Hi everybody. Michael Martin. Thanks for being here. So question came in about how did I analyze the data right from Monday’s episode about my being wrong and then figuring out the wrongness was because I was early to a trade that eventually worked out, right? I say early means wrong because I don’t know at that moment in time if the name’s going to go up. So the best I can do is manage risk in the here and the now. I don’t get to manage risk using what I think is going to happen next week. I have to look at largely the price right now, you see? But so then the analysis comes down. Yes, I kept very accurate records, but you can also think about it from base theory, more conditional probabilities. What’s the probability of event B? If we can observe the probability of event A, so I knew what my overall losing percentage was, and I don’t have positions that jump through stops and this and that.
So my largest loss and my average loss are the same thing. Why was because you take them religiously. So there wouldn’t be, if I was risking two bucks, I wouldn’t have a $10 loser. I would just stop everything at two bucks. And so that’s both your biggest loss and your average loss. And so you want to watch that in your own behavior and see if you break your rules, does it tend to benefit you? Because in the short run, it might feel good emotionally to take that risk to try to earn your money back. It’s typically something people do at the wrong time when they’re losing money. The time to trade bigger, or maybe more frequently is when you’re in a crazy winning streak because then the market is saying, we are absolutely amenable to your trading style. Again, the emotional benefit of trading smaller at the beginning for me was that if I got stopped out on any one particular day, it wasn’t a big deal. And it doesn’t mean I don’t care about the money, especially when it’s other people’s money, but I would rather lose less money much more frequently, right, than lose a lot of money as frequently. So you can look at conditional probabilities and say, again, it helps to do it with a simulator. If you’re good with spreadsheets, then by all means, but you can think of again, what they consider conditional probabilities. It’s in the world of statistics, but it doesn’t get beyond say, using algebra, which I presume most of.
Again, what is the probability of event B happening, right? Given the known probability of event A, which you can observe. So the event A for me was trading and using my optimal position size on the initial entry, I found out that yes, I could make money, but then I have to conjugate a few other things. I am going to have a larger drawdown, both in magnitude and
Duration to recover. So I’m saying, okay, finances can be defined many, many ways. Applied microeconomics, you could say it’s the time value of money. If I’m going to see a 50% mover, I don’t want to see that if I’m trading 70 cent dollars. Do you see what I’m saying? I would rather start and have close to my highest equity point to see that move if I’m in a big draw down and then the move comes in, right? I talked about what happens in, if you sold a house for half a million dollars and you put the money to work on October 1st, 1987 versus it clearing escrow on November 1st, 87, it’s the same trade that’s the same liquidity, but there was a big event that happened in between, and that’s a 28 whatever percent haircut on your capital if you were just doing the market stuff, at least by the Dow.
So you don’t have to go berserk on the math, but you do have to analyze your own behavior. If you want some private stuff, then shoot over an email. But please just ask one question. I don’t need the backstory, just ask the question. If I need more information, I’ll ask you. But when you send me a block of email with no spaces and stuff like that to be, I’m telling you now it’s tldr, I’m not going to read it. I don’t have the time for it. Because in order to understand the backstory, you’re kind of making the miss miss the assumption that I need all the background to understand what your issue is today, which typically means you’re dealing with some form of regret.
How do I know I’ve been there? So I don’t need the reasons why you feel regret. I just need you to answer the question. If I need more context, I’ll get it from you, but you can shoot that over because studying your own behavior to me is the quickest way to get to success because only why you do stuff the way that you do it. That’s alpha. You just want alpha to be positive though, not negative. So by all means, think about conditional probabilities. Think about the emotional payoffs. How could you trade maybe and make as much money but doing it slightly differently than you’re doing it today? For me, that meant cutting my initial position sizes to a point where I could afford to be early and wrong in the way I look at that word and still have some of those trades come back and work and work out for me as opposed to being super prudent.
Kudos to me for getting stopped out. Granted was in a big drawdown, but it could have been much worse if I didn’t stop it. You see, if I didn’t stop my equity at that point. So be kind to yourself and learn from yourself because it’s improvement, it’s progress, not perfection. And in trading, I don’t know too many people that didn’t have to go through the rigmaroles of paying some form of tuition. And it’s not just financial, it’s emotional tuition. Cause you don’t know what you’re doing that makes you feel insecure. That could hit your self-esteem, at least it did for me. And so you have persistence and determination and, and to me, when you add persistence and determination, what you’re really speaking about is a person’s resiliency, attitude, and resiliency, right? Resiliency. If you don’t have it, you get pissy because you’re losing money. You can really shut yourself down and end up.
You don’t want to be your own worst enemy is what I’m trying to say at the end of the day. So you can study your own behavior and see what works for you. Otherwise, market’s hard enough. You don’t want to beat yourself up, take your punches from the market because guess what? You don’t have a choice. So it appreciate, again, the questions. They’re all pretty good. They get me thinking on things of where, especially on the margin to equity one, there was a time where I thought that was actually much more material. And it happens a lot when you’re speaking with institutional allocators. They’re like, what’s your daily? What’s your margin to equity? And I personally think that’s a stupid metric. Daily vol might matter because they’re looking at you as maybe one of many, many traders that they have or portfolio managers in their stall or at their horse ranch, so to speak.
So they need to make sure that everyone plays nice in the sandbox and that they’re not actually adding extra risk by adding you among the people that they allocate to. So that might make sense, but again, if someone starts talking margin to equity rules, it doesn’t really make a lot of sense. You really have to look at the results and you have to look at drawdowns. Anyway, please like and subscribe. I’ll keep trying to come up with good stuff that meets your needs that’s also very timely based on what’s going on in the market. And I’ll absolutely respond to all the questions that you send via email or through the comments themselves. Thanks for being here, folks. I’ll see you tomorrow.

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Everybody, it’s Michael Martin. Thanks for being here. Most of the time I’m doing these daily five to 10 minute monologues. Sometimes one day gets a little longer than the other, but I try to keep it short and sweet, make my point and be done. As I like to say, if I can’t say it in five minutes, I can’t really say it. Very rarely do I interview folks just because I way of doing stuff, and this is kind of a bit of a niche, and I don’t think you need to have a lot of discussion about the psychology or the emotional intelligence around trading. But every now and then I have a guest on, and that’s going to be the case today because he’s just written a great book. 

The problem with trading books anymore is I feel like they’re an amalgamation of things that have already been said and someone’s kind of putting their take or their understanding. And I’ve written a book, right? It’s hard to, it’s easy to write. It’s very, very hard to write well. I’m going to let the public figure out whether or not my book is well written or not. It’s not for me to say I wrote the book I wanted to write, but having said that, there’s some new work and I want to have the author on – Brian Shannon. But before I get there, I want to stick to this other point real quick, and that is a lot of the trading books today kind of take what’s already out there and they kind of reword what’s already there. So there’s not a lot that’s new, and so it makes reading trading books for me anyway, not all that great. I got Trader Vic’s book “Methods of a Wall St Master.” Victor’s a good friend and partner of mine. I have Chester Keltner’s book, “How to Make Money in Commodities,” cheesy Title notwithstanding.

There’s a great book on the evolution of Keltner channels and this and that. I have Edwards & Magee, so I have a lot of great books and I think over time it might be too easy to say, but my good friend Brian Shannon just wrote a book on Anchored VWAP and I think it’s great. It’s a great book. It’s a book that you can have as a reference book to understand what anchored VWAP is, but it’s also a playbook in that there are at least nine strategies in there on how you can take VWAP and kind of use it in your own trading. Now there’s probably a hundred ways you can use it. He discusses nine. We’re going to talk about those today. Stay tuned. Here’s Brian Shannon.

Hey everybody, welcome to this show. We’ve got my good friend here, Brian Shannon, who I was trying to think, I must known Brian for about 20 years. I know we met in Malibu at Near Pierce Brosnan’s house near, yeah, way past Zuma Beach, way back when. And then I know I saw you because I had to admire your work. And I think I ran into you at an event where either you were speaking or we were both speaking or we were speaking, but on different days. And I remember going up and saying hi to you. 

Folks, today we’re celebrating Brian’s new book. And I do mean celebrate because this thing, as I mentioned in the intro, is ass-kicking. I think, as I mentioned, if you’re a newer person and you’re looking to try to figure out where is your edge anchored VWAP is a great place to start because it really tells you who cares and at what prices. Brian, congratulations on this great book. It’s your second book. I have the other one too somewhere. It’s in my bookshelf.

So yeah, thank you.

Please go buy this book. It’s the best $60 you can spend. And we’re going to talk a little bit about it today. There’s a lot in it. It’s very pithy, but man, congratulations. I know you’re getting a lot of good press and from people who know, know the difference too. It’s not just these books on technical analysis where man, people send me review copies and it’s like, okay, I saw this in Edwards Magee. I saw this in Chester Keltner’s original book. I saw this in Welles Wilder’s original book, or I saw it in Bella’s book The Playbook. So this is all original thought, man. So that’s kudos to you because it’s really hard to do. It’s very well written.

Thank you, Michael. That means a lot coming from you, especially, I mean your stuff. And I knew when I sat down with you today that we’re going to, I don’t know what we’re going to talk about yet because we haven’t discussed that, but I know it’s going to be thought provoking because when you dig into it, you dig into it and I know that you’ve read it and that means a lot.

Yeah, this thing is dog-eared to the max. I got, I’ll have to get another copy to actually hold because this thing is beat to crap already. There’s so much in here, folks. It’s almost like where do you start? But the point being is, and I mentioned this in my blurb, here’s another thing about this book. There are more people who have written blurbs in terms of the total pages than there is the index. To give you an idea of what high regard people hold Brian and his work, and I’m not even exaggerating the who’s, there’s a, who’s who of people who know their crap and have stepped up. So in my comment, I said, “institutions leave footprints,”right? And that’s one thing that a mutual friend of ours, Scott Kaminski had taught me way back from when he was at Tudor, and he’s like, small speculators, of course they matter.

They’re important people, but it’s the institutions who can really push things around. Especially in the equity space. In futures, it’s a little different because the cash market drives futures. But in the equity space, there’s only one instrument of Tesla. It’s not like natural gas where you’ve got 20 years of depth on the calendar. So this strategy, there’s se, there’s several trading strategies in here, but what it does is it marries price and time. So Brian, I’m not going to hamhock my way through it because I know what it feels like, but tell everybody why it’s important to marry price with the volume,

Price, volume and time actually too, because timeframe is different for everyone. I might use it for swing trades, but it’s also very applicable to the one minute scalper where you can anchor from the 10:35 AM low for the S&P for the SPY, and then anchor it from the 11:27 high and find value in it. Really, it’s amazing how well it works, how accurate the support and resistance levels are. I don’t like to use them to be a place to blindly buy, but as a level of interest, if you draw the anchor anchored VWAP in the correct places, you’re going to find it to be amazing in terms of where the supply and demand is. It’s simply, and that’s what it is, it’s a representation of supply and demand from any start point. And it tells you with 100% accuracy, who’s in control? The buyers are sellers and no other oscillator or indicator that I’m aware of can do that.

And folks, if I had to go back in my painful 35 years, some are more painful than others. And even to this day, you know, don’t get ’em, right. Yeah, you absolutely want to know who’s control of the instrument buyer or seller, because if one of these people who want to buy value and get the baker’s dozen and buybacks will make sure how you have a plan for that as opposed to a hunch. Human beings, and you could read this in simple heuristics that make us smart people suck at predictions. So no matter how smart you think you might be, and I have amazing intuition, nothing is more powerful than looking at this because like I said, institutions leave footprints. And by using anchored VWAP, the way I looked at it and it was just hit me last night, I was rereading the book just to fill my brain before I go to sleep. It’s forced objectivity…

And it, it’s a hundred percent objective too. And I mean, the only subjectivity comes from where do you set your anchor? Yes. And if you follow some guidelines there, it’s really not that difficult. We want to measure who’s in control from the Federal Reserve report announcement. Yes. Who’s in control from the earnings report from whatever that gap was that occurred three days ago? Yes sir. Who’s in control? Are they defending that level or is it being rejected? That tells us something really important about the unfolding psychology of that market.

And anyone who’s watched this show, first of all, if you’re watching my show, thanks for being here. Psychology really runs everything. I know that technical analysis and having CMTs and CFAs, I always celebrate that level of intelligence because it puts you in the upper echelon. But at the end of the day, and today we’re still mourning the death of Michael Marcus, a mentor of mine. The thing that he pointed out to me is like, you can no support and resistance and all this stuff, but you have to anticipate how the crowd’s going to act. 

It’s crowd behavior, fear and greed and everything in between. You have to answer the question, what would these people do at certain key inflection points? Anchored VWAP gives you a, I’m a visual learner, so it absolutely would give me a visual indication of who cares at what price. And that’s important because I don’t want to be on the wrong side of the trade. Why? Well, because most of what we do is highly levered. And so when things get ugly, they go from like, eh, not so great to ugly very, very quickly. And so what I have found just in the short time that I’ve read this book is I’m looking at it and applying it to my own models, which I’ve evolved over decades and seeing how I can exact a little bit more of an edge. Because even if I can pull out an extra 20 basis points, when you do that with leverage and then compound, it could mean a big deal.

We’ve mentioned, or I might have mentioned in my remarks, the art and science of the technical analysis. Now the equation for calculating this is not, it’s publicly available, no different than trying to calculate the numbers for the day’s range that goes into the average true range. But picking the anchor is really the art of it all. Now you can use news, you can use price gaps, you can use high volume days, you can do earnings. So you do have to go in there and kind of massage what you’re looking at almost on a chart by chart basis. In terms of volume, what I, I’m going to show, we have a few slides I’m going to show eventually when we get into it. I used a 20 day simple moving average on volume and I looked for stuff that was more than 1.5 times that number. These were 4x. So we will hit the standard. Now again, Brian, you mentioned in this book, cause I didn’t have time to do all of them, but there are nine different ways that people can use anchored VWAP as a trade setup.

Yeah, I mean there’s probably a hundred of them, truthfully, Michael. And yeah, this was just to get people going in the right direction. The most important part is just simple support and resistance, a level of interest. And then it comes down to where do we anchor from to see if that level does in fact hold us support or as resistance. And then when we can combine it with fundamentals as well, an earnings report, it all goes back to, like you said, the psychology. It’s the psychology of what are people doing after that earnings report. But then you look at the earnings report and say, Hey, wow, that’s pretty, they sold how much of this stuff and they made how much money? Well, I look at that and I look at it kind of the fundamentals that is, I don’t care what the fundamentals are for me personally, but I look at the fundamentals and say, this is going to get growth managers interested in this stock because compared to the other merchandise out there, the other stuff isn’t doing as well on a fundamental basis.

So I know that there’s going to be a potential source of demand from the people who do look at fundamentals. And then I look at the pullback to that anchored v a and I say, well, there’s a potential demand from the people who are buying and they want to combine the technicals and say, I want to buy it this price, this average price since the earnings report. So it is always all about psychology and trying to get into the head of the participants and find the reasons maybe fundamentally, but then where and when with the technicals,

Right? Because then at the end of the day, you might have strong opinions about what the merchandise that the company is selling. You might have strong opinions about the merchandise that’s for sale in the marketplace. But ultimately I have found, yes, when I first started, I had good hunches and good intuition. But here’s the thing, I had no technique. I had really good intuit to, I was a diamond in the rough. I had good intuition about what I thought was going to move, but I didn’t have great risk management. Probably for the first three years, I didn’t have any idea about entries. I didn’t even know what the hell breakout was. Brian, full humility. And so what happens when you’re dealing with traders, somehow we all have to come down and face uncertainty. Really, that’s what it comes down to always. How much are you willing to risk to be in the trade in the first place?

And then when you have winning trades, how much of those unrealized gains are you willing to risk in order to stay in a winning trade? Now, some of you might peel off a third and all this and that. I’m not going to get into that cause that’s a personal preference, but what Brian’s saying is absolute gospel in that you can’t fight the tape, you can’t fight the fed. But when you’re looking at anchored v a p where it takes price, time, and volume all in one snapshot, I think it’s better than almost any other indicator because you can see it all in one snapshot and it’s pretty much black and white. You might feel strong feelings, you might disagree with what you’re seeing, but if you’re just starting out, in my humble opinion, you do that at your own peril. You can’t fight what’s objective and what’s out there.

If you’re marrying this up with MarketSmith and volume and you can see short interest or earnings dates, you can see all this unfold and marry it all together to have one really, really powerful system. You get to see, for example, if you’re bullish on a news report, that might come out as a surprise. Well for one, what’s happening with volume on that particular day? Because if big news but the thing isn’t moving, maybe it’s already priced into the market, not even with the price but with the volume because whoever has the stock is going to hold pat.

Yep.

Earnings. You get to see how material, because listen, if you’re dealing with big, big companies, I had a, we’re going to talk about some short interest. I remember back in the mid 2000s when Netflix, where you were still sending the DVDs in the mail, they were supposed to lose 8 cents and they made three and that stock was heavily shorted and the thing gapped. So then the question is, is the gap going to stick? So you have to use that perhaps as your anchor. 

So Brian, when you are doing all your studies here, I want to talk to you because since this is your material, how hard was it for you? And this might not be the best worded question, but in choosing the anchors, right, because that’s really the art of it. You have to take chances, you have to invite that vulnerability, you have to invite that uncertainty and really kind of pick and choose in a very subjective way as to where to set that anchor.

Do you do it in one particular manner consistently or do you kind of say, well, I’m going to look at a gap on this one. I’m going to look at a high volume day on this one. What would be the best way for say a beginner to look at setting that anchor? Because I think that’s where, in my humble opinion, someone might be a little skittish as to like, okay, I like this, I like the idea, I like the ideology of it, but setting that damn anchor, I’m going to sit here and be like, ready, aim, aim, aim, aim, and never should or get off basically. So where should someone start if they were looking to set the anchor and keep it simple just to get going?

When it comes to trading stocks that I think that most people start out with somewhat of a fundamental background. So earnings reports are really, earnings are what drives prices. At the end of the day, it’s all about future expectations. Is this company going to earn more, therefore the valuation is low today compared to what it might be. So we’re buying the stock today. So I think that when you look at what comes naturally to people and what they’ve been, I might argue brainwashed into thinking about stocks is that it’s all about the fundamentals. If you start with earnings reports, especially the ones that get a strong reaction either up or down, yeah, because sometimes we’ll see that the stock will miss numbers, the stock will gap down, and then that day it kind of is under the daily v WP for half the day, then it surges above it and goes on this incredible tear for the next week or two. That becomes one of the best anchors because it’s something that you’re already familiar with the fundamentals of the earnings report and it gives you the opportunity to look at the stock and say, I don’t have to buy it on day one of the earnings report, but I can wait 3, 4, 6 days, let it settle down a little bit and then see if it’s above the v a. Is it holding from that level or is it just crossing back above and buyers with regained control. So definitely earnings would be the first place to start.

Yeah, because man, when I grew up and stocks were still trading in 8ths, there was the number, then there was the whisper number, and then you’d go out and get other ones research and you’d realize, okay, for all the smart analysts out there, the predictive value of any of this information is zero, right? It’s really informative. It’s really, and they’re very smart people. I’m friends with a lot of those I teach.

I teach them. But here’s the thing, folks, if you miss a day, it’s not the end of the world. Yes, if you’re sitting there watching one minute bars, it might be painful because you kind of missed your moment in that regard. But think of it this way, if there’s a stock and you can go to most of these places and rank the top performing stocks, some of them are up 800%. So guess what? If you bought it at $8 and it went to $16, there’s still a long way to go. Of course you don’t know it’s going to go there, but don’t feel like you missed out or that you have to act impulsively. I think that’s one of the benefits of this book is that it has a built-in pause function in that you can see thing up, see things objectively, one good or one bad day. I know that people say if you missed the 10 best days, this and that, but guess what? Good days and bad days are clustered. So if you were so unlucky to miss the 10 best days of the S&P, chances are you missed eight plus of the down days too. So you have to be super careful. 

Also IPOs…

Absolutely. I’m not an IPO O guy myself, but for example, if you looked at the duress within crypto, you could go back and look to see when Coinbase for example went public and how that’s holding up. You can see any other big inflection points. When did FTX go broke? When did SBF get indicted or arrested? So you can just see those, did those news events have an impact, right? Because you don’t know why people do what they do with their money. No, they say fear and fear and greed, but it’s really the news, especially if these investors don’t have a daily methodical process that you know and I would have day after day, we know, okay, some days this isn’t the right environment to start rolling the dice. There’s a lot of fear pervading we are kind of like every day is unprecedented times, but it’s hard enough to make money in good markets.

This doesn’t seem like it’s a good market. 

If crude’s up $5 today, mind you. So again, this is objective and its dynamic. So you let anchored VWAP do the interpretation for you. This is a great way for as far as I’m, because people always ask me what’s the best indicator, what’s the best indicator? And I’m like price and volume for the most part, but all the other stuff really just confirm what you can already see. And I don’t have that emotional need to see something on my chart that confirms something that I can either see on the chart or even better in my P&L because if I’m in the right trades, they tend to start making money right away. And if not when I’m wrong, it’s usually because I’m early. So I had to cut my position sizes down by 90% because I was getting in with these full risk units and I was getting knocked out and I was in 20% drawdowns just because of bad luck, bad timing.

So I was like, okay, if these names are eventually going to make money, I need to find a way to have more staying power. I got to hunch, and I haven’t proven it yet, but I’m going to come back. Maybe I can have you on a couple months. I’m going to go back and look at my own trading ledger and see if I was able to deploy some of these techniques, how I can improve my own stuff just as a case study because I don’t have all the answers. All I have is my own humble experience.

Well, they’re not all in that book either. Michael is as good as you saying it is. They’re all, the answers aren’t in there, nobody has them all yet. We’re all searching for that elusive edge and me managing risk when we’re wrong because we’re going to get it wrong a lot.

And again, I’m using a lot of leverage and so when I get it wrong, it can be a little bit more painful than it might be for other people. Of course, I don’t recommend that you do things my way. I have also stated on the show that if you have a cash account, call it $50K, doesn’t matter what it is, but you can’t trade, say $10,000 of that cash and get it right. By all means don’t start using leverage. The only time you can start using leverage is when you absolutely know you have a definable edge and you can look back objectively and look at your own trading results and see that whatever it is that you’re doing, even if it’s rolling the dice, that somehow by the grace of God you do have positive expected value based on all your rules. If you don’t have that, that then leverages out of the question. I know.

No, it reminds me, there’s a long ago I read one of Martin Pring’s books and I got the line from him is when you commit your money to the market, like it or not, you commit your emotions as well. And I like to add on to that. If you leverage your money, you’re going to also leverage your emotions and you’re going to find yourself doing really stupid things at the worst times possible and selling when you should be buying more and in the opposite. So leverage, yeah, you’ve got a good handle for it, but a lot of people aren’t. Take a lifetime to get there.

Well minutes seems like hours and hours seem like weeks. So all there, these are hard earned learned lessons. No one has it easy. It took me for people like man, it’s taken me so long, I want to make money. I want to be a trade already. Well it took me four and a half years to figure out my backside from a hole in the ground. So if you’re within that four and a half window and you have even a small amount of respect from what I’ve been able to achieve, you’re right on target, you’re not going, the markets aren’t going anywhere. They will be, as long as issuers need to raise capital, there will always be a secondary market in trading. They’re not going anywhere. So I have a few slides to go over some of the trading techniques. I think Brian says it best so I’m not going to steal his thunder and try to replicate the whole thing.

So I came up with a couple of themes, right, because that’s good. I’m going to share my screen here and go on. There it is. I stole this, this from your site, Brian or your Twitter feed. So I’m kind of sorry but I’m not sorry because I just like the graphic looks very good. Thank you folks. You can get the book at Amazon. I don’t have any financial interest. I don’t use affiliate links because that shows that you’re broke and you need the $4 on the sale. I don’t. 

So the first very simple example here would be Alibaba. It’s in the news any given time for one reason or another. Fundamentally what we’re looking here at the 52 week high, I anchored this one on the big gap and the breakout, you can also trace down and see that the volume was a multiple of the lavender line, which again, just for a footnote or a key so to speak, is a 20 day simple moving average on the closing volume.

So the green bars are up the red or down. This is from Barchart, I just use it because it’s one of the few places that has Anchored VWAP that you can overlay. And so I did the overlay just to create some support and resistance. I know some of you might be using a 20 or a 50 period exponential or simple moving average. But Brian, when you look at this just on this simple example of anchoring to this big breakout on a high volume day, what are your interpretations for the newer trader? How could they use this?

Well, so when I looked at that, Michael, it looks like if I’m looking at this correctly, there’s that other gap four days ago.

Yeah, right

Here. At least both earnings reports.

Yes

They were. They look about three months apart. And then I would say probably that low was an earnings report. If you go back to that big red volume bar, yeah, that was probably another three month ago event. So it looks like it gapped up on that where you have it anchored when it got back below that volume weighted average price and it was a little bit of a battleground there for four or five days right here and then as it broke below and then five days later it rallied up towards the AVWAP and got sold off hard would’ve actually I’d anchor another one from that gap down because that would tell me this.

From that gap lower, that was another significant event, a change in the psychology of the market that the sellers took control. And I would’ve anchored it probably about four or five days later or after it broke down below that day consolidation, I would say that was an important event. So a lot of people say when do you anchor it? Where do you anchor it on the day of a gap? I like to, but I also want to see how it trades around that level as well. So the brilliant, now the new gap from four days ago, that becomes an important level that I want to measure against. One, I want to see that a natural pullback in here. If it could hold above the VWAP that you have drawn in there, that’s great. And then I would want to see maybe it comes down below the anchor from four days ago and then starts to consolidate a little bit and then begins a new move. So this is a new momentum campaign right here. It appears with that huge volume on that gap. So that’s clearly a new level to anchor from.

And so this is where we go into multiple timeframes. If you’re looking at you want to conjugate to make sure that if you’re looking at intraday, five minute bars, 65 minute bars, you want to make sure that there’s an even number of bars and that’s in Brian’s book as well. And then conjugate the trend action among those different intervals because one day trend sure can be powerful, but you put the odds in your favor by looking at multiple timeframes. And that’s Brian’s first book, multiple timeframes. So talk about the importance of looking at anchored VWAP, not just this a daily chart. Yeah, talk about looking at it at intraday levels and even at various intra 30 minute bars, 65 minute bars, stuff like that.

Sure. Let me go ahead and share my screen. Sure Michael. And I’ll pull up a couple different timeframes and we can look at that together. So for Alibaba, here’s our weekly chart, and on this weekly timeframe I’ve got the 10, 20, 30, 40 week moving average. That pink line is the anchored v a from the beginning of 2022. So I just have blue is this year’s anchored VWAP. So I always have the year to date and I keep the prior year on for about the first three to six months of the year. But what’s most important here is the anchored VWAP from this peak. That’s the number one thing I want to look at. So from that large decline, then you’ll say, well, it’s all the way up at one 40 and here we are at 99. That’s not really too helpful. So I want to do what I call the handoff.

The last time that VWAP was touched was right here on this gap lower, and that still doesn’t provide a lot of value. So I’m going to hand it off to this next control point where you saw another big decline. And there you can see that one, this one right here, held resistance there and kind of in there as well. So now if we go down and anchor to this next level, and I’m going to just color that, I’ll color it red so we can see it better. So we’re fighting with that one. So what we’re starting to see is some of these longer term volume weighted average price levels are holding the support, they’re flattening out. And just if we just clear that all up, look at this daily chart, we’re still in a big range, right? If they didn’t scare you out, well then they’re in the wear you out phase. And realistically,

Well said,

Realistically for a larger term, stage two uptrend to begin, we need a higher high like this, right? Yeah, yeah. Otherwise this is a move within this base still. And you could then even look at that and say, well, that could be a shoulder, that could be head, and this could be the bottom of this right shoulder, fine. Sure. So traditionally people want to buy above the neckline. I want to see it go above the neckline if it’s extended pull back test and then buy over here, love it. And then set an anchor to this point because if this is an important low, so we’ll do is we’ll take a look at multiple timeframes. So that’s those drawings on the left are the daily timeframe. So I’m just going to clear that up. And on the right is a 30 minute timeframe. So this is the anchor from that earnings report right there four days ago.

And so far you can see it was defended on day two, it opened at that level and then buyers came in and scooped it up. Now on a short term timeframe, I look at it and say it made a high two days ago. So now what we’re seeing is the range is so far, maybe it’s going to compress between these or pinch. And then if it doesn’t pull back, then as it gets back above here, so this is the average price since that high, if it gets defended from the sellers and then energy gets compressed, well I want to buy here with a stop under here. What I would actually prefer, Michael, is that the stock, because it’s had this big run recently from this low, yeah, I would prefer that the stock kind of does this, pulls back a little shakeout, comes back in and then does that, grabs a lot of stops, brings new short sellers in test this level, and then perhaps we could come up that right side and get back above this anchored view app, which might look like this.

Brilliant. Exactly right. So if you chart on one screen just for a second, what if you can just go to the left screen? Yeah, yeah. So folks, if you’re looking at this chart here, I don’t know if you can see my cursor, but if you look where Brian, if in the far left top left corner you can see the numbers come down from say 300 and now it’s down below 100, it’s come back two thirds. So some of you write me and say, you know, hate the feeling of missing winning trades. So you have to operationally define what that means, like a winning trade. I figure if you got into this trade on the breakout and made even $10, but then we’re in the sidelines only to watch it recapture the highs of 300, I’d say that that’s not a good trade because you left the majority of money on the table.

And if you’re newer and you want those, see remember there’s two payoffs to every trade. There’s the financial P&L, but then there’s the emotional P&L. If you miss where Brian’s drawn the neckline here at one 20 to one 30 and it goes, you catch the breakout say where he was saying after it does a little breakout and creates some stages, call it circa 140. Yes, exactly. He had the last time. If it goes from one 30 back to 300 or one 40 to 300, what’s the difference? And the answer is ret, it’s there is no difference. So you can’t worry about a $2 move, $2. 

Again, if you’re new to trading, it might be an emotional win for you, but it’s not. When you’re looking at the chart of Alibaba that Brian has here, if you’re in a winning trade, then by all means keep some of the good risk on. And so it gives you some context here that when you miss a trade or an entry, you’re never really out of the trade because if the campaign is more meaningful, there’s plenty of times to get on board. Anchored VWAP is a great spot to look and see where that spot is and it’s objective, which is great because it doesn’t make you have to sit there and have to make a decision when you don’t have any experience.

That’s something interesting there too, Michael, I didn’t mean to interrupt you, but you know it from the beginning of its IPO, the anchored VWAP had been important as support and resistance for the first couple weeks. Then as support, then resistance. And we saw the same thing. We saw a shoulder, a head, and a shoulder over here and it broke above that VWAP from the IPO, it came back and tested it, held perfect support at that and a multi-year rally. Now if you look at the anchored VWAP from the IPO, it comes in exactly as the same place as the anchored VWAP from the all time high. So what I just drew in unintentionally is probably where if we saw a real big rally, it would find supply and see that pullback and that pullback would likely come down to the anchored VWAP from this low, which might end up looking something like this if I can draw it properly, something like this.

So would then again, kind of pinch between those and then buy as the, a lot of people want to buy the breakout right here. I want to buy the resurgence of momentum right here where I can see the higher high on a shorter term timeframe and sell some to the breakout chasers. That’s the way I like to look at it. Buy some in here and sell some at this point, right? So anyways, that certainly looks like it’s going to be an inflection level, 144 if it can. That’s a long ways away from here. That’s a great trade-in and of itself.

But this is the beauty when you’re trying to play Columbo or detective as to where things could happen on the chart, you put up the indicator like this and again, it gives you information, it gives you data that you wouldn’t see certainly on any of the financial channels and you probably wouldn’t see unless you’re following alpha trends, for example, on stock Twitter or Twitter for example. Or you get Brian’s end of the day note that he does. So this is all very powerful stuff because now part of a traitor’s job is to have a sense of imagination. You have to have a sense of anticipation. So all this stuff could at the same time get you slightly excited about maybe putting this name on your wishlist, but also give you a moment of pause that you don’t want to get ahead of yourself. Because again, it’s hard enough to make money in good markets.

I don’t feel we’re in a good market. Two, I admit that you only need three or four markets in a year to make your year right. You’re not talking about diversification here, we’re not talking about buying the s and p, we’re talking about being able to find a couple of good moves that you could have a solid position in to make all your money. That might happen for some of you. But I like this. I like idea though that it forces you to be objective and that it forces you to take a moment of pause because this isn’t randomness, this is longer term stuff you’re looking at. Again, generally speaking, shorter term timeframes, the data is much more random than when you’re looking at a longer time series. Now, we could spend four hours talking about randomness because it’s all around us, but sooner or later you’re going to have to develop a trading edge.

And if you don’t have a trade point in putting on risk, unless again you want the action, action means I want the emotional feedback from the market or the potential to make money. This is objective in that it can give you that moment of pause. If you’re at a stage in your career where you lack discipline, you lack discipline, and you don’t have a trading edge in this type of an environment, just go be a philanthropist and give your money to a schul at church because at least you can direct where you want it to go. It’s too easy to lose money. This is excellent an analysis as far as I’m concerned, I Can I take back the screen? 

Okay, boom. So let me go my zoom go. There it is. Share the screen. We’re going to go move on to the next one. So thank you for that because you took the id an idea, a starting point and really evolved it, which is kind of exactly what I wanted. Now we’re looking at one that’s always in the news Tesla. And what I did hear is I did actually anchor the last four earnings reports. Oh, nice. Now Brian, what’s that?

Nice. I like it.

And so again, I stole this, this from Brian. I didn’t come up with this. This was one of the, that he mentions in the book. And so I anchored the last four because people have strong opinions about Elon Musk, which I think cloud’s judgment,

But in both ways.

Exactly right. He’s a polarizing figure, right? Yeah. So you have a polarizing CEO who can’t stay off Twitter. You have a company that’s in an exciting field. We always have fossil fuel arguments. You have the convenience of electrically charged vehicles, but if you don’t have your own charging station, it is a pain in the as at best. So what I did here is I went back to Market Smith and I learned, I looked and saw when were the earnings reports. And so I anchored on all of these earnings reports. The last four, I colored them differently. They also happen to have high inflection points. When you look again, this lavender line is a 2020 day simple moving average on the volume. 

And as Brian suggests in the book, if you’re looking at volume as being a place to set the anchor, you want to think about 1.5 times. So the green bar or the red bar, right? Because either one, you’d want to see that this be one point minimum, 1.5 times where the lavender line is. But nonetheless, what I like about looking here is that we call into sharp relief in a very visual way. Something that Brian referred to in the book called The Pinch. And the Pinch is kind of where the price set of the instrument in candles settles between two different anchors. Is that right? Would that be a fair way of saying it?

Yep.

So interestingly enough, the earnings-anchored VWAP from a year ago is the solid blue line, and this is through last night. Cause I wanted the charts to be as recent as possible, but not so recent that I put the whole thing at risk because I didn’t have the charts ready. So I like to be prepared like a day or two in advance. So let’s talk about the pinch here, Brian, because you can see there’s a couple of spots here. Without getting confused, I have a sense that you’ll do a better job of describing what’s going on with the pinch and the width of the pinch lines.

Yeah, that’s key is the width. So what we’re looking at is there’s really kind of introduced this or expanded it to a lot of people is from contraction comes expansion when you have that compression of energy that the stock is resting after a large move and it’s building energy for the next move. Maybe we’ve attracted a lot of short sellers who think, hey, the stock’s up from a hundred, the low this year it’s doubled. I’m going to short this thing. So it brings in a lot of short sellers. Other people are maybe some long sellers are getting out and giving it to other longs, new longs in here. So what we see is a compression of the energy, the volume is building. 

I’d really like to see it get a little bit more compressed and pull back maybe towards that middle line where the red and the green from last quarter and three quarters ago are. But it’s really amazing when you look at that blue line look at first how it acted as resistance the whole way down. And then we saw some higher lows in June last summer and then it poked up into that anchored. And then as it got above it, the buyers took control ahead of the earrings report and then the next one, it broke down below it and it, it’s just amazing to see how these levels, so that orange one from two quarters ago, that call to the pullback. What I’d also like to show you, Michael, is if I could take the screen here too, is expand on this even a little bit further with the idea of the pinch from highs and lows. So that’s something that we can easily anchor to different earnings reports. Sounds good. Here I’ve got a 20 and a 50 day moving average.

That’s great. They’re right next to each other. The twenties starting to curl back up the 200 day moving averages above the high last year March is right there. And that was perfect twice, maybe three times after it had been support previously and then resistance as well. And now we know that this was an important low. So look at how from that low, we saw buyers here, buyers here, and then we had a shakeout and now we want to anchor to this point and look at how this anchored VWAP is now holding. So what that tells me is we can use that. So when the buyers take control from this high, we buy above here and now we set our stop At that point, our stop would go under this level as it rallies up, we now have our stop raised up under this shakeout low and maybe it can build and do this, but that’s how I like to combine them from multiple points, highs and lows. Because you can see that they’re just so damn accurate that you just can’t deny it.

You can’t deny it. And again, it’s objective. So for the newer person or for the person who’s super experienced working at tutor, a lot of information, you have good instincts, you have good intuition, you might be reading lots of research, you might even be people in the business. This can help quiet the chatter because they always say the committee’s in session. So this might help quiet the chatter because it kind of streamlines things. Brian, I want to talk to you about something that’s kind of like at the heart of making and losing money because for all the entries and exits that are out there, we make and lose by our position sizing.

Now. So when you had some of those other charts, I didn’t want to interrupt you, but the way it looked, that big breakout bar, it would seem to me with the line being beneath there, I might be able to, I don’t want to say cheat, but trade the thing a little bit bigger and have a tighter stop because I have that line right there. I have that anchored VWAP right there. And if that fails, that tells me something much more loudly and clearly than any analyst or anybody could, since it’s kind of harder to read tape now that stocks don’t trade in eight segments. So maybe I could trade it a little bit bigger, not be in cavalier or anything, but am I onto something…?

That’s exactly how I look at it. So the way I view it is that’s the money management aspect. Risk management is, hey, my stop is 20 cents away or is it 60 cents away? Well, if it’s 20 cents away and I’ve still got to say I still want to risk $2,000, well that means I can do 10,000 shares if it’s 20 cents away. But if it’s 60 cents away, I’m only going to do 3000 shares. But is this market that we’re in, is it convincing enough that I want to take that full exposure? So I will always look at it and I always like to have a really tight stop because a really tight stop says to me, I can get in with my maximum share size and still risk the same dollar amount and I’ve just got more upside. And if I’m buying it right as it’s starting to move, not three days later when it’s breaking out, that’s when I’m selling some to the breakout chasers. It’s lonely when you buy that first little higher high on a shorter term timeframe,

It’s lonely. That lonely feeling. It comes with a lot of doubt. Am I the only one who sees this? It’s so obvious what’s going on? When are people going to join me? And we all have the same anxieties when we hit that buy button and commit our money. 

That’s what keeps us human and that’s what keeps us me defensive in the trade. And when I see that and I start to see, hey, now the volume’s coming in. Now it’s up to daily R2, I’m going to sell a little bit here just because I was uncomfortable to start with. So I want to reduce my anxiety in the trade. I want to take a little bit off just in case it fails. I’ll most likely even raise my stop at that point. And then I’ve in a theoretically risk-free position theoretically because we never know what’s going to happen and right bomb might hit their headquarters or whatever it is. So absolutely Michael, it’s about getting as big a size position as possible by looking at those shorter term timeframes and really trying to find that inflection point and be ahead of the crowd. 

Anticipate, okay, well if it gets moving here, the breakout people are going to be buying it in three days. So I want to be ready to feed some out. Not necessarily just throw it to them automatically, but start watching the tape real carefully. And if it just keeps running up there and making two minute candle higher lows, that’s kind of one of my default scenarios is that it, I’ll use that as a stop for that first third. But it gets me to say, here are the levels. Just like any successful trading strategy, here are the levels where I want to take risk or where I want to put it on or take it off.

Well said. My head is swimming with ideas because when I’m, everything to us is largely systematic. So I don’t think I’m not infallible, let’s just get that off the table. But because everything is so kind of systematized on my end, I don’t really have faulty analysis because everything is highly regimented. Of course I can evolve my system and again, I’m not infallible. I can be a bonehead like anybody. But I did notice when I looked over the past couple of years, which has been true, a hallmark of my own trading is that when I’m wrong I tend to be early so I can anticipate what I think is going to happen. Unfortunately for me, my P&L gets chopped up because the crowd doesn’t see things the way I see it and the crowd’s always right. If I go outside and it’s clear blue sky here in Los Angeles, but there’s a thousand people around me who say, man, it’s cloudy and overcast rain’s coming, guess what?

Rain’s coming because it doesn’t matter what I can see, I can’t fight the tape. You see what I mean? So I’m going to look at this and go back and say, okay, I’m not really a short term trader only because when I put on a trade, I don’t care about a $2 scalp. I want to make $50/share, 6,000 bucks and I want to have all my money in one name. Again, I don’t recommend that for people who don’t know what they’re doing, but you can have, I’m not bannonballing in or cannonballing  out like Brian talked about 20 and 60 cents stops. There’s an inverse relationship between position size and where you replace your stop. I’ve adjusted my own trading to kind of scale in with 10 basis point style positions so I can just keep buying, buying, buying, buying. Guess what? If I do get knocked out early 10 times in a row, which is very, very unlikely, but it can’t happen.

I still have 99% of my starting capital. So I have all my money emotionally speaking. So you have to evolve, not you, Brian, but well I guess all of us, we still need to evolve cause the market’s going to try to steal our money and induce us to do things by pushing our buttons. I want to come back to this cause I don’t want to keep you on all day, but there’s just too much, too many gems here. Let’s use this same chart and we’ll talk about the blue line, which goes back a year, Brian, and talk about the handoff as it might relate to say this six months ago, right? Because look at the blue line, as Brian mentioned. It act as resistance and then through here through the next quarter, people were anticipating good news. Probably we had lower lows. We kind of held the line here until we finally broke through. But then after this breakdown from last October, you could see that the blue line, there’s so much distance between the blue line and the actual price that Ryan discusses in the book, something called a handoff. So Brian hit the handoff maybe even as it relates to the last two reports. That would be the orange and the lavender or this, yeah, I guess that’s lavender.

Sure. So actually right there in October, that gap down looks like October 1st. That was clearly we broke below what had been support from that first earnings report. That was an important event right there, that gap, right? I would anchor one right there to kind of see how that price responds around that. And it kind of looks similar to your orange one in that it offered a little resistance. And then when we jumped back above it here late January, that’s kind of been holding a support as well. Very similar to the orange. And the longer these things build because they’re cumulative, the more likely they’re going to kind of come together in the same place anyways, right? Yeah. Because the data from 200 periods ago has now just a 25 basis or 50 basis point weighing in the calculation. Not really. That would be a simple moving average.

But when it comes to volume in that, we’ve got to put that in. But you know can see where the heavy volume periods are going to have a much greater impact on that wick VWAP waiting, which is why we see the volume weighted average price from the beginning of this year becoming so important right now because we saw so much volume after that. That’s the psychology of the crowd from the beginning of the year. How well are they positioned? Are the buyers feeling good? Are the short sellers feeling anxious? And how does that equate to what’s the next potential trade out of here?

Yeah, I don’t want to get into it right now, but this is amazing stuff. I did get a reader question from a video that I had done a couple weeks back. “Can you help me better define what support and resistance is?” I would say don’t try to draw horizontal lines because you want something that’s much more dynamic. I would anchor this VWAP and do what Brian says. Look at the gaps. They don’t necessarily have to be high volume days, but they are significant in terms of price. And then just kind of see where is it holding, because that tells you what the institutions are largely doing more than say the smaller speculators. I’m going to move on now. Brian also talks about among, again, he, there’s, there’s ways to use this. He mentions nine in the book. One of them spoke about short squeezes and if you go, it is publicly available.

I think the exchanges have to report the numbers every two weeks. For example, top five that’s currently, I think as of Friday’s closed, this was number three on the list. There’s the BBBY, which at 50 cents, not sure why anyone is still short. I mean what’s left, but who knows why. Here we have simple 250 period simple moving averages and the closing price. And in the bottom here I’ve trailed this and looked at the short interest. Yeah, so it tells you a lot of stuff too. As the bottom of the market was, the bottom range here was consolidating. We actually saw PE shorts adding to their positions. And even as the market rallied, the price basically doubled. You could see that they added to their shorts. It wasn’t until we had a recent selloff that market has kind of placated. So when there’s 43 million shares short against the float, and if you do the math, it’s 52%.

It’s not the highest that I’ve seen. But nonetheless, it’s high. And Brian goes through a system, if you will, a set of rules that are objective that you can follow if you want to look at how to play a short squeeze without getting into guesswork or having hunches of what you think the company’s going to do and this and that. So I went into a different program here Barchart just because it’s publicly available and you don’t have to make a subscription. Again, this lavender line here is a 20 period simple moving average on the volume. That number is 12, excuse me, 12.8 million with 46 million shares outstanding. So you can calculate the short interest and I anchored it to these, the low and then the recent highs. So Brian, improve this chart for everybody.

Well here two things. First, Michael, as I mentioned, there’s two types of short squeezes that I consider. Two types of short squeezes. One is a knee jerk short squeeze. It’s a stock like Carvana. If you scroll back up to the top frame, you see that Carvana was $200 and something dollars, the $400 level for more than a year ago. So the shorts have been correct. They have this right that that’s structurally they are correct in here. But short term we get these knee jerk short squeezes where the stock goes from

Here and here, right from $4 to $16 a share. I don’t care what your cost basis is, that hurts when you’re short. So you’re going to scramble and get and cover some. Now, longer term, who knows? They, everyone says this company’s basically dead. They’re, they’re the next bankruptcy or BBBY probably first, which is why it’s at 50 cents. But I personally, if there’s rumors of bankruptcy and that sort of thing, I don’t think it’s a good stock to trade long. So I’m not going to try to participate in the short squeeze here because who knows, maybe they’re going to default on something and they’re going to file one day. But what you’re seeing here is that from that low, the buyers have been struggling to hold on to control, but they’re still below the anchored VWAP off that peak. So from that point where the average short seller from that point at the top, the sellers are in control the average price from the low they’re at about break even.

So this is really kind of looking a lot more neutral than anything to me. There were some fantastic moves. If you just look at the big volume spike, low volume pullback there in early January, and then another push on big volume. So I’m not sure I could really improve on your chart here, Michael, because it’s it. It’s just one of those emotionally driven ones at this point. I think where a structural short squeeze is one where you’ve got a stock in an uptrend and the shorts of still being stubborn and they’re fighting it and fighting it and losing, that’s a losing game.

So one of the things that I’d point out is some of you might be into trend following and buying an end day breakout and being the variable that you can set. It could be five days, could be 20, could be 19, could be 55, doesn’t matter. There’s some popular ones out there and you have these nice round numbers. This, you can’t see it here, but this is zero because of the number 10. And if you look back X amount of periods, you might look at this as a breakout. So the question though is do you want to buy the breakout? If you look at this as being a bit of a trading range, the anchored VWAP numbers kind of create a dynamic trading range. 

So we talked about position sizing and taking chances. You’d have to do this enough times and test it to see if you’re going to buy a legitimate breakout, say at $10.25 cents, maybe $10.50 cents, for example.

You’re still within a range where there’s a lot of overhang, there’s a lot of inventory where the people are at home saying, please, God, if it goes up a little more, I’ll just sell it at close to break even. Or I’ll sell it for X amount of dollars and take my loss and walk away. This might give you a moment of pause to say, yes, there could be something interesting if they refinance their debt or they can convert their death equity. Who knows what’s going on. This absolutely tells you what the market thinks about those plans and all those news reports, especially when you see the garbage on PR news wire or PR web or things that come from the company or people who are promoters.

Right, exactly. So on this one, Michael, when you look at $10.20 cents per share, here’s two questions I answer before I put on any trade one, where has it come from? So if you look at the low four days ago, it was $7.20 cents per share. And if it breaks out at $10.20, that’s three points on a $7 stock. That’s 42% or so. Yeah. So it would’ve run 42% in four or five days to break out. That’s asking for a lot for it to be able to continue after a 40% rally in three days. And then where does it have the potential to go before it’s likely to encounter a source of supply, which might be strong enough to become resistance. And that would be, I would look at it and say $11.41 cents that anchored VWAP from that peak. That’s where I would expect to find supply. I would expect the shorts to defend it like they did for the four days after. So my reward potential in my mind is about a $1.20 up to that $11.40 level my risk, however, it’s just rallied 45%. I’d have to look at it on a much shorter term timeframe to really kind of determine where that stop might go. So I’m going to share it on my screen to show you.

Can you let me take a look at that sharing? There we go. So here’s the way I look at it is look at the personality of the stock. We’ve had a couple of these runs up to this level, quick ones, and then what happened? Then they get the shit kicked out of ’em, basically.

May not happen this time, but when we anchor it from that peak, what do we have? We have this. That’s where I see the potential price target to be. Yeah. So now I’ve got these higher lows and I’ve got these higher highs. Is this this higher? Is this low now kind of going to be the turning point where it goes lower. So I want to look at it right here and say, if the buyers are taking control today, I want to see that this stock. If it gets punched back by that, or if it does this, then I would be more willing to buy here on anticipation of that breakout. So I’m ahead. I can sell a third here, have my stop under here, and if it rallies up towards that, makes this high or low, raise my stop to this point as it breaks out and I sell a third, and then look for maybe holding the two thirds up to there if it makes a nice pattern, unless it does this and breaks a higher low. So it’s about the definition of trend. If it’s making the higher highs and higher lows on the timeframe I engage, then I’m willing to hold it. But if it breaks down and makes a lower low prior to hitting my price objective, I’m getting out right here. I’m going to listen to the definition of trend because I’m buying this emerging uptrend.

Brilliant. So folks, again, if you’re just starting out, this gives you a roadmap of how to marry, how do you feel, right? And how to temper your emotions by looking at the facts and then being somewhat reasonable. Like Brian said, you’ve saw a 45, 42% move off the lows here. Let me just get back onto the screen and we can keep moving along here. Bang. There we go. Brian was saying in the last few sessions we had a strong move. Percentage wise, you always want to think in terms of percentages. Yes, you have to price the risk in terms of dollars and cents when you put your orders in, but the way you can gauge the actual magnitude of the move is to think in terms of percentages and what Brian is saying. 

You’re asking a lot of the stock when there’s still a lot of overhang that things already moved up quite a bit for who knows what reason. So the thing here is to demonstrate that just because something has high short interest doesn’t necessarily mean that it’s a good trade. You still have to interpret what you see in terms of the price action, because as Brian has said, a million times only price pays. I like to say only now after having read his book only price, volume, and time really tell you the truth, right? And you have to develop your own opinion. You can’t be, and this is my, I want to say this actually stopping. I want to look into the camera. Traders have to be leaders. It’s hard to be a follower in this business because you have to be decisive. We live in a paradigm of personal responsibility. This tool of a anchored VWAP really can help you do that so that you can kind of come into your own.

If you’re trying to be like, I follow so-and-so’s action alerts over here, or I have this discord that I’m involved with here. You wake up every morning and what effectively your life looks like from my standpoint is that you’re a Jew on Monday. You’re a Christian on Tuesday, you’re agnostic on Wednesday, of course, on the weekends you’re satanist or you’re agnostic. So it’s very difficult to have the word. The fancy word is apostasy. You can’t juggle philosophies. You have to pick one and know that it’s yours and then own it, and then replicate that day after day after day and focus on the process. You can’t look at any p and l. I know some of the short term people like, man, I didn’t make my 500 bucks today. To me, that’s a little too anal. If you focus on the process, you’ll get the results, especially if it has positive expected value.

I’m reminded of this knowing that Bill Dunn (now retired) is one of the greatest traders ever and was purely systematic. Had three years in a row where he was effectively down 15% and he’s well in running well, or he was, he’s since retired, but he was well into nine figures of assets. Let’s look at one more, Brian, then I want to let you go cause I don’t want to hog up all your day here, but such pithy stuff. We’re looking at another stock that’s kind of breaking out. We have simple 50 and 200 day moving averages on Crocs. 

Back in the day, it was a bit of a fad because it only had one product. Now they’ve broken out again, just for this and that. I’ve put in short interest. It’s 7 million shares. This one’s about a four point something short interest ratio. And then when we look at Crocs with respect to the earnings, we have a little bit of a handoff action here. But in this case, unlike the Carvana, we have some different price action. These are earnings. The last four earnings, the volume also is massive when you think about it as a ratio or a reflection of the average. Again, this is a 20 day simple moving average of volume. And we see the handoff here. We see the big volume day. We put in 52 week high, and then what we saw was a breakout, but then we saw the reversal.

So Brian, what do you think of this?

Look we got here. I mean, look at that, that red one, which occurred near the low, which was when we had the handoff from the purple, which is just crazy. But the pullback there to that red one, perfect bounced in there. And then just three weeks ago, another perfect. It pulled back after that earnings report, it found buyers at that prior earnings report anchor. And now I, I’d love how you put the one on the peak, because from that peak, we saw that volatility and we saw the sellers come in and profit takers come in and take control until it touched the prior anchor. And now, as it’s gotten back above the anchor from that prior peak, that earnings report, it tells us again that the average short seller from that peak is now losing money. The average price this stock traded at since that earnings report is $123, basically.

So the average short seller’s down about three points and going, scrolling up to your previous chart, this is what you have potential for a structural short squeeze. In other words, the shorts are fighting this uptrend. Look at how that earn, that short interest is as high as it’s ever been and the stock, so they added to it after that earnings report. Well, we can then take an anchor from that and say, we can look at the number of shares. I can’t really see it from here. Let me expand this screen. It looks like maybe there was 5 million shares. You mean here? Yeah, if you look straight down at the purple, there were about 5 million, maybe five and a half million shares share.

Yeah. Okay. And that the last report, 7 million. So it tells me they added about one and a half million shares from that earnings report. So the average, so we know now basically that 1 and a half million shares are down about three points. That can’t feel too good. That’s that’s a crummy feeling. So now we have the potential of a structural squeeze. If this doc continues to pull back in the next day and a half and finds support at that $123 and then bounces from there, I think the shorts will start to get a little bit more motivated. They’re going to try to push it back down underneath that average price and take back control. But this thing could get away from them pretty quickly in here. And you could see Crocs, I think, make a run, maybe even for those highs from 2021, which are up near $180.

So again, folks, these aren’t trading recommendations as much as they are educational to take the ideas that Brian has written about very eloquently in his book and show you what it looks like in real time. So again, I think in terms of percentages, as soon as Brian said five to seven, I’m thinking 40%. That’s a massive increase in short interest when the stock wasn’t really at best, it’s kind of channeling here, it’s a $20 range, but again, they did win on the day. This is clearly a reversal day of Victor Sperandeo’s written extensively on 2B reversals, and then is another one here where the sellers took over and whatever gains we had for the day were relinquished, relinquished either because new shorts were entering, right, or there might have been some day traders in there. But nonetheless, it gives you some sharp relief that you can see how the dynamic of the anchored VWAP, how it access basically support and resistance without your needing to step in and draw lines using your very subjective ideology, especially if they’re horizontal. This takes into account price, volume, and time in one fell swoop and calculates the number for you. So at that point, you’re just basically interpret interpreting what you can see, but it’s very, very objective.

I love it. And if anyone does take this as a recommendation, which they shouldn’t make sure you have a stop near about 119, because if it gets below 119, I wouldn’t want to be long at it anymore.

So again, we have to determine who’s in control of the instrument. I think some of my, this is, and I want to speak to the short term folks because I hear them griping a lot about slippage and skid. Some of the best trades I’ve ever had in my life had the worst slippage in skid. Why? Well, cause I was clever enough to be buying when there were other buyers who had much more muscle than I did. You see? And so that becomes an actual leading indicator for me. It’s like the worst to fill, the better of the trade. I know it sounds kind of weird because some of you are very sensitive. If you’re buying a thousand shares or something intra day, you might be using day trading, buying power if you have more than I would as a $25K. So a $0.10 move might rock you on a couple thousand shares because of how you look at your P&L and what you’re looking to do intraday, right?

But from my standpoint, where I’m even buying futures, I want to hold the positions for weeks and I’ll come back and we’ll have Brian on to do a little deep dive. Maybe we could talk about some commodity stuff here to Ford been doing equities, but I don’t look at slippage and skid as a bad thing because I want to be buying when there’s other buyers. Like Brian said, it’s a lonely feeling when you’re B, you’re the only person buying that breakout and you’re around saying, hello, Hey, hey, did you get any of that? Are you in that? What do you think of that trade there? So what do you do? You start going to social media to look for other people who are bullish to support how you feel about being in the trade. So anyway, Brian, we’re coming up here on hour and a half. I feel very guilty. I mean, I kind of feel guilty because I’m a kind of gentler inner voice, but I love the idea that we can go on and talk about this book till we’re blue in the face. Maybe I’ll look at a couple of other examples and have you back on.

Be my pleasure.

Yeah, it’s good stuff, man. I really wish you the best with this. The people are raving about it. It’s already got over 105 star reviews. Yeah, I think in my interpretation of this, this is a good reference book to have on your shelf, but it’s also a playbook in that you can come in here and start the process again. Brian delineates nine setups, if you will. There’s probably maybe a better way to say it, but nine trading techniques, nine different setups that can get the juices going. And then, like I’ve said a million times before, folks, the best teacher of trading is you trading. Yep. You people can kind of lead you in the right direction, but the only way you can calibrate if the goal for the trader is to have a system with which she or they are compatible, you have to actually do it because that’s the only way that you get the emotional intelligence. The book here and the tactics that Brian speaks about is very salient because it gives you a very objective way of looking at price and volume in time without having to make a lot of decisions and starting to second guess yourself, you see? So I would recommend that you get it if you don’t know your trading edge, this is a good place to start. Very well done, Brian. Excellent work, buddy. Thank you.

All right. Well, I want to call it a day here. Brian, I’m going to have you back on the show. We can take this and maybe do a part two or a deeper du. Sure. Nuts and bolts for folks who want a part two. And I’m always game for that too because look, I don’t have all the answers. All I have is my 35 years experience, but I’m not infallible, so none of us are.

Amen. Brother, great book. Thank you for being here, Brian. 

Thank You, Michael. I appreciate it.

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Hey everybody, it’s Michael Martin. Thanks again for being here. So the next question that came in was like, can you speak to margin to equity as a ratio? So a lot of folks look at, alright, let me give you some context. If you are a commodity trading advisor and you have 15%, so a million dollar account, you have $150,000 committed to margin for systematized CTAs, you would be, I would think, towards the upper boundary of committing margin. Because when that all that margin means is it’s 15% of notion of a notional value. So the question then becomes, if you had a million in cash, what is the actual notional value of what it is that you’re trading? Because therein to me is a good measure of leverage. It’s not just the fact that you’re putting down 18 K to trade one of the nqs, for example.
It’s what is the notion of value work out to be based on the amount of money that you have in the account because the margin is controlled by the exchanges and they use a SPAN calculator that takes into account liquidity and also volatility, and then they set what their margins are, they can change it at any given moment. The fcms and the clearing members can then use those as the lowest number. Sometimes they make them stronger, but they can’t go lower. So unless there’s some funny politics going on, there’s really no way to say, well, you’re going to take trade the NQ and take it home with you that you cannot have 18,000 a margin. Now if you create spreads, you’re simultaneously long and short the same instrument if two different extra expiration months. So for options folks, it would look like a calendar spread, right?
So that lowers your margin. Why? Well, because you’re simultaneously long and short, the same instrument of different expiration months. So they’re highly correlated. This is what Bruce Covner did if you read about some soybean trades in market wizards is he realized that I think it was the July, November bean spread was acting and trading like an outright so cleverly he decided to put on the spread because he could put more contracts on why? Well, because spread margin might be only 10% of what the directional outright for one contract would might be. So if I’m long, long July, short November, that might only be $1,800. If I was going to trade July long on itself might be 18,000. So he was like, I can put on 10 spreads as opposed to one outright and have the thing net perform like I’m 10 directional units. I wouldn’t recommend doing this.
He ended up giving back quite a bit of money in doing it, but it was a good learning, a good learning situation. So when someone asked me again about one of my better trades, I found myself in a spot where I had an account that I think it was like a 401K rollover thing. It was like 50 K and I traded some sugar. I was trading much larger. I think the account had an almost 40% draw down. Now I think I had maybe 30 million in client assets at the time. I had over 10 years of trading experience. I had already been in the trading tribe, for example, and I think in 2004 I was ranked number one as far as emerging CTAs. I don’t know if they were emer established CTAs at the time, but I was doing as well as I could possibly do.
All my pistons were firing in the right direction. I was trading again very large, and I remember there was a time when in that sugar trade in the early part that I had, I don’t know X amount of contracts, I was in a 40% drawdown. So the 50 K was 30 K and of the 30 k, 20,000 was cash and 10,000 was unrealized gains and sugar. So it was a good, I’ll do a case study on it one day, but it it’ll be in order to do it right, it’s going to be like four hour program and I don’t have the time for that right now. But when you see the confirmations, which I st, I still have from my clearing member, which was Edn F Man at the time, you’ll see I’m taking lots of small losses, small losses, small losses, small losses. I just got a big number of them in a row.
So you figure if you’re trading 2% risk units and you have net 20 losers, you can see where your drawdowns are going to come from despite some of the gains. So you go to school on yourself, you’ll learn. This kind of helped me to cut my thing that I talked about yesterday so that I wasn’t losing as much money. It also showed that you got to pull your weeds and let your flowers. There was no reason to sell the sugar because it kept going up. And so I didn’t emotionally want to go for that win. Now at the same time, I was fully loaded. I probably had 50% of my account balance was in margin to hold those sugar trades. So the margin to equity ratio isn’t necessarily a risk management tool because I was not risking 50% of my capital. I was never going to let that the sugar long position go against me to take out all of my margin.
What your margin is, just like Mickey’s finger, when you go to Disneyland, it says you got to be this tall to go on the ride. So you have to meet the standard. And that’s just because the exchange, knowing the volatility and the volume or what they estimate to be the liquid, you find out volume isn’t liquidity the hard way. So they figure out, okay, what the numbers are because they want the market to have integrity at all times. So if they let somebody in who’s too small or if they don’t put exchange limits as to the number of contracts that you can have on the same side of the market,
Which would be long futures, long calls, and short puts and aggregate all that you might find the marketplace itself doesn’t have the most integrity because any one player could either really screw things up or take advantage of and push the market around, at least on the future side. Remember, it’s the cash market that drives futures not the other way around despite what you hear from the politicians. So you cut your position size, you want to be mindful, right? Because you can’t buy more contracts than cash that you have. But mind you, the way the accounting works at the fcms because somewhere, somewhere, somewhere, no matter who you’re using, the money is custody that an fcm and then they mark everything to the market. So now you have a big position, 50% of your cash is in margin. As that contract goes up and up, your open equity, your open trade equity increases and that creates more buying power.
So your risk isn’t on or necessarily the margin that it requires to hold a big position. Your risk is the distance between your entry and your exit multiplied by the number of contracts and getting to that spot is an art and a science onto itself. If you’re using ATR based system, it’s all calculated for you. The volatility takes into account the dollar amount and the percent of your account that you’re willing to risk and it calculates everything right down to a T based on the volatility again and the amount of money that you want to risk on your account.
So to give you some context, say you had a million dollars in your account and you are risking one half of 1%, so 5,000 bucks. I think if you look at the 20 day ATR on the nq, the big NASDAQ futures contract, and I’m not saying to buy it or to sell it. I think the volatility on that using the 20 day ATR is about 5,200 bucks. Call it 5k. Now, if you are running a strict system and said, I have a million dollars, I want to risk one half of 1% and you took the ATR and you multiplied it, I think the multiplier is what, 20? It would come in at 5,200, but 5,200 is greater than 5%. So the amount of contracts in your risk unit at one half of 1% would be zero. And that’s doing it strictly and very puritanically using that model.
If you’re like, okay, it’s close enough, I can buy one contract that’s 18, right? Thousand dollars as margin. So it’s almost 2% of a million dollars to control one contract, and if it moved one ATR against you, that would be 5k. That would be your daily limit. So I don’t know if 2% is a lot or a little to you of a million dollars for example. So suppose you had a bunch of different contracts across several instruments and you edit all that up. Then you also might have stocks and regulation T. So I think your margin equity ratio is something you want to be mindful of, but I don’t necessarily, it’s not a tool that’s going to help you manage risk in a very long-winded way, right? Because there’s lots of ways you can look at it to try to say, what information or data can I glean from this and use to my benefit?
I have never been able to use margin to equity to know and to say this is a big position or it’s a small position. Two margin values can increase overnight. And even though you have the cash, so say you have a million dollar account, you get a hundred K in margin, one contract might go completely berserk and so they up it from say five to 8,000 per contract. Since you have so much, much excess cash, you’ll just see now you have 150 or whatever the number would calculate to in terms of committed margin. It doesn’t change where your stops are. I will say this though, and this is kind of related but not related. If you find yourself where you’re close to getting a maintenance call, you never want to add money or try to create a spread on a situation, don’t get cute, especially if you’re kind of newer to the game, which means for me, less than 10 years, when you think of how market cycles work, six months, a year, three years, not enough time, it definitely matters, but it’s not enough time to get a full or to really thicken your skin.
So if you put yourself in a spot where there’s a maintenance call on your equity, you have to offset contracts. Or if the exchange came, comes in and then your clearing member comes in and they increase the margin substantially for your position, then by all means cut it in half or more if you need to bring that number down. Certainly if the position is losing you money and you find yourself coming into a maintenance call, the best thing to do is offset the position. Don’t ever meet a margin call with cash or add even other securities to your account. Always just offset what’s losing you money. I know it’s, it’s not really related, but it’s kind of related as we’re having this discussion here on margin to equity and this and that. So anyway, hope this helps. Hope that answers the question. I think you probably knew a lot of this inherently, but if not, might be good to hear it. And as always, thanks for being here. Please consider liking and subscribing. Leave a comment if you want. Cause I look at everything and it gives me good feedback on what I’m doing and what your concerns are. This question actually came from a comment, so this is one way that we can kind of have an ongoing conversation and keep things moving, hopefully in a direction that’s meaningful for you on the channel. All right, appreciate y’all being here. I’ll see you tomorrow.

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Hey everybody, it’s Michael Martin. Thanks for being here. Happy Monday. It’s a good week. It’s kind of like I have the extremes going emotionally. I’m in morning over Michael Marcus, but baseball season started, so I have two extremes happening in my brain. Thanks everybody for subscribing to the show. I appreciate it. And leaving comments or up arrows and subscribe cause I get some good data from that. And I seem to be building some momentum thanks to your feedback because then I know what it is that you like. Who needs to sit and listen to me even for five minutes. If it’s on something that you don’t care about, I’m not going to waste your time, even if it’s for five minutes. So I don’t want to waste my own time for five minutes either, bud. So couple questions came in via the comment section so I can address those because in my experience as a teacher, usually if one person’s asking, there’s probably a few other people who have a similar curiosity.
If nothing else you notice, I also get rid of that nagging cough. I’m sorry about that, but I’d rather do the episode and hack my way through it. I’m an ex-smoker rather than not create content. So one of the questions came in about, let’s just see here, I’ll read it from mat. This came in on Friday, this past Friday. Michael, how many trades weekly do you open, get filled on average? And the answer is actually very few, less than 10, mostly because I’ve realized that most trades are suboptimal. Even in the setups that you would look for or whatever trading rules you might have, if I do get filled between five and 10, it could be 10 orders of the same instrument. Now why is that? It’s because, well, it’s a longer story. Let me see, do I want to get into this now? I don’t. But I feel like I opened my big mount. So now I have to.
When you trade, you keep data, you keep your general ledger. What’s all, what are all your trades? And so what I came to find out with my own style, which is as unique to me as are my fingerprints, is that I have good instincts from a gut feel kind of a trading standpoint. But I noticed with some of my trades, I’d put the optimal position on all at once. That’s the old way. I don’t do that now, but then I would get knocked out a certain percentage of the time. In fact, half of my losing trades were ones where I got in with my optimal position, but then I got knocked out cause my protective stop got hit. And so I said, okay, well that’s half of my losing trades were trades where I got in and I got knocked out relatively quickly. However, those trades eventually went on to make money.
So I kept thinking like, okay, well how can I do this? I’m in a trade early that I had got knocked out of the old mic and the old, and then the damn thing would go work. So I said, hmm, I got to work on that. How can I make an adjustment to my behavior? Because my behavior’s going to predict where I end up at life. I don’t mind draw downs as part of life. You’re going to be a professional trader. You learn to live with losses and the frequency with which you lose otherwise you’re going to have a tough time. So then what I did is I adjusted right? Because my instincts were right, but my timing was bad. Remember, we can lose money, bad analysis, bad timing, just dumb bad luck. You’re going to get all three. So conjugate that with your emotional constitution.
Now you might not like it, but you know that that’s going to happen. So my take is like if you get pissed off about that, that’s your problem. That’s acting like a teenager as far as I’m concerned. I would never have any of my traders tolerate. I don’t deal with complainers because complainers complaining means you’re weak and it means you’re not in the solution. So we try to think optimistically. So I said, okay, well what if I took those trades that I, with my optimum position got knocked out on? What would happen if I held onto him a little longer? So you go through the back test and what happens? Well of course you get bigger drawdown. So instead of stopping and knowing, you know that you have all these trades, you get knocked out on your drawdowns bigger even though you might go make bigger money.
So now you’re looking at that ratio of what’s your best year compared to what your biggest drawdown is. For a lot of people, that ratio is one-to-one. And if you look at most even anything that’s trying to emulate like the s and p 500, those types of managers where the s and p 500 is their benchmark, I guarantee you very, very close to a one-to-one ratio. And these are people that are gigantic marketing people might have professional designations, they might have a mba and they’re super connected as human beings so they can get really good information that might be in that gray area of what’s public and what’s private. So then I said, okay, well what would happen if I took that same name but I cut my position size in half. I think that’s what I did and I back tested that. But then what did I do?
Because I’m not in my optimal position to start. I need to add in another leg. And I think we did a video on it. If not, I’ll try to do one. And I showed it. Someone asked, what was one of your best trades? And it was one of the best was in sugar of March of, I think it was March of the 2006 contract. I had chunks of that from 8, 9, 10, all the way up to 18. It was definitely the best trade of the year. I’ll talk about that account in a minute. So then what I said was, well, if I get into these positions and use the same criteria, but I’m trading half as big with the proviso that I’m going to add to the winner. If I’m early in my timing and I have bad, which is bad timing, my drawdown would be smaller. Why? Well, because my initial position now isn’t the
Optimal position. I’m going to have to work into that. I’m going to lose less money upfront when my anticipation or my intuition is off or if it’s good, but I’m early because early means you’re wrong. If I’m early and it comes back against me, doesn’t matter what happens tomorrow. Cause I can only manage risk in the ever evolved MoMA. Now I can’t come back and say, oh, I have my stops placed and I’m super close. I’m just going to adjust them because I know the thing’s going to go back up. I don’t give myself permission to negotiate with myself to abandon my stops. Those things are the only thing that’ll preserve your capital. And if you turn your back on your stops, you actually are betraying yourself. That’s my belief. You might think differently, but that’s what I would say. If you were working for me, I’d say you’re not doing yourself any favors by staying in losers, right?
And I’m not the only one to say that, right? Go read Ace Greenberg’s book, which I have somewhere. It might be in my closet if, yeah, it’s the rise and fall of it. It’s actually right there. It’s the rise and fall of Bear Stearns. Decent book rest is sole Greenberg Allen is dead. But he basically said to his prop traders, no matter what you think about a name, and it can be as blue as blue chip as something like at and t I think was the example, or maybe McDonald’s names that anybody who’s not even a stock or an investor would know. If it’s down coming into Friday’s close, which today is actually Friday, even though you’re watching this Monday, it’s two minutes to closing bell. If you have something that’s got a bracket around it, it goes, it trades. Doesn’t matter how blue chip it is because big losses have to have been small losses at one point and you just let them grow up.
So you have to conjugate that with your position size. So I went to school on myself and said, I can’t beat myself from trusting my instincts and getting into trades early where I had bad timing. That’s the way I use early. I’m early on the trade, it’s mean I got bad timing, but it eventually works out. Now you only know that after the fact, but if you keep the criteria the same, then you can go back and kind of lab test the thing. And I realize if I came in with half the position size and I was early, i e wrong, my near term drawdown was much smaller. And I’ve said to you, I say it to myself as almost a prayer, what you don’t lose, you don’t have to earn back. And once your draw down goes beyond 10%, now you’re putting more pressure on yourself to perform. You might be using more leverage at that point and you literally and figuratively dig yourself into both a financial and an emotional hole. And that’s not where you want to be. Feel confident even if you’re in your draw down. Why? Well, because the best you can do is to follow your rules. You’re powerless over the results. Just follow whatever your rules are. If they’re discretionary rules, then focus on maybe cup and handle I, whatever it is for you. Five and 20 crossovers, don’t care.
Doesn’t matter to me. To the extent that you’re successful is the only thing that I care about. I don’t have any judgment as to how you do it. There’s some people who just don’t like chocolate ice cream. So figure out what’s best for you. But you have to try that. So then a miracle happened, right? And this comes from making the attempts and feeling the feelings that go with the uncertainty of trying something new. Then I need, okay, well what’s the criteria for adding the second piece? Because it’s the two half pieces that make me into my optimal spot, my optimal position that I want to get in. But how can I do, how can I steal second base without taking my foot off first? That’s the question you have to answer because you don’t get reward if you don’t take the risk. And I knew that inherently, right?
That’s kind of how I’m built. I’m also, I tend as a human being, I would say that I’m slightly impulsive because I have good instincts and I trust myself super messy if you were on the outside looking in. But I typically trust myself. I trust my instincts, I trust my intuition cause I put so much thought into what my dreams are and then I start chipping away at taking action. Cause if you don’t try, you’re not going to get anywhere. So you have to invite the failure. It’s the only way to win. So then you have to say, okay, well I’m going to put a governor then on. What is that risk? What risk am I willing? What risk am I willing to feel as a tongue twister? What risk am I willing to feel and take on financially and the emotional stuff that goes with those positions?
So in that regard, I’m kind of fearless. I don’t have any problem with losing money. But I started testing and I tried it, found a good criteria to add to my winner. And then I found something else interesting is that if I actually cut what that optimal position size was by three quarters and thought about having 4 25 basis points st. That’s not 25 basis points. But if your goal was to eventually get loaded up to hypothetically a thousand shares, and you don’t have to use round numbers, you would think of four risk units of 250 shares. So what happens when you’re early, in that case i e early meaning wrong, you lose even less. Then you have to have the criteria to how do you add, you add additional risk units when it starts moving in your favor? Well, you have to pay higher prices. But my take emotionally is that you’d rather be buying when there’s other buyers than trying to buy on dips when people might be looking for liquidating to take some profits, day traders this and that.
One thing that you can use, I don’t like necessarily using indicators, but one thing you can do is watch the behavior of the instrument that you’re looking at. And I know a lot of you, because you e email me and messaged me privately are looking at Nvidia, not necessarily because of any earnings or whatever, but because of the promise of ai. And I think chat GTP adds to that fundamental chatter, that story, that rhetoric. Some people would call it drama. So that’s harder to gauge because it’s super subjective. You can believe what you want to believe and it comes down to religion. What are you? But for your faith, some people are like, I don’t believe in God. Well that’s okay. You wouldn’t make a good Christian or Deval a Jew. What doesn’t matter to me what religion you are. But what I’m saying is if you look at those names and how they perform, how do they perform if they’re making new highs coming into Friday, Nvidia, whether I like it or not, is a darling.
And it closed near the 52 week high Friday after a week of decent movement. So that tells you a lot, at least funda, you got to manage risk. But it tells you a lot fundamentally of what people think. They had every opportunity to sell the thing. It’s making 52 week highs, at least as of Friday. Nick closed near those highs as well. It’s, that’s kind of bullish at least doesn’t mean you can throw caution to the wind, but those are the types of indicators you can watch more than the indicator proper. It’s more like what’s the behavior of the instrument?
So then you find the criteria to say, well, I’m only going to take one fourth of my optimal position. I’ll have to find a way to add three more risk units in that regard. The benefit in the short run is that when I’m early, i e wrong, I have a smaller drawdown. That’s even better for me because as a trader, in my humble opinion now Mike Beore might say something different, and I don’t want, I know Mike for 20 years, I don’t, I’m not putting words in his mouth. I’m just saying that someone that we might have a different flavor and come to a similar solution, but in a different way.
So I would say again, what you don’t lose, you don’t have to earn back. You also then don’t have to go to bed Friday night or have any type of duress because now you’re in a drawdown and you emotionally need to win the money back as much as you need to win it back financially. That just puts you in a grind. And I know I’ve been there, it sucks. It’s the worst part of trading is that if you get into a drawdown and it’s too big, then how do you dig your way out? Because without discipline, you can start taking flyers. You trade too big. I got to earn it right back because I don’t like the feelings of being in the drawdown, and that’s just the way that it goes. So I would say, look man, take your time. Trade smaller. Most of the pros, if you read market wizards, write a lot of them said, take your initial size, cut it in half, and then cut it in half again.
Well, that’s what I just did. Then I have to find a way to add to my winners and build into that optimal position. And that gave me great solace because then I invested my gains into my protective stop. They weren’t big gains because I was only on one fourth my optimal size. But the key is, is that I got to manage the draw down. So that’s why so many people say, and I would advocate too, that even as a speculator job number one is to play superior defense. Forget being Michael Jordan. Think about Lawrence Taylor, the famous giant linebacker, probably greatest of all time. So focus on defense. That means you might have to be super selective, and that sucks because if you have the sense of urgency, I need to do executions, I don’t feel that need. That was the original question. How many executions do you need?
Well, I don’t necessarily have data that says I need to make 24 trades a week in order for me to hit my goals. I need to be super, super selective and buy into the winners that I already have. So that audience, that universe is terribly small for the thousands of securities that trade. It might be only one in a thousand name that you’re even looking at. So I would encourage you to be hypers selective. Be very vigilant. Don’t trade too big and give yourself a lot of outs. Because think about it, to be honest with you, now I’m looking at one 10th of 1% to one fourth of 1% as my initial risk unit. That means I could add 10 times to get to my optimal spot. But again, think about defense. If I’m risking one 10th of 1% on a trade and I’m wrong 10 times in a row, which could be a combination of a whole bunch of stuff, bad luck, bad timing, bad analysis.
It tends not to be bad analysis because I kind of sit and wait and wait and wait, but I’m, I’m not infallible, right? I’m not infallible. I can still make bad analysis, I suspect. But the point being is that if you’re risking one 10th to 1%, I could be wrong 10 times in a row and I still have 99% of my starting capital, or at least whatever that high watermark was. So therefore I don’t care about losing one-tenth of 1%. I’m very free. I’m liberated. I can put on any or all of those trades and it doesn’t bother me. Now as the first one-tenth of 1% risk unit starts to move and I start to add, I start to add, I start to add, I have small bits of capital gains, nothing close to what I’m working for. Some of you are like, dude, I’m done by four o’clock Eastern.
What are you talking about? 10% point 10 basis point risk units. I don’t have time to get on 10 trades in the same instrument during the day and say, okay, well I celebrate your style, whatever works for you. I’m just saying for me, when I was trading, yeah, I was trading 200 to 500 basis point risk units and you get all that goes with that, you get the drawdown and you get the upside. I’m going to talk about that tomorrow. So I wouldn’t look to optimize, I guess is the answer the number of trades that I put on, is it largely irrelevant? Think about it this way. Suppose you trade a sector fund and you just look at Nvidia and the sector of semiconductors. When the season is hot and people are rolling money into that sector, that sector’s going to go perhaps parabolic. But guess what?
When that sector falls out of favor, it doesn’t even matter how good the best name is. It doesn’t matter how strong that hor the best horse in the barn is because the sector sucks. You see? So if I was trading like that, I could easily be in a sector that’s super hot, like say the softs in the commodity space, were going berserk. I might find myself having 25 fills, but that’s just incidental because the sector is getting all that attention and I’m getting triggered, but I’m not sitting there saying like, I’m going to sit and do this. So the number of trades really don’t matter because then you also have to consider that I’m probably trading smaller, even though I have more money than probably the majority of you out there. I’m still trading as a percentage much more conservatively than you might be because that meets my emotional needs.
It meets my emotional needs that if I get knocked out because I’m early, meaning wrong, I’m not going to lose a lot of money and dig myself into a drawdown. So that means when I do catch the move, I can add into the winner and then the thing goes, you see? So think of that with your own trading and how that might make sense for managing the drawdown. Because again, if you don’t have plans on how you’re going to manage the drawdown, it’s going to manage you and that sucks. That’s not where you want to be. And you can avoid that if you know ahead of time how that market activity could unfold. And you also have a clear understanding that there’s two payoffs to every trade. There’s the financial payoff, there’s the emotional one. You got to monitor both. You have to manage both.
So anyway, I’ve been blathering on here almost for 20 minutes, sorry, but just when you ask me what I do, I’m typically very guarded. I don’t really talk about what I do. But to the extent that it can help you compare it to your own behavior, then you have something to go by. There’s a yard stick, right? So please consider liking and subscribing. If I’ve said anything on the show that resonates with you, go to bad, please leave a comment. I don’t have all the answers. I only have my own 35 years of very subjective experience and I’m happy to share that with you to the extent that it would be valuable. Thanks very much for being here, folks. I will see you tomorrow.

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Everybody, it’s Michael Martin, thanks for being here. I want to go back and talk about position sizing because I don’t know if I emphasized a certain aspect to position sizing as much as I wanted to. Of course I could go back and watch the video to see for sure. I just don’t have the time to do it. So I’m going to make this video. If you run a little bit of a mechanized system, you’re going to use some type of an indicator for volatility and you’re going to use it across all instruments so that you remain consistent This way, you take the subjectivity out of it. One thing that people can use is obviously standard deviation. They could also use something known as the average true range. Doesn’t matter to me, which one you use. I can’t say one’s better than the other. And two, even if there was, that’s really something for you to figure out, right? So let’s just say that we talked yesterday about some of the popular names that keep showing up. Why is that? Well, because media companies make money on advertising and if they know people have a lot of interest in the names that they see shooting through social media, what do you think they’re going to do to compete for your eyeballs? They’re going to cover those stocks, and that’s actually a disservice. But it proves the point that this is infotainment, not critical research. You’re not going to see that on television.
And so to me, when I think about people arguing or debating certain stocks, I think it’s like the red and blue states, it’s all politics. And so if someone has a strong opinion about a certain name and who cares about Netflix and Disney plus growing subscribers, whatever, it’s like, I don’t care. I don’t care what they think. So let’s just take two examples that I know I’ve mentioned in Nvidia was one. And let’s take a futures contract like say s and p 500. So right now, if you look at the 20 day ATR average true range for Nvidia, it’s about 10 bucks a share. If you look at the same for the E mini the es, the June expiration, that’s a whopping 70. So if each point’s 50 bucks, the normal volatility in the emen is going to see your equity swing $3,500. You say, Mike, I got 10,000 bucks.
I can’t swing 3,500 bucks. And I know that. So what are you going to do? Well, I’m going to risk X amount of points. Well, that’s great. So say you want to risk $2 on Nvidia when you know the daily vol is 10, when you try to shortcut the system that way and say, I’m going to trade within a $2 band when the ATR is 10, or I’m going to risk say 20 points times 50 or a thousand bucks on the E mini when the thing is 70, you put yourself in a spot where you’re going to get knocked out of the trade or you have a higher probability of getting knocked out of the trade regardless of the chart pattern because you’re trying to trade
Within what the market’s already telling you, the instrument’s doing, which is an observable and objective data point. And so I think that the teachers out there, if that’s what you want to call them, do you a disservice when they say, yeah, focus on this pattern, da da, and don’t mind the volatility. Because if you step into that type of a trade and you’re trying to trade a smaller number on your protective stop, meaning the distance between your entry point and your protective stop is less than what the 20 day ATR is, you’re likely to put yourself in a spot, even if you’re looking at one minute bars to get knocked out of the trade just because of noise. So then you’re internalizing all of that. Why? Well, because you’re not focused on the process, you’re focused on the results, and now you’re beating your pillow and screaming out loud, barking at the moon, and the whole process was bastardized from the very, very beginning.
So what can you do? Well, you could trade smaller trade less frequently. Look at the minis in the micros, but a leopard isn’t going to change his spots. So if you think you’re going to trade Nvidia and make believe that it doesn’t have a $10 vol, or if you’re going to trade the EIN and think doesn’t have a 70, 70 point vol, you’re kind of deceiving yourself, which people do. Now, you could be ignorant to those facts and maybe now you’re enlightened. I don’t know because I don’t know who’s watching. But you can’t fool mother nature. Those are the numbers whether you like it or not. So that’s why I always say trade smaller trade to a position size that you can dig. Now, if you’re trading Nvidia, which has a high share price and you don’t want to lose more than 200 a day and the vol is 10, you can do the math to figure out how many shares you can afford if you have the capital. And the same thing goes for the E mini, right? You can figure out how much do you want to lose, and then how many points between your entry and your protective stop are you willing to risk knowing that you’re very likely to get knocked out just based on noise?
And I think if folks looked at that a lot more closely, they’d avoid putting on those trades in the first place because they’re suboptimal. And what do you think happens to your trading when you remove suboptimal trades? Isn’t that like weed in the garden, right? So this is kind of the stuff that you can do just by observing your own behavior. Maybe you didn’t know how to measure fall. Okay, I’ll say that’s a coin. Toss 50 50. Maybe you didn’t, you didn’t want to. There’s a whole bunch of combinations. But ultimately, if you don’t measure vol and figure that out, some places just say, yes, trade the E mini or trade the qqs, or trade the S p Y and risk X amount. Well, that’s great, but I think it’s a mistake if you don’t look at the overall vol in the marketplace because just because you’re looking at shorter timeframes or intra date doesn’t mean you can’t see a whopping move that’s one a T r from your internal one minute bars. The A T R doesn’t care what your starting
Point. So measure the ball and know what you’re looking at before you get involved so that you can use that maybe as a filter to remove suboptimal trades, even if you have very strong feelings about where the instrument’s going to go. That’s part of maturing, and that’s part of knowing who you are as a person is behaving able to control your own behavior while you are at the trading desk. It’s too easy to lose money in good markets. I’ve said that a million times. It’s true today. It’ll be true tomorrow, and all you can really do is control your own behavior. All right. Anyway, thanks for being here. Please like and subscribe. I will create more videos, at least along the lines of what I know you like. Thanks very much, folks. I’ll see you. I’ll see you next time.

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This is an automated transcript