The most powerful mindset for your success is your belief and you can achieve your goals. If you think you want to start trading by reading a bunch of books or doing this and that we all know what your options are to learn charts or the craft of trading, which will never end, there’ll never be a lack of sights for you to look up or charts to follow or this and that. The single most important thing that you need is your belief in yourself that you can achieve a goal. That’s why when we do in the coaching program, in the program goal setting is job number one. You have to know what the target is. If you think that I’m going to acquire information first and then I’ll figure it out, not going to work even before that. You have to see from the periphery like, okay, I’m interested in trading.
I might have a certain proclivity, which I will find when I start risking real money. My interest might be in position trading. It might even be in investing. It might be in short term stuff like day trading or scalping or swing trading. It’s all legit, but high performance people that I work with and the person that I’ve become, the only reason my success ever came was because I believed I could do it. Because when you’re in your darkest hour, and excuse me, when nothing else seems like it’s going to work, if you don’t have belief in yourself, what else is going to carry the day? You might think that this is a game of accuracy. I think you’re going to learn the hard way that it’s a game about conditional probabilities, expected values and probabilistic outcomes. So a smart trader is going to know that ahead of time, and we’re going to talk about all that this week about mindset because I feel like on many levels, and the more of you that I get to speak with, which thank you very much for being here.
By the way, I wrote about my struggles in “The Inner Voice of Trading,” which was published by FT Press in 2011. If you’re new the channel, you can get the free audio book download. The link is in the description, and when you read through that book and you think about how I was getting my head kicked in, even though I was making a lot of money, I didn’t write about the gloating part. I wrote about the failures because I think that’s what everyone could identify with. Even if you are a fan of a certain trader, it could be anybody from the market wizards or the legends that are out there to people that you might know personally, everyone’s going to lose money. Doesn’t matter. Your status doesn’t matter. Your assets under management doesn’t matter your trading style or your holding period. So when people say, well, what are the qualities and the characteristics that you need?
There’s a lot of them. I think having a good attitude is one discipline. Yes, true from work ethic standpoint, but if you have a pissy attitude, even if you have a good work ethic, it’s tough to grind on yourself. The grind of trading is going to be enough. If you beat the hell out of yourself, you’re going to find that trading is the perfect vehicle for you to continue to beat the live shit out of yourself is like having 10 devouring moms. So the most important mindset to me for success was my belief that I could do anything. Oh, Michael, you’re amazing. You can be president one day. I never believed that bullshit. And to be honest, I hate politics. I don’t really get along with people either who were too far one way or the other. I’d find it really obnoxious. But do what you think is best.
The point being is if you don’t have, because I think belief, right? Think about any type of, whether it’s politics or religion, the key word there is belief. It’s what are you but for your faith, right? So that comes down on belief. So in trading, because it’s such an entrepreneurial activity where you have to be both a leader and a follower, and you’re a team of one, no matter who else is out there, even if you are listening and you are or you currently are, you were, or you think you’re going to be a coaching client, you’re still on your own. I can help you shorten your learning curve and help you go geometric in terms of your ability for sure. But if you don’t believe that you can do it, there’s nothing that I can do at any price point to help you. You have to have this unwavering ability to believe in yourself that you can get the job done no matter what, even if you don’t have a clue about what it is that you’re going to trade, because in that regard, it shouldn’t matter.
And that I think is really good advice for life. I mean, if I look at the things that I’ve done in my professional career, I’ve certainly lost a lot of money. I’ve definitely made some boneheaded moves, but if I look at some of the major achievements that I had that I’ve achieved and not be prideful, most of it came about because I believed I could do it. Even in getting, I would call it the book deal when I was reaching out to publishers and I was doing it via cold email. I didn’t have any relationships. I just thought I had a memoir in me in the form of a book that would be informative and entertaining different from all these how-to books. Because my whole take was that if the how-to books, this goes back and I’ve got every how-to book out there, and I’ve got the collector items because sometimes I too need to be reminded, but most of the time I’ll say 90, they say trading is 75, 80% psychological. I’ll go as far as to say that I think 99% of your success is going to come from your belief in yourself and your ability to pull it off. Doesn’t matter how you’re going to do it, don’t focus on that. I would say focus on yourself. That’s why I spend all the time here talking about you because you are the asset here, not the chart pattern, not your trading style. It comes down to you.
And anyway, I was calling these, there’s really two big publishers. I mean, there’s a couple of publishers, but I went to the two that everybody knew. I cold emailed, I won’t mention, well, fuck it. I emailed Wiley and I emailed FT Press. I made two emails. I don’t believe Wiley even got back to me. And FT Press was just like, yeah, tell me more about this idea. I had sent them a treatment, a three-page treatment. They loved the idea. It was unique. It’s the differences that sell. And I got on the phone, I had a successive group of chats with the executive editor who was very, very helpful in the whole process, not just getting the deal, but through the building of the book. I didn’t know anything about the book business and I got the deal, and that’s to God’s honest truth. I sent out two mails, two emails.
Like I said, one never got back to me, but I believed that I could do it. And was I in the right place at the right time? Could be was I lucky? Could be. The book has four and a half out of five stars, so it seems to have resonated with folks who are fans of that type of book. There are other good books out there that can help you, but that’s not my concern. I’m looking to fill up my Karma Bank. Why? Because you, I’m a one person shop who has to believe in himself, who has to be a follower and a leader. I have to be entrepreneurial and I’m going to have good luck and bad luck, good timing and bad timing. And I’ll probably have mostly good analysis because after 36 years, it’s not to say that I can’t be an idiot, but I’ve come past the point of worrying about what’s my trading edge.
I don’t worry about that anymore. So in that case, I’m lucky, but I’m still going to lose money. I still have to keep my losses small. I still have to use my protective stops. So in that regard, we’re equal. So what’s the difference then? If you think I have any type of success that you want to emulate? I’ll tell you what the key is. The key is that you have to believe that you can do it If you have any insecurity about it, I tell you, they say bees and dogs can smell fear. So can the market, any ticker symbol can smell fear. And fear doesn’t have to be like I’m afraid. It could be trepidation, it could be insecurity. It could be that you’re not any of that stuff that would take you away from the middle line. That would make me say he needs a little more time.
She needs a little bit more time to ripen on the vine before we’d give them an allocation. They don’t seem sure of themselves. People will their way into success. So I don’t want to come up with a cheesy title like the Secrets of Proven eight Figure Scalping, day Traders, whatever, because I’m not trying to sell you something. And those people can still make mistakes and they can still lose money. Now, I hope they don’t because I just don’t care about most other people because I’m in this alone. There is no frater. Yes, you can kind of cohort with people behind the scenes and I’ve got a lot of really great friends and they’re good people and I’m grateful to have them as friends because meaningful for me and my life. But at the end of the day, when I go to trade, it’s just me and my higher power. And so that higher power has to stem from a belief first and foremostly that you have will do it. You will get it done. And if you don’t have what resources you’ll need, you’ll create the ones that you need.
The world is trippy, man. When you think about how things come together, I can remember when I was looking to kind of go pro and associate with a bigger firm, the funding account style stuff wasn’t around. So you were looking at where inside Wall Street were there firms that took proprietary risk. There were really two places there were real, because proprietary trading today is a bastardized version of the word proprietary trading. To me, it was best represented inside of Bear Stearns, for example, where they gave you a desk and your resources and they gave you the money to trade. You didn’t have to pay for an education and you didn’t have to put up any of your own money. They just said, here’s a person who could create alpha. Let’s give them the tools that they need and then we’ll give ’em a certain amount of time with which to get it done.
Since then, it’s evolved into include a whole bunch of other stuff that in my mind, because I’m a purist, probably conservative too, and I’m grouchy old man that I don’t really see it as proprietary trading the way, and I’m talking about all the firms that I don’t really think of them as prop trading, but at any rate, we can disagree or agree to disagree. And I sent out resume and cover letter mostly by fax because there weren’t emails at the time. And I was like, I can show them I have a track record. I had assets under management. I had proven documents that showed that I could make money, and it showed drawdowns. What did I lose portrayed? I had all that worked out. I had to do it by hand because the resources that you have today don’t really exist or didn’t exist then. And I mean one after the other, I got thank you, but no thank you. I had a lot of you’re overqualified, which I couldn’t quite understand because I thought if you give somebody money, wouldn’t you want people to have mostly, which is your track record, to try to go out and make money but also not have the massive drawdown? And my ratios were good. My ratios were like five to one, which means my best month was five times the size of my losing month. So I made a point to know that not losing is just as important as having the ability to make because if I have a million bucks to give you to trade, I don’t want to see you having plus 500 minus 500 months. They might happen coincidentally, but normally you want to see drawdowns that are much smaller too because of the emotional aspect of trading and that you don’t want to have to dig yourself out of a deep hole of what it does to you.
It could put you in a make or break kind of a situation. Plus some places they don’t necessarily have the 50% puke point. It might be a much tighter leash when you’re starting out. And I remember keeping those letters, not because I was proud of ’em, but because I knew that these were people who discounted my ability. And of course, not from an ego standpoint, but from my own self-esteem, which is different from ego. I wanted to prove them wrong. And like George Bernard Shaw said, if you can’t find the resources that you need at David Shaw’s house or Renaissance, I don’t know if they were around at the time, maybe they were mostly programmatic anyway, which wasn’t my deal. But Bear Lehman, this and that. And it’s interesting because now if I look back to those names, they don’t even exist anymore. Now, who knows, maybe I could have been there for a few years and then moved on or scaled up.
Who knows how it would’ve worked is myriad combinations. But the point is, is that I always believed in myself that I could get it done. So I went to the place where I thought would be the lowest hanging fruit. Go to a place where there’s a desk, a computer, there’s capital. They’ll give you a line of credit, you could meet with other like-minded people, share resources, give and take maybe obviously get an education in that process and everyone’s better off. And that wasn’t the path that God picked for me. So I kind of had to do it myself. Now again, I had someone hand, I caddied for John Merriweather at Wingfoot, great guy. And I’m sure I had a friend of mine hand deliver a cover letter and resume to the hiring person at Long-term Capital Management. Now, that didn’t work out for me. They weren’t interested.
But look what happened to the company. So I think the universe had a way of saying, this guy’s for real. He’s true in his aim. He’s probably what they would consider a good guy. So let’s not put him, let’s save him from himself and let’s not put him in harm’s way because of the two or three dozen firms that I went to. Again, bear Gone, Lehman Gone Long-Term, capital gone, and the list goes on. I won’t bore you with the details, you might not have heard even of the names, but they were big for the day. And so I got saved from all of that. There would be nothing worse than going to work and saying, Hey, we can’t meet a margin call. We have to scuttle our firm. You are out of a job. And now there’s you and 200 other people who are highly qualified, who have really good track record track records, all now looking for five open seats.
And I was never put in that situation. I got shut out. I was “0-for” in trying to get a job on a desk, and so I just went out and started my own company and I haven’t worked for someone else ever since in that type of space. And that came down to my belief in myself. It was like, okay, I’m going to try to walk through the front door. I’m even going to try to jump through the bathroom window. Sorry, ma’am. Didn’t know you were sitting here. That’s seat taken at the end of the day. So then I said, I’m just going to find my own way. Can’t cut a hole in the roof. I don’t want to do some obnoxious things. I did try, I won’t talk about it now, but I did try some clever things to try to get people’s attention, which I’ll talk about another time on maybe an episode that really, who knows, it’ll be a little bit more of background of my life more than trading stuff, but I’m not sure that those stories are actually even interesting for you.
So I’ll spare you the details. But when you’re thinking about it, if you’re trying to, and you’re several years into your practice and you’re trying to figure it out and you think you’re close, honestly, just keep believing in yourself. I don’t want to sound like some kind of bong, smashing, granola bar, California guy, but even for the rough edges on my New York personality, it was really my unwavering and unlimited belief in myself that I’m a guy who hits his goals. I went to a public high school. I got into Columbia when I didn’t even know how hell I was. I going to pay for it. So there was enough things in my life that I could go back and reference and say, huh, when you do put your mind to something, you find a way to manifest all the resources that you need. Why? Well, they already exist.
Everything that you need to make money and to succeed as a trader is already in existence. What you probably have to do is some emotional portfolio management and cut away the bullshit that doesn’t serve you. That’s where the coaching could come in. I don’t know, but I’m telling you, don’t keep looking for external solutions. The internal solution is your belief in yourself. It’s the single most important thing. Tap into it when you look back in your life and see, look at the other things that you had to achieve. Well, how did that go down? Try to create a model out of that and then replicate that model and overlay that into your trading.
Michael
The most important time of the trading day
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The most important time of the day for you as a trader is not the time that you’re spending in front of the screen. Trying to get your executions in your mindset is the biggest asset. If you’ve been following this channel, thank you for coming back. If you’re new here, welcome. If it’s your new first time here, I give away the audiobook version of my book, the Inner Voice of Trading. You can get the link in the description. The most important time of the day is how you do your preparation. Now, I want to talk about that because again, we know there’s two outcomes to every trade. There’s the emotional and the psychological, and there is the financial.
You are being able to process your feelings around. All of that is really what your goal is each and every day. It’s to follow your discipline and without getting emotionally invested in the outcome of anyone particular trade. Your goal is to say if you want to win the day regardless of your P&L, and you’re following a set of rules that have positive expected value, which means you have a trading edge, the outcome of any one particular day doesn’t matter. Emotionally, you might make it matter to me. That’s wrong. I don’t think you need to see a green day every day, but that’s my emotional constitution. When I hear people say, have green days, just book a green day, I think they’re anal. I think they’re too uptight about shit, but I have a cast iron stomach. My emotional constitution is subject to wanting to just win over the longer haul. I tend to make more money when I think that way also. Anyway, so the most important part of the day might not necessarily between 9:30 AM and 4:00 PM Eastern, which is the stock market. It might not be 8 am to 1:30 pm when the Cocoa market is open or in eastern time. It’s the time that you are getting prepared to me. When you set yourself up to win “the victorious warrior, first wins then seeks battle.”
I practice jiujitsu. I go to MMA fights where my friends who are both pro and amateur at the pro and amateur level compete. We talk about camp. Well, camp is very brutal, and I train with these guys. They want me to go hard with them and put them in really bad spots to fight out of it. Why? Well, because you really want to bleed in practice, not in the octagon, right? So your preparation is key. You’re powerless over the outcome. All you can do is control your behavior. So to me, the most important time of the day is what are the ritualistic things that you do, right? What’s your routine? You can have a little bit of both. It’s not bad to feel, to feel good. I think it’s important to understand the difference between ritual versus routine, but in terms of your preparation, this is kind of where you’re putting your shopping list together.
What is it that you’re going to try to do? And if you’re beginning, you don’t have to worry about saying, I’m going to scalp here. I’m going to day trade this one. I’m going to trend follow here. That’s not part of your dialogue. You need to get good at one thing. First, you have to attain the skill. Then you can expand from there. So your preparation should be, I’m not just going to wake up and go look at the MNQs in the morning. You’re going to do your preparation beforehand and say, here’s where I see my cup and handle. For example, if that’s what you trade across, any number of these names. So when the day starts, I’m going to look to see how those markets unfold. I’ll put my buy stop orders at a certain point, so if the market trades through that level, I’ll get executed.
I’ll add length to my portfolio. That’s the best that you can do, and that to me at the beginning is all you should be doing in terms of trying to interpret charts because you don’t get paid to interpret charts. You get paid to put in orders and have them get executed and then manage the risk. The other thing you have to do, because again, there’s two trade-offs. There’s two not trade-offs, but there’s two outcomes to any given trade is to mentally prepare yourself for the fact that if you have five trade ideas and you put them on, there is a probability that all five might lose. But if you know what your risk unit is, you can mentally prepare for that happening long before you even enter the orders. If you know what your win-loss percentage is, you can calculate the frequency of winning and losing streets of any particular magnitude. The math is easy.
So again, mental preparation, be ready for the day, be ready for the possibility of anything. If you’re in winning trades, practice adjusting your protective stop in lockstep. When I’m scalping in the cocoa market, the damn market’s moving can move 200 points in a 5 to 10 minute window. This is coming from a period of time 3 months ago when the 20 day ATR was like 60 or $600 because it’s 10 metric tons, it’s $10 per tick. Now you could see a 200 point move in a 5 to 10 minute window and a daily ATR of $4,300. So with that type of volatility, it requires you because again, the goal isn’t just to go hellbent for election to make a lot of money. That’s part of it. You have to be in it to win it, but even when you’re a hellbent for election speculator, your #1 job is to protect your capital.
And so over past month, I can share with you, there were times where I was setting in alerts to know when to add to my winners, call those orders in, but at the same time that that alert goes off where it looks like I’m going to add, it also tells me because of the way I think I’m going to be adjusting my protective stop higher accordingly, and there were days when I was doing that five, six times during the day. So you can’t be in a trade where you buy a stock at $20, your protective stop is at $19 and it goes to $25 and you protective stop is still at $19. That’s bad trading and I’m not making fun of you. Maybe you’d never heard that before, but your job as far as I see it isn’t to sit there and try to read one minute bars.
It’s to adjust your protective stops accordingly all day long if need be. Now, I’m not talking about scalping for one or two minute bars where things like 10 or 20 cents might be meaningful for the position size that you’re on because you don’t really have to do that because you’re scalping. I’m more position trading looking to hold things to see how much unrealized gain I can build up, add to my winners, adjust my protective stops accordingly so that I could stay with the trade for as long as possible, evaluate how it’s coming into the close, and do I offset the risk because I don’t retain stuff I don’t have. When I think of people scaling out and keeping a peace for posterity, I immediately start thinking that they have trouble feeling feelings around regrets because if the getting is good and it’s time to get out, it’s time to get out of all of it.
I know people have strong opinions, that’s mine. I don’t care how you think, but that’s how I do it. Learn from it or make a better rule for yourself. It’s fine with me. So that’s kind of how I look at the markets is all that preparation work is done before the opening bell for any particular market, whether it’s a stock or a futures contract, is I know what the plan is long before I have to execute it, and then I don’t waiver from that. On Monday, we talked about limiting distraction. I don’t pick things up on the fly and if I miss something, then that’s my penalty to teach me to change my behavior. That’s the negative reinforcement. It serves me, right? But I’m not too liberal to say, oh, I’m just going to take this one on the fly. It looks like it’s set up. I don’t do that. That’s how, to me, especially when you’re starting, you could end up losing money for reasons that you don’t fully understand. Again, where’s your discipline? Because it’s better to go back and say, okay, how did that happen? How did I miss it? Was it an intraday upgrade? Okay, well, how can anyone fault you on that? But that’s when you go back and you do your preparation and say, I need to build up a system element or variable that doesn’t allow that to happen anymore. What could I screen for so that I don’t miss those opportunities and then systematize it? Because if it’s a one-off, it’s nothing to be concerned about. It’s very difficult to look into find any of those one-offs as they’re aberrations by definition.
So figure out what that is for you. For me, the most important time of the day is typically, well, I’ll tell you definitively, it’s in the evening. Usually when I come back from class, get cleaned up, I eat something pretty healthy. I don’t like eating a heavy meal at the end of the day and somewhere between, depending on the evening because the classes can run later into the evening. It might be somewhere between 8:00 pm and 10:00 pm Pacific time. That’s the time where I’m doing a clearheaded postmortem on the day and also preparation for what I’m anticipating the next day or where certain instruments are in the neighborhood of my needing to put in an alert and or an order. If I already have an order that was, I don’t use good till cancel. I’ll use good for the day if the price never is achieved, of course, the day orders are canceled.
So now I have a list, okay, I’m still kind of in the neighborhood, but I might be 20 points off for this and that I’m still going to reenter that order the next day and this way. You might find that on any given day, you’re just babysitting a book of buy stop and sell stop orders, buy stop to add length to your portfolio. Sell stops could be protective, sell stops, or they could be, I’m up 5R in a trade and I’m going to invest my gains into my protective stop and walk away with nothing worse than 4R. If I’m going to go short, then I’m going to put in sell stop orders to enter the market short, and I’m going to put in buy stop protective buy stops to make sure the market doesn’t run away in my face and blast me on the upside.
But all of that is managing risk. I’m adding risk and or removing risk, either taking profits or taking small losses, and that’s largely all I do all day is adjust those stops. I’m never going in and saying, okay, I’m going to try to lift the offer here, or I’m going to try to do all that. I’m just adjusting stops and I’m letting the market come to me. It’s a much more peaceful way of doing it where I’m not invested emotionally in having to do something right now. I always live by life on life’s terms, so I’ll let the market come to me, and if the market determines the move is over, then so be it. I’m powerless over the market. I don’t want to be in a spot at any given time where I’m trying to impose my will on the market and I need to see a certain price in order for in order to execute.
I’ll say this one thing and then I’ll be done. That’s why I don’t use sell stop limits because if the job is to protect my capital, I’m trying to unwind the position and get the hell out of it. If I use a limit, now all of a sudden I’m in a spot where not only do I have to see the price on the stop side to get triggered, but then once that’s elected, I have a limit order which says I need this price or better. And if the thing could be going against me and I’m below my limit, I’m not going to get filled, and now I could either be giving back gains or otherwise, and the goal is to move the inventory to manage the risk, specifically to get the risk out of my portfolio, because after that point, it’s not a good risk. Good risks are when you’re long in the market’s going up. If the market reverses, then that length in your portfolio to me is no longer a good length. Again, depending on how you’ve calibrated your position sizing. So I’m saying for whatever your position size is, my position sizing is set up a certain way, so I know at what price point if the market looks like it wants to roll over or there’s a two be reversal or whatever have you, that’s what I would look at more than a swing low to.
And before you ask, the answer is no. This is what we do in the coaching program, but it’s a much lengthier conversation. It’s not a five minute discussion that you can do on YouTube. Some people can do it and they say the link to the course is in the description. I’m not selling shit because mindset includes everything. Your trading system and then how you behave, and it’s too long of a conversation for me to do here. I’m giving away the most valuable stuff for free every day on YouTube. You have to make of it what you want. You could take any one of these lessons and make it homework for yourself, but at any rate, the preparation for me is what lays down the game plan. Then there’s no wavering in that game plan because that’s the best that I can do for that particular day. Every night I do a postmortem and say, how did I do? Did I win the day? Did I execute the way I wanted to execute? Because I know I have positive expected value in my system. Just because I didn’t show p and l for that particular day doesn’t invalidate who I am as a person. It doesn’t invalidate my trading strategy. It’s life on life’s terms and the data in the short run, intraday and even daily data, and oftentimes they’re just random.
So all I can do is come back and put the orders in and follow those rules the next day. Where the market goes is where it’s going to go. I’m not trying to predict things. I’m just trying to anticipate where does it make sense for me to have certain risks in the portfolio and minimize and or eliminate risks on the other side? And when I say minimize, I’m not saying scale out. I’m saying minimize. Like for example, if I’m up 5, 6, or 7R in a trade, how much of those gains am I willing to risk in order to stay in the trade to invite the 10R trades? Because again, for me, there’s no difference between 6R and 7R except for your ego, right? I’m open to the possibilities. I’m very open-minded, that way. I don’t process the P&L. I don’t look at the P&L. You shouldn’t either.
Five golden rules I wish I knew when I started trading
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What are say five golden tips I wish I knew when I started that. I kind of had to find out the hard way. I want to give you what I think there’s probably 35 right or 7x because five goes into 35 7 times. There’s probably seven times more because it’s all nuanced and it really depends on your style and your asset class. But before I get there, that’s what means. I have to make a point. I got an email from an email subscriber who’s downloaded the audiobook version of The Inner Voice of Trading, which you can get for free. The link’s in the description. His name’s Ron. I don’t want to give you his last name because he didn’t give me permission to read this. So I just want to say it’s from Ron. You have really provoked me to change my thought process as to why I have not been consistent in the market.
It seems clear now that the mental game is my weakest link. Your videos seem to be talking directly to me. Thanks very much for saying that. Sometimes feels like you hit me right between the eyes, not trying to thank you for your direct non-sugar coated information. So this actually speaks to why I even do the show. You remember when I started, there was no one really to help me. There was no smart phones, there was no wireless technology to speak of that. Those big ass Gordon Gecko phones cost $1,000 – had 30 minutes of talk time and cost $1/minute to use. And there were books and people and I mean, I felt so isolated. I feel isolated
Shit, man, help me, help me please. I’m starving. It’s cold.
And I said, well fuck it. I’m going to make it in spite of all this bullshit, right? Things going against you. That famous guy, he’s in the Navy, I can’t remember his name. He says, “good.” That’s how I’ve already approached my life from day one. I knew I was on my own. I didn’t come from any type of a background, which you would’ve said that kid’s going to be a star trader someday. I had the emotional makeup, which I was born with and I’m very, very lucky. If you don’t have it, the odds are against you. You have to develop mental toughness and that’s the hardest part. So when people say, I’m going to give you the list of the five golden rules, they say anyone can trade. I don’t agree with that. I don’t mean to on this Thursday. I don’t want to burst anyone’s bubble, but I just don’t think trading’s for everybody. I think despite what you can learn, anyone can learn it. That’s true. You could even look over my shoulder. That’s a marketing tactic, right? “Come look over my shoulder,” “join my Discord.” But that’s not going to help you if you don’t have the right emotional constitution to want to take risks to want to invite losses, to invite losing money. And for those of you that have big communities, whether it’s in person or online, the humiliation that goes with being wrong more frequently than you’re right.
This is why I say if you’re going to try to skew the odds and make it, you really have to focus. You have to be a leader. You have to be decisive. You have to focus. You have to realize tomorrow’s another day and that you also have to realize that you can’t get your way just because you want something and you want it now it’s life on life’s terms. It’s a 12-step process. You have to be sober around what you’re doing and you have to do that knowing that there are other people who are always going to be better than you, and they’re making it look easy.
And that’s just the way that it goes. It’s really your personal space. It’s your personal journey to kind of figure out how do you want to get this done. So when I think about, I mean I have 50 things written down that could be golden. These are subjective because they apply to me and what did I have to kind of go through? Remember I was trying to trade immediately with limited cash. I was trying to trade. Any timeframe could be scalping in one or two minute bars to trend following across four asset classes. Obviously looking back, that’s a recipe for disaster. But the first thing that I’ll say is that you should all be doing, let’s not even say that you’re starting out, but you haven’t developed the consistency which leads to profitability because thoughts, feelings, actions, actions, behavior, behavior predicts where you end up.
So if you’re in the grind and you’re in day one and day five, to me, you’re still starting out because you haven’t found the combination that works yet. So even with five years of trying to figure it out, I appreciate your determination, but I also understand that you might be having a very difficult time because you haven’t figured it out. The key to having sustainability, and this is number one, is to trade small. Don’t worry about making money. Your job should always be to play superior defense because your winners, like I said in yesterday’s episode, will eventually pay for all the losers and then some, it’ll pay for your experimentation. But don’t get excited about taking small gains. Get excited about taking small losses and learning how to play superior defense. Really what gives you the staying power as opposed to wanting to be having to fund your account frequently because you keep losing money.
Don’t worry about getting to your optimal bed size. Get to learn how to do a process day after day after day. Scaling up is the easy part because you’re not going to go from trading 1 or 2 MNQs or whatever to having to get filled on 150 contracts going from one to two to three to four to five, which is really how you should do it is easy to do the market ample liquidity for that. Second thing is to be get locked into saying, I got to master the MNQs, and that’s all I’m going to look at is the stock index futures. Why? Well, stock index futures as a group, doesn’t matter whether it’s Russell 2K, the E-Mini or the Nasdaq, they’re all highly correlated and chances are, if you look at those overlays, unless you’re trying to trade spreads long, one short the other, they all very much look the same.
Price points are different. Margins might be different, but there’s a way of looking at it where it doesn’t matter which one you’re looking at because they all kind of look the same. So if there’s no trade set up on one or if one’s not in an uptrend, it’s very difficult to find another one that might be a better trade. So that’s why I’m saying be promiscuous. Look through other asset classes. Look, if you’re looking at say the grains, look at the metals, look at the softs, look at the currencies. Be open-minded. You could always trade small. If you can’t get it done in futures in the minis of the micros, then you could trade 5 of the closest related. If you can’t trade Comex gold, then look at the mini gold. If you can’t trade the mini gold, then look at trading shares of GLD because your goal is to learn the process, not worry about necessarily making a lot of money.
You want to get your process down. In fact, when in the coaching, the goal setting isn’t like, I want to make 16% a week. I want to make 100% a year. I want to be in a trading competition. The goal is to find the process with which you’re compatible that you can replicate day after day after day. Because with expected values, that is now your combination to be able to print money. You’re not going to do it over. You’re not necessarily going to be able to do it day after day after day, but you’ll be able to do it enough over a long period of time when you can trade, when you have an edge and a trading edge, at least a simple definition of that is you are having a set of rules that when you enact on them in the marketplace, it has positive expected value. You’re not going to make money every trade, but over hundreds of thousands of trades it should work. So again, “thoughts, feelings, actions.” Number three, you can think and have opinions on Bitcoin, Nvidia, this and that.
Ultimately you are making money is going to come down to behavior. If you’re missing trades, set alerts, then that’s just to say, okay, ready. As they say on your mark, get set go. The get set part is the alert. The go part is you are putting a stop order in above or below the marketplace so that when it trades at or through that level, you’ll add or remove the risk to your portfolio according to whatever your strategy is. For four, Brian, Shannon and I are kind of famous for saying this in different ways. Brian says, “only price pays.” I agree with that a hundred percent. Love Brian. My way of saying the same thing from before I even knew Brian was on Wall Street. “Only price will tell you the truth.” We’re not CFAs here. We’re not talking valuations and P/E multiples and Efficient Market Hypothesis, which is epic bullshit anyway.
If you are bullish for one particular reason and the price is going against you, not just on the day but the week, what have you, the price is telling you the truth because it’s the sum total of what everyone else is thinking. So you might have a very good reason why you feel bullish on something, but if everybody else is doing the opposite trade and or they’re showing up with inventory for sale with the auction process, the prices have to drop in order for the market to clear. You’re on the wrong side of the trade. So while I guess you can have a bullish thought process, don’t be long. Now, again, I don’t want to get into it. It’s illogical for me. If you’re telling me you’re bullish but you don’t have a position on, you have a conflict going on that we would have to work out in the coaching process. But trust me when I tell you, this is why I say, and you can go look up the video, why you want to be buying when there’s other buyers. In that case, you want to be with that herd mentality. They might have fundamental investor style reasons why they’re in that particular trade, which have nothing to do with why you are in it, but you can ride their coattails and be supported by them, especially if they’re institutions.
So let the price tell you what everyone else is thinking. That’s how you decipher the price. It doesn’t have anything to do with the fundamental value. And if you’re a trader, be mindful that you’re using investor chat market caps, trillion dollars, that doesn’t matter. Nosebleed valuations, that’s investor talk. That’s for people who are trying to sound smart. It’s irrelevant in trader speak. Price, earnings multiples, forward earnings, market cap doesn’t matter. Does not matter. What matters is we make our money on position sizing and then you need to calculate however you do that. What is the distance between your entry and your protective stop? Three things that you need to know, but in terms of direction, price will tell you the truth.
Your job is to play defense. The price as it goes against you. If your long is telling you that it’s the wrong time, you might have bad luck. Maybe your analysis is bad, but you have to listen to the price. You have to do what you’re told. If you think you’re going to stand up in the face of that, you’re going to lose a lot of money and then you’re going to be angry and you’re going to get into all different types of destructive behavior. And the last thing I want to say that you might not expect me to say is once you develop a skill and you can create alpha, you can outperform buy and hold with less risk. That might mean you get even market like returns, but you have only a fraction of the drawdown that’s very valuable to people. Don’t underestimate how valuable that might be When I was starting out, the total return on the s and p, and this isn’t the point.
The point is because I get sidetracked, I get excited about this stuff. I so want you to win. Use other people’s money. Number five, as soon as you possibly can, go to Martin. It’s not on YouTube, but there are audio podcast episodes on Spotify where if you go to martin chronicle.com and you search about finding backers, finding investor raising money, there’s a whole bunch of audio recorded episodes that you can find on Spotify or Apple Podcasts or Google Podcasts. I forget what they’re all called anymore because they change, but it’s not on YouTube. It’s the audio version. So before you go searching on YouTube for these episodes, they were before I started doing the video ones here on YouTube, there’s a whole how do you do it.
Now I will say don’t ask friends and family. You have to be afraid of the person that you’re asking money from. Do not trade your retirement money under any circumstances and do not trade friends and family for a lot of reasons. You want to make your mistakes with other people if that’s going to happen. And two, you don’t want to have to be talking about the markets all the time 24/7 because the people you chose to solicit always want to talk about the markets. I don’t like talking about the markets. I don’t meet with people to chat about and go meet for a coffee and chat about gold. It doesn’t do anything for me. I know what I’m doing. And two, don’t take this the wrong way. I don’t care what anyone thinks about any other particular trading strategy or instrument. That’s how independent I am.
I wouldn’t meet Victor Sperandeo who I know and love as a family member to go talk about the markets. It’s just not what I do. You want to talk about baseball? Now? You got me warmed up. But ultimately, someone who I don’t know says, let’s go to a ball game. I’m not doing it. Why? Because they want to pump me for free information and it turns into a coaching lesson, and I don’t want to do it. Don’t mean to sound that way, but that’s what ends up happening. There’s always a subtext to what’s going on. So using other people’s money, why? Well, look, if you learn how to trade the way I’m trying to teach you how to trade, that’s valuable for everybody, not just yourself. Remember, I started thinking I forgot what day it was. Might’ve been Wednesday, might’ve been Monday. I can’t remember what day is today. For the love of God, think about creating generational wealth that could affect your behavior today and stop you from being an idiot, right? So when you use other people’s money, now you can earn incentive fees.
It depends on your client agreement. But again, go listen to those because I’m not going to rehash it here. Go do your own homework. At the end of the day, if you had say a hundred thousand of your own money and you grew it 20%, you get all that money, now you have $120k, you earn $20k. If you had a million dollars from a bunch of other people who you could run in a separate managed account type of style, and you were up because you put on the same trades on 20%, now those accounts are up to $1.2 million. You created $200,000 in realized and or unrealized gains collectively in the way money management works, you are entitled to a piece of those profits. Now, it’s all negotiable. It’s all over the place. There are, when I was coming up, the standard was 2 and 20, but the numbers, excuse me, are really what you negotiate.
“Two and 20” means 2% management fee, 20% incentive fee. So if you put that even that standard number on a million dollars of third party capital, you’ll have $20,000 in management fees that can go to help pay your bills and 20% incentive fees. So say that could be 20% of $200k another $40k. So you did $20k on your money, you did another $20k in management fees, that’s $40k. Then you did another $40k as your stake in the gains that you created for other people. So now you are up fourfold in terms of your net worth. You went from just doing $20k on your a hundred to pulling down another $60k – $20,000 in management fees, 2% on a million, and 20% of the $200k is another $40k. So you add another $60k that brings your total return for the same trades to $80,000.
You did four times better using other people’s money. How do you think Paul Tudor Jones became a billionaire? He could sure grow his own money. Not a problem. Now I think Tudor is, and I’m not soliciting for Tudor however they make their money is fine with me, but I think they are like 3 and 24 – 3% management fee, 24% incentive fee. It gets a little sophisticated. What I used to do is if I had the two and 20 on the million, I always remembered that the high watermark was the million, right? So if you did 20% a year, that’s $5k a quarter. So your million goes to $995k. I never took an incentive fee on that first $5,000. I’d say, okay, let the client earn back through capital gains back to the million. Then I’ll participate above the million, there’s a million ways to do it. Renaissance, I think is 5 and 45. That’s Jim Simons. So you can get creative. Don’t give the house away. You could also say 0 and 10 if you don’t need the money or you don’t have an office and you really don’t have expenses. Maybe you’re working from home, you’ve got your monitors. You don’t even need a management fee.
But that’s the quickest way to roll and grow your capital. If you have a strategy that works. So think big, because now not only is your trading account, a hundred goes to $120k, say over the first quarter. Maybe it’s over the course of the year, it doesn’t really matter. But now you’ve got another $60k coming in over the course of the year. So now your trading corpus went from a hundred thousand. You added $20k on your own activity, but another $60k came in because you had $20,000 in management fees on the million and another $40k in incentive fees on your performance for your client funds. Now again, we’re not talking taxes and all that kind of stuff, but you could have as much as $180,000 in your account
Right now. A 10% move in your account brings you about to $200k. So now your account size is just about doubled. So as you want to accumulate wealth and you have a skill that someone else can find valuable, you can get that from using other people’s money. Again, I can’t get into it right now because I’ve covered it till I’m blue in the face. Sometimes I consult on the stuff. There’s a lot of free stuff at MartinKronicle.com.
How to avoid your biggest potential losers – with a twist
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Your biggest losses aren’t necessarily from actually taking trading losses or things with brackets around the numbers, but perhaps missed opportunities. I’m Michael Martin. I’m a Los Angeles based trader and I talk about stocks, options and futures, what I trade, someone asked me if I would do a video on my biggest losses and I really talked about them in The Inner Voice of Trading. To be honest with you, those were the ones that were really the biggest magnitude and also the biggest emotional impact on me. So you can get the audio book version for free, the links in the description. I think the ones that hurt me the most though were things that I had seen and for one reason or another, I didn’t take it seriously enough or it didn’t look like it was my particular setup, so I kind of disregarded it, tried to make a mental note, which of course is a big mistake and I never put an alert in the system and next thing you know, I look four days later and it might be up a big number and I miss the trade.
And so if you believe what I say when we’re in a market where you only need several names a year to really make your year, especially with my style of trade, not in and out, in and out, in and out, I’m looking to kind of scale in and to build into positions. The missing those opportunities can be particularly painful both emotionally and financially because if you trade with leverage and the thing moves, it really hurts because those missed opportunities. You might not see it. You might not see another opportunity that has the same, that could have had the same type of an impact. Now I look at a time in the mid two thousands I had had a CTA, it got purchased by another company. That company had a 401k plan, so I was installed as “manquisition” and I had a $50k rollover at that point, and then they actually breached the contract, which I don’t want to get into.
So after two, it was supposed to be a five year deal. I left after two and I rolled that account over into a futures margin account and I started trading and I was in the right place at the right time, and I started and I caught the moves in sugar, gold and copper China. At least the rumor was China was going through enormous growth. They were buying all the commodities that you could possibly get. So that account went in a nine month period of time. Again, I was trading minimum 2% risk units and still adding to my winners almost an unlimited time. That account went from $50k to about $279k in 9 months, and I caught, like I said, gigantic moves in gold and in copper in those days I was seeing $0.14 moves in copper. You were seeing gold go from $500 to $800, sugar went from 9 to 19, and I was heavily loaded.
So when I think about the market and how everything works, I always had the kind of a similar trading strategy for those instruments at that period of time. But if those moves didn’t show up, you can have all the ability in the world. You can’t just go and say, I’m going to harvest X amount of money out of the marketplace because you have to put the trades on and the moves kind of have to be there. If the moves don’t show up, the best you can do is sit like a sniper and wait. So conversely, if I imagine at that period of time that I had all that ability, which I did, but for whatever reason I didn’t have it within me to put the damn trades on. Maybe I was looking at equities, maybe I was looking at this and that I was clearing ED&F Man for futures, Goldman Sachs for equities.
So I had all the resources that I could possibly need. Typically in those days I entered my own, Goldman had bought Spear Leeds Kellogg, and I believe that was the platform was called REDI Plus. So I would enter my own equity trades, which I didn’t really like to do just because if there’s a mistake, it’s on me. Whereas with my futures then and now I still call them into the floor so that if there’s an error on execution, it’s recorded and it’s not in my error account. So that’s typically why I pay the pros like I do to get the job done. Plus I like another set of eyes and ears on the account. You kind of get what you pay for, and I don’t ask for discounts. Going back though to those missed opportunities. You can have all the ability in the world, but if you can’t be decisive and you can’t put the trade on, it’s like did the trade even exist?
And then you get into your head and you start getting into negative thinking, right? You talk about winning streaks and losing streaks. When I approach the markets, and this is a big mental takeaway, is I come to the market every day knowing I’m going to win. I don’t know what instrument’s going to move because I’m not looking at the MNQs trying to make $2/point – You see what I’m saying? Or whatever it is. And I know if you are, you are where you are, but I just figured like, okay, based on my preparation the night before, there might be as few as two or three things on my radar that I’m going to set alerts for. Sometimes there’s more, but it all comes from the market. I’m not in my will coming to the market saying I’m looking at the NQ’s or the ES is every day I’m promiscuous. I think you should be too. Otherwise you’re missing out on opportunity. And that’s kind of what we’re talking about today. You have to look across all instruments. Once you know what your setup is, then it shouldn’t really matter whether it’s Nvidia or whether it’s the Einy cup and handle is cup and handle. If that’s what you’re trading and you have a mental hangup as to why you would trade one and not the other.
But Mike, the margin’s lower and I can’t afford to buy as much. But that’s not an argument. That’s something that you’ve made up in your mind. That was material. Your goal is to try to grow your net worth, not become a person who just trades the E-minis or the micro contracts. That’s small-minded thinking, and I think by definition, traders are people who have to be bigger minded traders. They have to think big. Think about making big money. Think about, and if this is where you’re at, one thing that can help you is you have to start manifesting it. Start by dreaming about taking winners off only when they have a comma in the P&L and set your stops accordingly. But Mike, things don’t just go to 5R. Well, that’s bullshit. Sometimes they do, but you might be small-minded and thinking, I don’t like it when it pulls back $200 on me so I could be up $300. Then it pulls back $200, so I’m only up $100. I don’t like that feeling, so I’m going to stop out of the trade. I mean, that’s something that you have to get over, right? Because an emotional issue, the money’s not that material.
So you are your own worst enemy at that point. You cut off your nose to spite your face. I can share with you that when I was in certain trades, like in gold and silver or even the copper, the sugar, they do go up and down, but maybe in an upward fashion you have to calibrate your emotional system to be able to deal with those small pullbacks in uptrends. They’re not reasons to sell. I don’t necessarily know that there are reasons to add more at that point, but don’t psych yourself out of winning trades when they’re going up just because they’re going up and down in an upward trend. That’s how trends work. Same thing with short sales. There might be a rally if that’s what it is, or a, and I don’t even know what you really have to define what a rally is, but if you are trading stocks, and the thing is going down, if the thing is up 50 cents in a downtrend, I don’t know that that’s a rally, right?
But learn to calibrate your system to be open-minded so that you do not miss those opportunities. That could be enormously profitable for you. Because once you get to your, I always have a goal for myself where I want to be up 10% in January because now I know I have a buffer even though that that’s money in the account. I never like to lose corpus, which is a fancy word for account balance. It comes from dealing with trusts and foundations. Corpus is typically the money in the account. So I started using that word because now it characterizes your account balance in a different way. It puts more of emotional, it puts more of an emotion on it. So I start to think about corpus as the body, which makes sense because kind of what the damn word means. So say you have $500,000, I don’t like to see $497k, so I tend to be super stingy, and that’s why I risk small amounts of capital like one 10th of 1% at the beginning. So this way I could be wrong 10 times and I still have 99% of my capital, but I get to put trades on because why? I don’t want the missed opportunities. Now, I will share with you, it’s likely that I have more money under control than anyone watching the show, and I’m risking one 10th of 1%. Listen to what I’m saying. Do you think that that makes me emasculated?
Not in the least. I know myself when I’m wrong, which is plenty of times. What does wrong mean? You lose money. It doesn’t matter why. If you buy a $10 and it goes to $9.90, you’re wrong. It doesn’t matter how you want to qualify it. But this way, if I have one 10th of 1% risk units, I could be wrong 10 times in a row, I still have 99% of my money. So in the way my mind works, what’s the difference between 99%, 100% and 101%, for example? Nothing. No difference. So when I do that enough and my account equity goes a 101%, to 102%, to 103%, 104% – back to 103%, back to your beginning equity at 100%, 102.5%, 102%, 102.5%, I’m still skewing things ever so slightly, even though there’s pullbacks. So then you get to the point where you’re up 10% to $550k, in my previous example.
Now it’s like, okay, well I’m in a trade and I know if I am losing money, I’m not losing anything from the original $500k, I’m losing from gains and or unrealized gains, but I’m still taking those chances. I’m still putting those trades on. So if you have regrets or you have fears about losing money, the best thing you can do is trade smaller, sticking to one strategy, get good at that, build your confidence, put those trades on, add second strategy or other asset class, go back to risking one 10th of 1% and trade. Now your normal size with your primary strategy. This way, when you’re taking those new chances that will both have financial and emotional payoffs, it will not destabilize you from your main baton ball. So this is what I’m talking about. If you’re trying to come out of a drawdown and you had $500k and you drew it down to $495k, you might have an emotional need to want to get your account back to breakeven. How do you do that? Well, you risk one 10th of 1% and you take every signal. You can’t overthink things. Now I’m just starting with one 10th of 1%, right? Look at this. In fact, I’ll tell you exactly how to look at it. Your overall optimal risk size might be say one half of 1%. So with $1 million, that would be $5k. Now say you look at $5k, that might be 16 contracts. Well, no one says you have to put the 16 on all at once.
So that means, okay, well let me break. I’ll chop that up into fourths, and I will trade four contracts long. First risking the same ATR. If you do the math, you’ll find out that you’re risking one one fourth, right? One fourth of a half. What’s that equal? One eighth. What’s an eighth 0.125? Is that close to one 10th of 1%, which is 0.1? Oh yes, method to my madness, steal from it. You can enter four times and build into your 1/2 of 1%, adjusting your protective stops all the way. And if you do that enough, you might find that when your winners win and you put on your fourth piece, which gets you to 1/2 of 1%, you’re only really risking one 10th of 1% of your capital because your other positions, I’ve made you money. The first two will make you money. Your protective stop will be at your third entry, and your fourth one is one where you would lose. So this way you trade smaller, you scale into your win winners. Most of you are like, well, I’m risk on risk off. If it moves that much, that’s where I’d be selling. And I’d be like, well, extend your timeframe. Hold it longer, hold it overnight. If you’re risking one 10th of 1% based on your protective stop and it has a gigantic move against you, maybe you’ll lose a half a percent. That’s nothing to be scared of.
It might be aggravating and frustrating, but it’s nothing to make you not want to try. I can’t do that. Can’t take risk home overnight. What are you crazy? That’s insanity. I’m like, no, it ain’t. I mean, if you’re trading back in the day with foreign exchange, you could lever your account like 200:1, which I don’t advise. That’s why I don’t advise trading foreign exchange at the beginning, is because you need to learn how to manage cash, meaning trade with no leverage. Trading into a highly levered interbank market
Is the moth to the flame. It’s much better to trade and learn how to trade cash first than trying to use leverage. Because my thought, my opinion is you might disagree, is that if you can’t trade cash, you really have no business using leverage because it just amplifies everything. It amplifies bad behavior. You don’t know what you’re doing. So focus on finding one strategy and sticking with that. And if you’re scared, just trade it smaller. And if you’re still scared, we’ll cut that position size in half because you have to learn how to trade through those strong feelings again, because the ones that you want to feel could be the other sides on the other side of the ones that you don’t want to feel here. And now that happens a lot when people think about buying new hives or buying breakouts.
Best timeframes if you want to trade for 2 hours a day
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What are the best trading timeframes or how I trade just two hours a day making all the millions I make. Of course, I’m making fun of a certain genre of videos, but I will say this about if you’re starting out and you feel that you need to sit in front of the screen all day, let me speak to that type of trader. You don’t you. Now, you might want to because it’s exciting or you feel like you’re doing trading activity, but to me, when I think about mindfulness, I always ask the questions of myself, why do I do what I do? What needs are being met?
And unless you’re running a high frequency trading platform like Citadel, that’s trading basically all day long using computer algorithms, there’s really what is really productive time for you. So I don’t let myself fool myself into thinking that I’m doing work when I’m really just being entertained. So the most liquid timeframes during the day are typically around the open and around the close. What you can see, and this is kind of both statistically proven, but also kind of folklore at this point, is that institutions that are looking to acquire and make allocations into a certain stock or even a certain sector, they’re not going to put an order to put down, let’s buy two and a half million shares of XYZ at the market. They have to work those orders all day long, and they might be doing them in 5,000 or 10,000 share clips.
So they’ll be working that order throughout the day, maybe it might take all week. It depends on the size, and it depends maybe even if they’re going to use options like just directional trades puts and calls to get that order filled. So one of the things, if you’re having trouble figuring out how to spend your day and you’re learning your craft, is go look at any particular day. Look at the last, say 10 days of whatever your favorite stock is, and then look and see if you’re looking at, say, even 15 minute bars. I’m not saying trade on 15 minute bars, I’m just saying, look at the volume in 15, 30 minute bars. Doesn’t matter to me. And then just see what, you’ll kind of see the volume. It’ll look like a little bit of a U-shape. You’ll probably see a lot of volume earlier on, and you’ll probably see, and I’m talking about 9:30 am ET.
I’m not talking about the pre-market or after the closing bell at four o’clock eastern. Just look what happens in the first half hour after the opening bell and the last half hour of trading and see how those timeframes compare to the rest of the day. Now, from there, you might say, okay, well now, okay, perfect. If you’re seeing a breakout or an instrument start to move to higher territory from a price standpoint based on say the previous days, weeks, and months, if the trends are going to eventually be strong, those campaigns will typically see higher highs. You see. Now, suppose yesterday was a big breakout day on a particular name and it closed near the high.
Now we have a situation where is there going to be follow through? So oftentimes you could look at the next day and say, okay, the market was up a lot Monday, let’s see how it opens. Tuesday. There might be follow through. So if you’re looking on the short end of things, you can look and see the opening ranges. There might be opportunity for you to do that where the rest of the volume kind of drops precipitously during the rest of the day. You can kind of come back and look at the close to see, okay, are those institutions continuing to add to their position because they’re not done buying? If you are a big mutual fund or an exchange traded fund and you’re trying to acquire inventory, like I said, you can’t put that order down to the floor all at once and get filled and then be done.
It’s going to take a while. Now, that’s just one institution. If you’re looking at a whole host of funds that are looking to add to their inventory because of fundamental reports, there’s better earnings, maybe the sector, right? Because the sector in stocks, stocks are secular, so the sectors kind of go first. Then you could look at the individual stocks in those sectors. You can say, okay, well now I get it. Maybe that’s the two hours that I’m going to spend is I’ll do my preparation the night before. I’ll see what names were up big and I’ll see whether, because think about it, if you believe in fractals, right? Then you can really trade a similar entry system across any particular timeframe. If you actually walk around saying that the market is based on fractals and fractals exist, then what’s the difference? If you’re looking at cup and handle on one bar or cup, cup and handle on a daily chart, does it exhibit similar characteristics? So because if you’re walking around saying there’s fractals, you’d think that that was the case. So this is how you can bifurcate your day. Maybe then intraday, you can start doing better research. Maybe you can do your back testing at that point and not participate in any particular trading.
But you do your research, you do preparation, you see, okay, well what’s up on the day? You watch a certain particular stock, it might be up, say $10 coming into the close, is it going to close, strong or does it start to sell off? So there again, now you might find opportunity where I remember doing this with Apple and it had gotten blasted on a certain downgrade, and it was off. It was off like $28 all day, just week, selling, selling, selling, selling. And I was like, well, it’s still in an uptrend. It’s getting blasted on this day. Let’s see what’s happening. Is it going to continue to weaken and stay weak throughout the whole day? Now again, I’m in Los Angeles, so it’s like 12 noon, and I’m looking at it and I’m saying, okay, let’s put an alert in the system and see if it sticks its head up a little bit.
Let’s see if it recovers, say even 10% of the move. So I’ll put an alert like three bucks above the low at say, where it would only be down $25. So if it was down $28, I’ll call that $30. So I’m looking for does it rally $3 off the low coming into the last hour? Why? Well, because we’re still in an uptrend. Two, you’re just dealing on a downgrade. You’re not even dealing with any real fundamental change. Just somebody who stepped up and decided to downgrade the company or what have you, or make a bigger stink over in those days, they were like, can they get the 6-year-old kids who were making the phones enough component parts to be ready coming into the holiday season? I think that was what spooked the tape. And so I remember watching it, and although it’s not my main trading strategy, I remember being able to capture, I set stops above the market and scaled in.
I think I acquired / scaled into 8,000 shares. I made almost $50k on the day as the stock recovered to finish only down $10 on the day. This is not my normal way to trade, but you can do this by watching the opening, by watching the close, right? Again, I was already was probably coming up on 20 years of experience at that time. We had all the money that we could ever need under management. So it’s all relative. The dollar signs don’t matter, right? Forget the dollar signs, things in terms of percentages, but it can be done. And then going back to yesterday’s lesson when I was starting, I wouldn’t have been able to do that because I wasn’t focusing on that timeframe and that strategy. I had to come back to it. You need to think that you’re going to be in this game for a long time, like think 10, 20, 30 years. So really you have nothing to worry about. Just focus on getting good at one thing and sticking with that. But if you’re having trouble figuring out what’s the best time of the day, you might consider looking at the open and the close as they tend to be the most liquid times. And if you’re trading small, so volume’s not going to really matter for you, but you can see a lot of activity where you might see trend continuation patterns, either at the open from yesterday’s activity, because the big timers can’t really execute a lot of volume in the pre-market. So they wait for the opening bell and then execution traders start to fill the orders. So you can see continuation from one day to the next and or look for it coming into the close if the market’s really sold off and your two standard deviations from the mean, maybe it’s going to mean revert before the end of the day. You have to watch the tape. Maybe it took a dip during the middle of the day, but it looks like it’s going to rally into the close and kind of push towards the highs. That might be an opportunity for you as well. So as far as how to do it for two hours a day, there’s my snarky little response to how you might be able to pull that off looking at the dynamics of the market.