, and they’re looking at it like, what the hell is this? I said to call the client right away and say, Hey, by the way, on that trade, I made a stupid mistake. I fixed it. It’s no error to you. You’ll see the paperwork’s going to come. They’re still going to get all the trades occurred in their account, so they’re going to get the trade confirmation, the memo as the trade memorandum confirmation.
And so I went back, man, I felt like a complete idiot because I didn’t, there was really no reason for that error to happen. It was a moment of weakness that I could have easily avoided. I wrote about this in the Inner Voice of trading, I’m pretty sure, so it might sound familiar to some of you. If you haven’t gotten it, you can get the audio book version for free. The link is in the description of this video. And so, man, I just remember feeling like a complete idiot because I lost $1,200 and there was no reason for me to even be in that trade. I shouldn’t have gone short. I should have had a plan because I was always the kind of the boss. I always had trading ideas, and that’s why they liked me. I made the money when I went out on my own.
All those people came with me. They were the founding clients of my CTA, so I did very, very well for them, and the client was like, you’re idiot. We laughed it off. They knew there was no financial responsibility on their part, but it was very humbling lesson for me that if I’m going to act like I have to adopt more professional abilities in my trading, so there was no more shooting from the hip. This is why I learned in that lesson probably going all the way back then, which is over 30 something years ago, that I don’t fade strong moves trying to get cute with the market. So when you hear me say that in other videos, this is what I’m thinking about. I know some of you might have a great sense of timing and you can nail that trade. I have pretty good intuition too, but for me, I would much rather catch the meat of the larger move than try to fade something with a scout position and make nickels and dimes.
It’s just not worth it to me. You might feel differently, and I respect that, and if you’re nailing those trades, I’ll be the first guy to stand up and say, rock and roll. It just doesn’t fit my temperament here. So it’s not like it’s a better strategy. That’s just not compatible with who I am, and that’s just the way it is. But if you’re doing it, smash it, then do it and make sure you’re levering it as much as you can. So I talked to the branch manager. The guy was a sweet guy. He was a really, really good guy. I liked him a lot. He taught me a lot about sales and marketing, and he had come up through

EF Hutton, so he knew all the guys from Hayden Stone. He knew Dick Donchian, he knew about because they were at Hayden Stone by the way, but they all became one company. When Sherson Lehman bought Hayden Stone. They bought Loeb Roads, they bought Hamill and Company, and that all was inside. Eventually Shearon, Lehman Brothers and then Sheasron Lehman had purchased Smith Barney and merged because Sandy Weil and Jamie Diamond wanted to have a salesforce. What we called, you should know this, they wanted distribution. So that’s what financial advisors are considered in management. It’s distribution. And so that acquisition, we were acquired by Shearon, and it was a real culture shock. They did things very, very differently. So that’s one of the reasons why I left, but that’s neither here nor there. The guy that I rolled over and took out with the cornerback blitz at the front door, his name, I’ll call him Peter, I came back.
So now I’m down $1,200, and now I’m thinking I’m going to get sued. I ran this guy over. My footprint was across his face, and I went back and I apologized and I spun the story. There was something going on in a client’s account. I didn’t tell him it was my fault that I didn’t know how to handle, and it had to be handled before the end of the closing bell, and I had to go speak with an operations manager immediately to make sure that the client was going to be whole or this and that. He never asked what it was, which was fine. So in his mind’s eye, he saw that it was a great sense of urgency. That guy ended up coming and becoming a client of mine and had 10 different accounts with me. So there’s the corollary later on. These clients, they went out and bought real estate. Some of them still have money with me. We have long, long relationships. So what did I learn from this? One is stay with the trend. Don’t be afraid of taking risk home over the weekend. You could always cut your position. I could have sold Decembers against my Julys and created an intra commodity spread to manage the risk. I could have sold futures and added call options.
More importantly, what I did learn to do though was I created these buck slips, and so now every order that I have, I write it out by hand and I say, here’s my entry. Here’s my number of shares or contracts. Here’s my protective stop. And that’s done for every order. I never do anything like hair trigger response. I know that’s a sensitive expression for most guys. I don’t shoot from the hip or just see something and double click the mouse. I always do something very, very intentionally and deliberately. That’s why I like to do my preparation the night before and have my orders ready. Sometimes I cancel ’em. Sometimes things move overnight. So now they’re not in the neighborhood of where I need ’em to be, but that’s fine. So I’m just editing the menu, so to speak. I know what my menu is for that day, but if the things fall away, I’ll say, okay, let me come back Tuesday.
If it’s Tuesday night, let me come back and see what we’ll do Wednesday. So no more fading moves. Write down your orders. When I call them in, I still do a lot of phone execution. I’ll read it to, I’ll say, okay, I need to buy 15 New York Gold. I’ll say 15 “1” “5”, because 15, if you’re saying it fast, it could sound like 50. So I’ll buy 15 New York Gold at X, Y, Z price on a stop, and I’ll say, read it back to me. So then they read it back to me. I put a check mark next to it. Then they enter the order and I say, okay, well what’s your ticket number then? Because they could have 50 CTAs calling in, and it’d be like, oh, it’s ticket 219. So I’ll write ticket 219. I talk to Gerard, blah, blah, blah, and then I’ll leave it in.
Then I wait for the phone to ring. If the phone rings and they say, I got a fill, I’m like, perfect. I already have my protective stop order written out, and I’ve double checked the math 10 times till Sunday, and I’ll say, okay, thank you. What’s the price? I’ll write the price. Sometimes it’s a blended price. We have sufficient slippage and skid to get our orders filled most of the time, and I’ll say, okay, I have another order for you. So I’m going to sell one five New York, and here’s my protective stop. Thank you. What’s your ticket number? This and that. And that has worked like a charm. So I don’t really make errors. It’s not that I make money all the time, and as far as like, well, what’s your biggest loss? Everything now is proportionate because it’s largely the same percentage at risk.
The numbers are obviously much larger, but the percentage of risk hasn’t really changed at all. So that’s that. So you learn from your mistakes. Obviously, that was a painful lesson to learn. It cost me some money. The branch manager said that he would eat half of it, which was a very nice gesture on his part. So it ended up costing me six and change, but I still had to do probably 1200 or so in gross commissions to offset that, right, because of the payout. So at any rate, in a world where everyone’s doing nothing but printing cash and showing you their Instagram reels and videos about how much money they’re making, I learned as it said, more from my mistakes many times than I did from my winners. So I thought you’d appreciate that story.

How to make a living a trading, trading one only hour a day. Guess what folks? You can’t. I’m putting you on. The thing is trading’s hard. I know there’s a ton of videos out there that tell you how you can use AI for this and that, or you can just do this one particular pattern on one minute bars in foreign exchange, blah, blah, blah, blah, blah, blah. It’s all bullshit. At the end of the day, I’ve tried every damn thing under the sun to make money because I had to. I was broke and after 35 years I’ve really seen it never ceases to surprise me. The creative stuff that the marketers will come up about, just how easy trading is. It isn’t easy at all. It’s fantastically difficult. Trading is going to test you on every corner of your life, 360 degrees.

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You’re going to be constantly under attack, your money’s under attack and your emotional constitution is under attack, and if anyone tells you that you can hack a system or that there’s an easy way to go around this, there’s not. Admittedly, you can get some insight, right? Oh, but Mike, I know the guy. I’ve seen him do that. Well, that’s awesome. Does he have 35 years of experience doing it? I don’t care about how much money he made last week doing something because in the short run, we don’t know if we’re good or if we’re lucky, and that goes for me too. In the short run, it’s very difficult to tell. All I can do is act consistently day after day after day, and then after many, many years, I’ll be able to look at my scorecard and say, okay, am I happy with what I’m getting?
What modifications do I need to make? But to go out there and try to tell people who are desperate to make it that it’s going to be easy if you just follow this one particular set of rules is not genuine and it’s misleading. If there is a way to be close to that, it’ll be in your preparation, right? Because the actual, when you think about it, you put in a few hours of preparation. That’s probably a good thing. If you run a trading system, you don’t even need that. The data is uploaded into your server through whatever data program you’re using. There’s a good one out of Florida called CSI Data. Then your engine, whether it’s Mechanical or Tradingblox for example, knows where the data is on your machine. You just hit F9 or whatever it is to run the thing, and there you go.
You’ll get the results spit out within a couple minutes. That’s about as much as you would need if you’re running a system, if you’re a chart reader, you probably have your chart book or your flip chart or whatever you want to go through, and you can do that preparation. So that is maybe how you can do it in an hour, but it’s not from sitting at the desk for hours. The entering stop orders to get in and out of trades is actually very, very easy to do. That part doesn’t take a lot of time. What I think is insanely difficult when you’re starting is to actually put up charts in any different number of timeframes and sit there and think that you can kind of see patterns. That’s very, very difficult to do, and if you’re doing that and you’re looking at multiple timeframes, and if you’re looking for convergences and divergences, you need years of experience in order to pull that off. Granted, if you’re in some kind of training program, the numbers and the results may be different from you, but you’re also probably paying 10 K or more for an education to get that type of wisdom. Those types of programs didn’t exist for me, so I had to do it myself and I don’t regret it. I learned a lot about myself in the process. I really wouldn’t want to do it any other way, but I think it’s not genuine to say for those that the rest of us who have to do it by ourselves for one reason or another, that you can do that. Now. Also, for those of you who might live here on the west coast and the opening bell is at 6:30 am or you start to trade earlier in the morning and you think you can get a few hours of trading in, I think that’s very, very difficult. So I’m not telling you to stop, but I would ask you to be realistic with yourself that the particular setups that you might need might not happen with that two hour window that you have before. You’ve got to get on the road and get to work. If you’re working from home, then figure it out, but you put a lot of pressure on yourself if you’re going to constrict the entire day of trading from 6:30 to one into a two hour window in the morning before you have to do your thing for your employment.
It’s just not the way things work. If it was that easy, everybody would be doing it and it’s not, especially on the short end. The estimation is that 94 to 95% of the people who try to make money trading in the short timeframes don’t make it. They don’t show up on Instagram. They don’t show up in social media because it’s humiliating and emasculating, right? Let’s face it. Are we going to say, “Hi, I’m Mike Martin. My expertise is in tax loss carry forwards. It’s like it came natural to me. I didn’t even have to try. I could lose money. It was nothing.” You know what I’m saying?
So yeah, “How I blew up my 401k in 25 easy steps.” You could have some fun with it, but I don’t celebrate the pain that people might be going through if that’s where you are. I know what that’s like. I thought wrongly that I could follow some gurus. I wrote about it even of one particular guy who I liked. I knew him very well when I worked at the wire house, and I wrote about that in The Inner Voice of Trading. You can get the audio book version for free. The link is in the description. I won’t blather on about it here, but I learned the hard way that if you’re going to rely on other people’s research, you have no emotional connection to it other than you’re paying a monthly fee to be in the Discord or this and that because you kind of want that payment and that commitment to absolve you from the duress that you feel. Well, you have to live with the uncertainty of making these decisions for yourself. Sooner or later, you’re going to have to have a come to Jesus where you learn how to be self-sufficient and you make those decisions and whatever amount of work it takes for you is the right amount, but to say that you could do it in 15 minutes or that there’s some algorithm that you can put to work, it’s very, very difficult to do. It looks easy on paper, but once your emotions start to churn and you start losing money, you’re not going to trust the very algorithm that you paid for and then you’re going to stop because you don’t like losing money, and once you stop even a system that has positive expected value, you’re probably going to be locked into a drawdown for a protracted amount of time because you’ve lost your nerve, you’ve lost your confidence, which we talked about yesterday, so I’m not here to call your girlfriend ugly. Try whatever it is that you think that you want to try, but just understand that trading in and of itself, especially for your first five years is very, very difficult.
Very, very difficult, and I wish everybody the best. I do my part in trying to speak to it here for free about the realities of it, whether you’re six months, six years, or 36 years like me, it doesn’t necessarily get any easier. I’m used to my process. That’s going to come with time. You’ll get there too, but you have to do it day after day after day and doing it day after day also means sometimes sitting on your hands because there’s no signal and you don’t feel the feelings of missing out or that you have to be in the game. There are times when you’re going to see things move, but it’s not your setup, so therefore it’s not a missed opportunity. You wouldn’t have been in the trade otherwise. I had to get over that one too. I’d see things move and say, how did I miss that? Go back to the drawing board again. Your work should be put into your preparation and that should be done while the market’s hours are not open.

Today we’re going to talk about how to trade with more discipline and without emotion. Obviously it’s very, very difficult to do, but I want to focus on preparation. I’ve mentioned this before. One of the ways that I was able to take emotion, which you can’t do overnight, but you can remove emotion over time once you get used to your routine. It’s just like your first day of school. You’re excited after the first, well, by the time you’re at midterms, you’re like, Ugh, trading’s the same way. So I removed the emotion decades ago from having a daily process, was talking about it a bit yesterday in how to outperform 99% of your peers. But in order to have the discipline, I think you need to know what you’re going to do before you actually need to do it or execute what it is that you need to do.

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You understand, and I’ve talked about the art of war. I’ve talked about: “Victorious warriors first win then seek battle.” By my having a plan that I knew I could execute day after day after day. Having that the night before, it gave me a great sense of confidence. And if you’ve listened to the show before, I’ve said that if you take a person with average ability really is dumb as the damn doorknob, but you fill them with a model that they can follow that has positive expected value and that they can replicate day after day after day, they’re going to have great success. When you can infuse somebody with confidence, they feel unstoppable, and that’s kind of what I want you to have for yourself. But you only get that when you know can count on yourself. You can’t count on people who are going to try to give you signals or tips and this, that, or the other thing.
You can’t count on in the Telegrams. You can’t count on the Discords. At the end of the day, it’s up to you and you have to follow your own drummer. You have to be the drummer. And so when I knew, and this all happened kind of by accident, right? Because I was experimenting, I didn’t really have anyone to help me. So in many ways I’ve had support over the years for sure. But all my trading stuff I learned by myself through massive amounts of trial and error, capital on the error. There’s a lot of it. So to detach the emotion from things, it really came from my being prepared, at least for my temperament and my emotional makeup when I knew at least I had a plan coming into the next day. I didn’t feel so, I don’t want to say unprepared, but I didn’t feel clueless.
I didn’t feel like I didn’t know what I was doing. I felt like even the best traders could see themes unfolding. They could see patterns emerging, not just chart patterns, but patterns in consumer behavior, patterns in the cyclicality of the commodities markets and the secularity of the equity markets. So that’s the kind of data that I studied more than chart patterns. That gave me a sense of confidence so that I felt a lot closer to my goal at that point, and that was really important. I know everyone wants to say like, Hey, you can just make all this money working one hour a day, but for me, if that’s the case and work an hour a day, it’s the hour in the evening that I prepare for the next day because now I know always what the worst case is. That to me, I always had to define.
I knew that if something was going to win, there is a certain knack to how do you handle winners. I personally think that that’s the hardest trade is how do you take winners? When do you know you should take them and not live with regret? Because then you could see the thing move on, and it happens. It happened to me two weeks ago. It’s the way it goes. You get knocked out of a trade. You did the best that you could. I did the best that I could. I’ll speak for myself, and we can’t predict things. So I let go of all the emotion around that, that I should have some type of predictive ability. And all I knew was like, okay, if the thing’s going up here, this is where I want to enter long. I know that’s where I could enter my stop.
I knew how much money I was going to risk on a per trade basis. Therefore, I could position size and know the number of shares or contracts if I was looking at commodity futures or puts and calls, and then where’s my protective stop. That to me is a complete program to get started. Once you start making money, then you’re going to have to apply a little bit of art and science to it. I know a lot of folks like to take things off at 3R. It’s probably a good start until after a while when you see things go. If you looked at Nvidia breaking out at $500 with $15 ATR, if you took it off at 3R, it was good trade. You made your money, you made 3% or whatever, or no, you made more than that. But what did you do to get back in after it kept going? So these are the types of issues that I had to deal with and learn about from lots of trial and error and risking real money, not using simulators. Again, I was lucky in that there weren’t a lot of simulators around at the time. I had to kind of create my own macros on Lotus 123 to kind of run the trading rules. So it was such a pain in the ass, but man, I got through it.
Having the discipline to me is being able to repeat a process day after day after day, even though you don’t know, because there’s uncertainty and the uncertainty can hit you a couple of ways. We talked about it a little bit yesterday. I wrote about this, by the way, in The Inner Voice of Trading, which I wrote in 2011. I give away the audio book for free. I was published by FT Press, like I said in 2011. It’s got over four star reviews at Amazon. The link is in the description if you want the free download, and I talked about the trials and tribulations about how I got my head kicked in basically for four years trying to figure all this stuff out. I kept really, really good notes about what my expectation was, what did I think was going to happen, how I felt about things, and then how did it actually play out? And then I was able to go back and double check like, well, why did I think it was going to behave the way I thought it was going to behave when it actually behaved this way? Where could I clean up my own analysis? And this was something that I did every day. I knew I wanted to learn a lot about myself. I knew I was the weakest link in my trading. It’s not the market’s fault. The market doesn’t even know I’m participating. Whether you’re institutional or even retail, the market doesn’t really know that you’re there. Sure, in the short run, you can push a few things around, but it’s not personal. Whenever I lost money, I didn’t take it personal. I didn’t feel like the market was out to get me.
And I knew because I knew math, that having positive expectancy was a huge edge. Once I knew that I had my rules, had positive expectancy, it was now a function of tweaking those rules and trying to make them a better fit for me emotionally. I wanted compatibility between what I knew how to do and what I thought so that I could replicate that again day after day after day with without going through histrionics and even to take tranquilizer like Michael Marcus did. So at the end of the day, if you do this type of behavior day after day after day and stop worrying about your p and l, you’re actually going to grow a lot as a human being because you’re going to be able to emotionally detach from the outcome and attach yourself to the discipline of your process that you can replicate day after day after day.

Hey everybody, it’s Michael Martin. Thanks for being here. I’m a Los Angeles based trader. If there’s one thing I could have told my younger self that it took me years to kind of understand where I would want to outperform 99% of my peer group and kind of make it to the pro ranks, this is never fall in love with the outcome of a probabilistic event, right? It’s so hard to do. I admit, when I was younger, I didn’t have any money. I needed to grow my account very, very quickly, and I wouldn’t throw temper tantrums, but I would certainly get emotionally invested in the outcome because I needed it to happen very badly.

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When you’re trading a system and you know that it has positive expectancy or positive expected value, and you can stick to your discipline, the best thing that you can do is enter your stops and follow your rules day after day after day. Because even if you go into a drawdown, rest assured that if you follow a system with very simple rules that has a positive expectancy, it’s only a matter of time before you make the money that you want. I’m going to say that again. If you’re following a set of rules that has positive expected value, your goal is to take every attempt. You can’t sit there and try to figure out which one to take, which one not to trade. That’s why I try to say simplify things, focus on one strategy, and then have the discipline and the emotional fortitude to just replicate that trade day after day after day, across many, many instruments.
If you’re looking at one particular instrument, you might become emotionally invested in needing to make it with that particular instrument and force yourself into traits that you really have no business being in because you have to find something that fits on that particular instrument, contract number of shares, what have you. So man, and it wasn’t like I had anger issues at all. I’ve always been kind of even keeled. I like to have fun joke around, but internally with my inner voice, I would chew myself apart. How could you be such an idiot? How come you’re taking profits too early? I never really negotiated with my stops. I would test to see if my intuitive strengths were there or not at times. Most of the times they weren’t. So I really honored my stops, that’s for sure. But man, by not getting my hopes up, how many times you hear that when you were a kid, don’t get your hopes up.
Santa might not bring you this and that. By not getting my hope, hope, let me say it again in English, without getting my hopes up on any one particular trade, I learned to just take everything in stride. And then I became much more even keeled about my trading because I was like, look, tomorrow’s another day. The best thing I can do is follow my setups, put my trades on, or sometimes I had systematized rules for certain CTA programs that I was running. I can get into that a little bit later if you’d like, but follow my setups, follow my rules, and just realize that we’re dealing with probabilities and on any given day, anything can happen. The thing that I have to do, and this also helps your outperformance, is if your peer group or your cohort are renegotiating their stops or adjusting them down, when the move is coming against them, there’s a higher probability that they’re going to lose money.
The best trades tend to start making you money right away. So if you’re able to take losses quicker, then when your system hits, meaning it’s amenable with what the market’s showing you, you have less that you have to earn back to get back to your previous high watermark or your breakeven, right? In other words, what you don’t lose, you don’t have to make back and you get to profitability. That’s really how you get to superior performance. So in that, keep your stops in, make sure you honor your stops, but just take it one day at a time. The winners will come. I promise you that the winning streaks will come and you’ll be like, I don’t even know what the hell I’m doing. Not in the sense that you don’t know what you’re doing, but I’m not doing anything differently than I did two months ago when I was in a 5% drawdown and now all of a sudden I’m up 17%.
That’s how it happens. But here’s the key. If you start to negotiate with yourself and be lazy on your stops and not keep your discipline, that’s when you can get into substantial drawdowns and that can really hurt you on your performance, and that’s when you find yourself down 25%, 35%, and that’s kind of hard. Now you need to see a big number on the upside to get back to breakeven. A few other things is consistent position sizing. I know that there are, in the shorter term space with scalping and day trading, swing trading, there’s lots of colorful language that people use in, here’s my scalp unit, here’s my swing unit, here’s my day trading unit, and without any proper training, and if you’re doing it yourself, I, I would really cut all that crap out and focus on one thing. What are you really good at?
Even if it’s just a hunch at the beginning, focus on one thing if you’re trying to do too much, this also can feed into you becoming like I’m emotionally invested in the outcome of the trade, and that leads to frustration. Without a proper process to deal with that frustration. Maybe because you have expectations about how things should go, that’s when you can start to get into trouble and start doing stupid things with your money, right? Frustration leads you to not have discipline to want to revenge trade. They want to renegotiate your stops, and that in most cases makes things worse. At least it was for me. So don’t become emotionally invested in the outcome of any one particular trade. Tomorrow is another day. Your goal is to be able to make this a marathon and be able to come back and play tomorrow. You don’t want to blow up and get into a spot where you’re despondent because you’re in a 40% drawdown because you thought

You were going to play He-Man with the market. That will always work against you. Very, very few people can do that, and if they get away with it, it’s lucky, and then it’s actually bad because it teaches them what to do. But if you don’t get your hopes up, it helps you focus on your process. Then you just take every other trade in, every signal, I should say, every setup, whatever it is that you’re using, chart pattern set up, mechanical set genome trading rules, you’re kind of placated. You’re like, okay, let’s see what the market does today. The best thing I could do is stick to my discipline and put the trades on. If I don’t go on tilt, that’s a good thing. So I don’t want to think about the outcome and start daydreaming about how great life can be. That’ll all be there in terms of your having a goal and you’re kind of coming into having a vision for yourself, but the vision of how you want your life to be different in the upcoming year is going to come from your constant or your consistent behavior day after day after day.

Hi, I am Michael Martin. Thanks for being here. I’m a Los Angeles based commodities and equities trader who sometimes trades options. Today I want to talk about what happens when you have a small account and what is the best way to grow a small account. I got news for you. It isn’t scalping and it’s not going to be day trading. The best way to do it is to buy bigger positions and hold them overnight over the weekend. Now, I know you’re fully yeah, buts, but I don’t want to hear ’em because unless you’ve actually lived through gaps overnight, you’ve got nothing to say about it. You can only speak from experience, and unless you’ve experienced, you don’t know how you feel about it, you’re fearing things that you haven’t experienced. How do I know I’ve been there. I’ve been a broke ass bitch. And again, I wanted to make money that was going to change my life because my overhead at the time when I was coming out of school and I first went to Wall Street was large. I had at least $1,000 a month for rent. I had $1,000 a month going back to student loans, and I felt like I was working for everybody but me. And so I was very, very hyper-aware of that and this kind of stuff that went into the stuff I journaled about because I kept track of like, okay, if I want to make big money, I have to have big dreams, but then I have to have my behavior parallel with my belief system.

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So come to think about it again, I was lucky in that the expense of executing trades when I was younger was insanely difficult. I’d have to pay 25 cents minimum, and this is besides the bid ask spread, alright, to get long and then it would cost me another 25 cents to get out. So you’re looking at 50 cents commission, alright, round turn, nevermind the bid ask spread, which on a good day, it might’ve been an eighth, it was probably at least a quarter. So luckily for me, the expenses were too high to try to move money very fast. So that was a good thing that forced me to be highly, highly selective to wait for the perfect setups. Yes, I did miss a few. I probably missed a lot over the years, but I had to wait for those asymmetric situations. And then what I did was, and again, you’ll have to figure out if this is good for you, if you speak with your financial advisor, because the way I traded was very, very aggressive.
But to me, trading aggressive wasn’t greed. It was me making a statement and acting intentionally and actually making a bet on myself. That’s how I differentiated it. So I would say take my $5k and I’d break it up four ways. So I’d have say $1,250, I guess is the first quarter. Put that to work. If I started making money, I would add and buy more, so then I’d have half my money in one particular name. But then when you think about it, if that particular name, say it’s a $10 stock and it goes to $11, and I’ve just made 10%, that 10% is 5% of my account balance. I was already thinking about I needed 50% to 100% rate of return for this to make sense for me after commissions. So I wasn’t going to make that money by whipping capital around and keeping my money in motion. That’s a theory out there, but it’s not one that’s foolproof and it’s not the only theory out there. You can make a lot of money by buying stuff and keeping it. Risk is good if you’re in strongly trending markets. Those to me, those are what I would call good risks. Trying to find names or trade around patterns where there’s nothing significant going on in terms of highs or lows is more random, more noise. And I refute the idea that you can kind of predict how much you could lose in two seconds in 35 years. I’ve seen markets jump insanely fast while I was in trades while I was sitting on top of the computer. And so this whole, you can act like a market maker thing. It might make sense if you were from that type of environment and you learned those skills, but without any type of trading training, excuse me, you’re a fish out of water.
So then if I could stick for the name to grow, say 20%, $10, stock goes to $12 or $20 stock goes to $24, which is reasonable, it’s not that unreasonable to think that you could see that over a couple of weeks. Now you’re up 20% on $2,500 and your account balance is up 10%. So I knew about diversification and I knew that I took bigger risks. I also knew that if you looked at how diversification reduces risks, those risks are what the unsystematic risk, the market risk is always going to be there. And having studied finance and economics at a pretty good school, I knew what the chart looked like and I knew, I think the number was six right after six names in your portfolio, the incremental benefit from further diversification is very, very small. So there’s an optimum number for you, and I know I’m not the only person.
I certainly didn’t invent this. I kind of came through it just through lots of trial and error in that. If you can think about taking your money and breaking it into four or five parts, that’s really all you need. And you don’t even need to use margin. You should only use margin since we’re on the subject, when you know can make money with cash, if you can’t, if you’re not profitable, just trading cash on cash, then don’t borrow money. Don’t worry about four times your capital and day trading, buying power. It’s not going to help you trade better. You should be able to master your skillset, risking $50 and learn your craft. Then you can scale.

So I really just knew how to handle the risks. I knew where to put my stops. I had a keen eye for that kind of stuff. I certainly made tons of mistakes, but my goal was to accelerate the growth and make monster gains, which is actually easier to do with a smaller account. Case in point, you’ve got $10k, you could turn that into $50k, I think a lot easier than you could take $10 million and turn it into $50 million. There’s people who probably debate me. Yeah, but Mike, I got this money from as a bequest, my uncle left me the money. So I’m very personally attached to it. Okay, well good on your uncle for leaving your money or whoever the parent or the relative was, but what do you think they would want you to do with that money? Do they want you trading at all? Because if you’re going to trade it, you should trade it.
If you’re not going to trade it, then put it into the bank and buy treasuries or something like that, but don’t take financial risk. Then I knew exactly what I want my money to do for me and making, like I said in other episodes, making 12%, which is what the total return on the s and p was at the time, wasn’t going to mean anything to me. 401k stuff, yes, that’s fine, but $5,000 going to $5,600 at the end of the year, it wasn’t going to move the needle when I had overhead that was going to knock out the Bronx Zoo at the time. So two, keep in mind I was also trading commodity futures. Now, the futures margins, the E-mini didn’t exist at the time. It was still the big daddy, which was $500 a point with $40,000 worth of margin. So it was an institutional product, you couldn’t trade it.
But everything gold was like $250 the ounce. Corn was $2, maybe $1.50 per bushel. Everything was lower, which means when it had lower volatility as a percentage of its base price, so the margins were lower. So I could look and say, okay, find me the best stock, be highly selective. Start with a $1,250 investment. Didn’t matter if it was a round lot or not, I was looking for percentage growth. If it’s working, buy more of the same thing, build into a position. I know where to put my stop. I can reinvest my gains into my stop and know where to get out, break even. I knew what was in it for me, but then the futures margin, I still had $2,500 there that I could use to deploy. Now today, they have what is the margin during the day versus what’s it overnight? I don’t know all that stuff, so I can’t speak to it. I don’t pay attention to it. But there’s still a way to do it with the right instrument. You might not be able to do it with your favorite instrument, but you might be able to find another instrument where you can. And that’s where you have to be promiscuous and very open-minded in your thinking because the goal is to grow your money, right? It’s not to be the biggest orange juice trader on the face of the earth.

That might be incidental. If you could do it that way, great. It’s very thinly traded, but you can go knock yourself out. And so same thing with anything of the cryptos. That might be the foray that got you excited about trading, but ultimately you get paid for taking risk. And if you’re in good risks, those good risks are going to reward you overnight and over the weekend. And that was the key to my success. It wasn’t making 50 cents in a day because by the time all the commissions and everything were done, there was no money in it at the end of the day. So I would advocate starting small. Why? Well, by putting only $1,250 to work when the thing didn’t work against me, I was able to get out quickly. I think if you’re going to plunge and put on your optimal size all at once, there could be ego there for sure, but you’re also opening yourself up to bad luck and bad timing.
And I didn’t want to lose money from bad luck and bad timing. I wanted to have good analysis and good luck and good timing. So I waited till I thought I could get all of those three to line up. And based on yesterday’s episode, you can go back and watch Mastering your own Trader psychology. This is the kind of stuff that I looked at. Where have I seen good timing before from my past behavior? What was my thought process that I used to put myself in the right place at the right time? You see what I’m saying? So it goes against the grain. Everyone feels there’s some kind of boogeyman overnight, and you could lose everything. If you’re afraid of doing that. In my humbled opinion, you shouldn’t be trading, right? Because if you’re going to sit around and make nickels and dimes, it’s going to take you forever to grow your money.
So yes, if you want the emotional wins, keep doing what you’re doing. I didn’t want to make peanuts. It wasn’t going to for the time that I had to put into it. It wasn’t worth the time that I was getting out of it. And even then, minimum wage was whatever, four or five bucks an hour. So I didn’t want minimum wage money for doing this type of job. I knew that I had to grow my money and accelerate it and make geometric returns, something that I’m very, very aware of. I know how to do it. And that was always my mindset and my approach. That was my overall ethos was how do I find asymmetric returns and how can I make more and more money from doing less work? Right? Pareto Efficiency. So when you think about this for yourself, really challenge the way you think.
Who taught you what to think and why do you believe it? If you have an experience that’s faith, right? What are we? But for our faith, why do you have faith in these statements when you’ve never experienced it yourself? How do you know that every overnight loss is going to be crippling or put you out of business, just not the case. That’s not my experience. Yes, there have been times probably like I was in Mad Cow, I was long feeder cattle when Mad Cow hit the tape. It was locked limit down five days in a row. I couldn’t get out of the position, but I had the position sized properly so that, yeah, it hurt me. But what does that mean financially, right? A couple of percentage points, 3%, it’s not going to kill you. It thickens your skin. It helps you understand the nature of how you take risk. I’m not saying go out and roll the dice. You have to have a process with which you’re compatible for sure. It’s not dart throwing despite what the Wall Street Journal thinks they can do with your money. Nobody with any type of even below average intelligence would run money that way. So it’s kind of cute from an entertainment standpoint, but it’s pretty stupid from a practical standpoint.
And that’s the way I did it. If you want to get used to scalping, that’s great, but I wouldn’t, to me, it’s like if you’re going to trade, you might as well put on your full risk unit. Don’t want to. If I’m normally trading 100 contracts, why do I want to put on 10? What’s the joy in that? Is that for the emotional win? I don’t believe in doing countertrend stuff. I don’t fade bull moves in uptrend markets, trying to be cute with stuff. I don’t think you should either. I know there are people who do it, but to me, I’d rather wait for the trend than just make, there’s no easy money. But with the wind at your back, you can make a lot of money. I made money when I started out and I didn’t even fully understand why I was making the money I was making, and I had a really good education.
I just had a knack for putting myself in the right place at the right time. And as my good friend, Jared Dillian would tell you, I always had a knack of knowing when to leave the party before the first beer bottle started getting smashed against the wall. And so maybe I’m lucky in that I was born with good timing, but I wouldn’t have known that unless I was willing to take the risks. And taking good financial risks I think are going to make you feel uncomfortable. They’re going to make you feel uncomfortable, and getting comfortable, being uncomfortable is probably a good thing. I felt it through all the stages of my life. I was over 50 years old walking onto the mats in Juujitsu as a white belt. I didn’t know anything. I didn’t know anything. It was really scary. It turned out to be a really great decision for me, but at the beginning, it certainly didn’t feel that way. That’s for damn sure.
So this is how I want you to start to think about things is don’t do this for peanuts because you’re always going to have a chance for loss. There’s always going to be something that could happen, even if it’s during the day, even if you’re looking at one minute bars, even if you have eight monitors around you, you could still always lose more money than you ever dreamed of being on top of the screen with a headset on. And a fast gamer’s mouse gives you a false sense of security. So find good risks. Keep those risks in your portfolio. The market will tell you when the move is over, right? They’re called reversals.