The fastest way to put a little wind in your sails as far as your longs are to buy when there are other buyers. Long time ago before all this internet stuff came about, we had level two and you had tape reading. That’s pretty much how you did it. As far as stocks were concerned with the floor, you have open interest volume, and certainly you had the level of noise coming in off the crowd as the prices moved into key inflection points. So my own style of knowing when there’s buyers or when I buy, when there are other buyers comes from understanding pretty much how the floor works. Now granted, there’s not much of a floor environment. I suppose you could look at CVD and this and that. I don’t don’t look at any of that. I try to keep it as simple as possible.
I don’t have any order flow metrics. I really just still kind of read the tape and look how the price performs at key levels, and I keep it simple. Why? Well, because again, I don’t need the level of security that many of you might need to make me feel good about what I’m doing. I don’t mind the risk that goes with it emotionally. I don’t mind the financial risk. I have really, really good instincts. So when I think about how things used to work when you’re coming up to a multi period high, for example, you knew on the floor that the folks who are trying to fade the move aren’t going to stay in a rallying market for any length of time, especially if they’re scalping. They’re going to place their protective stops above the market. We also know that the longer the timeframe, the less random the data are, and there are many breakout system traders who are going to buy, and I used to talk to Bill Dunn about this using “N” as a variable, you can calculate how many different systems are going to come into play by looking at the number of days knowing the N-day breakout.
So I learned reading the tape, learning how the floor worked, and then learning and marrying that up with the breakout traders who were putting resting by stops in above the market knowing that they wanted to catch that momentum and buy the breakout, so to speak, to catch the move to the upside. And I had observed that enough to see that that was, I don’t know that it was an edge, but it seemed to be a good entry point because the order flow that would come in behind was oftentimes, I don’t want to say it was gargantuan, but the shorts don’t want to be in rising markets and the day traders don’t want to sit in there because by definition they’re trying to make money on the day. So they’re not going to sit in shorts that way either. And the breakout traders aren’t really looking at reading tape or otherwise too.
They’re just saying, okay, if the price here is achieved at this price point, then buy me this amount of inventory based on all these other metrics and how to position size. And so what I would do after the fact is go back and look at time in sales right after the fact, while I’m already in the trade, I’m taking it home with me. Again, it might not be your style. You might not have the stomach lining for that, and I would see what kind of orders went through at those price points. Not all the time, but sometimes you’d see that there were bigger prints around those numbers. And so for me, I knew in many ways that those might not necessarily be aggregated retail orders because in the day a lot of those smaller orders were getting done electric even electronically without human intervention even back then.
So I kind of surmised there could be evidence that there’s institutional activity, as you’ve heard me say, I’m not the only one to say it, that institutions leave footprints. So then I’d be like, okay, well those people typically want to defend their positions then because they’re just getting started. If I’m looking at a hedge fund or a mutual fund, and ETFs didn’t exist, you had closed-ended funds at the time, open-ended funds, mutual funds and hedge funds so that the environment was very different. They have so much money that buy-in 10,000 shares of a stock again is just the beginning for them, you see? So I could infer that I don’t know who it might be because it’s all done anonymously, but that there’s more buying behind it. And two, if there is that little kind of cup and handle thing, there’s a moves of breakout, then there’s a bit of a pullback that oftentimes becomes a second entry for those folks, not the first one.
So again, I got to witness other people’s behavior for those people who were buying long and say, okay, what’s going on here? How can I play detective and figure this out? And so from that, I developed my own style just like I advocate for you to do. So what I found over time, not any one particular trade, but long stretches of time for both futures and for stocks that institutions would step up and support those price points. Being a smaller trader, the water’s cold, I needed to make sure that there were those other players there so that I wouldn’t get bullied. Think of them as big brothers because if they liked the price at a certain level for their first risk unit and the market pulled back as it does oftentimes have a bit of a natural reaction where there’s a quick little blow off for the scalpers and the day traders, oftentimes you’d see institutions coming in and buying their second risk unit at a very similar price.
I was like, well, that’s wind in my sail because now I know that those folks who have much greater account sizes who could knock my lights out in the flick of a are going to support the prices there. So that gave me a little buoyancy in my position. Not all the time, but a lot of the time. So that’s what I mean when I say I want to buy when there’s other buyers I want to take now. Now it’s, it’s a little bit different. I have all the money in the world, but when I was starting out, you remember things were trading at eighths. Big swings would hurt me. The commissions were also sizable. It would cost me 50 cents to a dollar to sometimes round turn in a trade just as break even. I wrote about some of these things in the inner voice of trading.
I give the audio book version away. If you’re still watching, the link is in the description. You could download the audio book version for free. It has 4.5/5.0 stars on Amazon, the hardcover anyway, and so this is what I mean by trial and error. I didn’t know what I was doing, but I had to try and see what I could garner from the data so that I could make better decisions going forward. That was always like people say 1% better every day. That’s really all I ever tried to do. I knew that I wasn’t going to become Paul Tudor Jones in a week. That’s just not practical. So through your own trial and error, you might very well find that there are no buyers in pullbacks. That might be an indication that there’s going to be further weakness. It also helped me define why a rule that I have that I don’t trade, and that is, well, did I say that right?
I don’t trade inside of channels. I either want to be long above resistance or certainly short or not long below support. I don’t really do anything when markets are channeling sideways, find that I don’t like scalping in them, it’s not enough money for me to care. And again, because I’m not in front of the screen. So while everyone’s trying to short it resistance, buy its support, and maybe do that several times a day, I’m going to miss that whole trade deliberately on my own volition and wait for the market to choose who’s actually in control for a much more pronounced move, which for me would happen beyond resistance. You see what I’m saying? You might feel differently. More power to you. I’m not here to again call your girlfriend ugly. I’m just saying that that’s what I observed in the environment that I grew up in. It was very different 36 years ago. So you can’t judge apples. It’s apples and oranges compared to when I started. And so my experiences and the environment I grew up in really shaped me and it shaped my trading the same way you’re going through all of that right now. So in the end, you have to make a suppose. Suppose what happens because you’re never going to really know for sure you have to watch this. I watched, I went back and I dissected and a postmortem on every one of my trades without judgment because I knew I didn’t know shit. So there’s no sense in beating somebody up if they don’t know what they’re doing. So I was looking at the data and what decisions could I have made differently given what I can see after the fact. Is there evidence of something raising its hand before I put the trade on? That might give me a moment of pause. You know what I mean? For example, if you buy breakouts, do you actually buy one tick above the previous high or do you give it more room to take into account that there could be noise around what you think that signal might be? That’s going to come from trial and error. Back testing can help for sure, and you can test to see what that does to profitability. For my style of trading, believe it or not, given another 25 cents on a stock, and even sometimes several ticks on futures didn’t really hurt my profitability all that much. Now if you’re scalping, it might mean all the world, but for me, that data, for my style of trading, it’s too random to care.
So this is what I mean by keeping a diary, going back and looking at your trades and not judging whether you made money or not. That’s not the point. You want to go back and say, well, what did I know at the time that I made my decision and what could I learn from what the result of the trade was by looking at the data, right? We talked about that. If you look at MartinKronicle and search for Annie Duke, she and I had a conversation about “resulting,” you do a lot of reckless behavior, but the trade turns out to be a winner, and all of a sudden you’re like, man, that’s the way I’m going to go. So you got rewarded for doing bad stuff. Sometimes you do all the right things, but you still lose, right? That happens in sports coach, you put Martin in there to steal, he got thrown out, ended the game you’d ever want to get thrown out at third base.
Well, Martin’s been, he’s stolen third 90% of the time success rate. So we figured if there was somebody that was going to steal the bag and get away with it, it would be Martin. This time we got thrown out. That’s the way that it goes. Well, knowing that, would you do anything differently? No, because the probability is that when he steals, he steals 90% of the time. So we’re going to play the odds. It didn’t work out this time, but if we do this a hundred times a season, he’s going to steal 90 bags. So I’m going to be the first 50/90 guy in the MLB in my late fifties. Get ready for me Acuña. So at the end of the day, that’s how you have to think. You have to think probabilistically. Just because something doesn’t work once, it might work out many, many, many times.
And that comes from trial and error. And that’s how I developed understanding where there are other buyers you might not be able to tell in the heat of the moment, but you can see after the fact, look at the size of the prince. They’ll be there if you have success with some of these other things. I’m too old and too cranky to care about CVD. If it works for you, knock yourself out. But I’m not going to look at that at this point. I feel comfortable with what I’m doing and it works for me and I still have great success with it. But again, at the end of the day, it still doesn’t mean when you buy with other buyers that it’s all the time going to work. It still could come back in your face. There could be a piece of news that comes out.
There could be something about the economy, about inflation that sends both the instrument you’re trading as well as the overall market against you. That’s why in the short run, you can’t really beat yourself up over it because there’s a lot of unknowns, things that you never could know. You see what I’m saying? But this is the kind of stuff that I put on in my brain and then I go back and I back test for the things that I can. And I see that there are very, very few things that you can trust other than the price in many ways, even if you’re not a momentum trader, open interest, that too is sometimes unreliable. Take a look at the coca market right now. This is here we are at the end of March in 2024, depending on when you might be watching this video, and the coco market’s going berserk because there’s a lot of things going on with the supply side in Western Africa where we garner 60 plus percent of the world’s cocoa.
And the fundamental side of the story is basically simple. These aren’t beef steak tomatoes where you can plant a new tomato plant every year and get a robust harvest. If something’s wrong in the cocoa crop and you plant new cocoa trees, it’s going to be six or seven years before it going to yield anything material, right? So my hunch is that these prices aren’t going away anytime soon. If you look at the May contract, which is the front month for Coco right now, you’ll see that the price has gone from $6,500 to $10,000 all the while open interest has gone down, and we still have five, six weeks until, well, at least another month until expiration. Why is that? Well, an outlier event, the exchange has seen that the ATR and the volatility has gone from about $60, 70-ish to almost $400. And when that volatility kicks in like that, in order to keep and maintain the integrity of the marketplace, the exchange raises the margin rates. They have a SPAN calculator that they use and they are the sole entities that can increase. Well, the broker dealer fcms can increase margins, but the exchange sets the base level. They can’t make it below the base level. So what ended up happening is the margin went up, whatever it is, $15,000 (it’s $19k per contract now) a contract, and so that’s knocked out many of the smaller traders who don’t have enough money to do that. It might take up too much cash or might cause them to have fear. So you saw a decrease in open interest simply because certain traders got knocked out. Whereas if you look at the July open interest has gone pretty much sideways. Normally when you would see open interest going down as prices increase, you could infer that shorts were covering into the higher prices open interest is going down. So what normally you’d see when you’re in a trend open interest and price moving, not necessarily in lockstep, but both increasing inferring that new longs are entering the market. Anyway, that gets a little too detailed for what we talk about here, which is largely trader mindset. It’s just good to know that when you’re buying that you’re not alone in the trade.
As your trading gets bigger and bigger and your position sizes get bigger, you also want to learn to live with very sloppy entries and lots of slippage and skid. The last thing you want to do is put an order down for 50 contracts of the large gold contracts in the Comex and get everything filled at one price. That could tell you that there’s a lot of people who were looking to move and get out of their inventory and ready, willing, and able to sell it to someone like yourself.
Being open to possibilities and avoiding labels
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I want to help you revolutionize the way you think about trading and kind of backdoor your way into stuff. Help you understand that your mindset, your approach to the trade might be the actual thing that’s holding you back. For example, when I was a kid, my mom would want me to eat broccoli. Apparently it was good for me at the time. I was basically mom, go forth and procreate with yourself. I’m not eating broccoli. I don’t like the way it looks. I don’t like the way it tastes. It’s too bitter. There’s no flavoring on it. I’m not interested. So then you get into this whole battle, she said, what do you think she said, but you haven’t even tried it yet. So when I think about traders, the thing that trips them up is that they wanted to find themselves as a certain type of a trader before they’ve actually tried to accomplish what that type of trading style would actually be.
This happens a lot in day trading. The marketers fill up their pipelines for everybody to see about how easy it is and how much money you could make. And of course, you can’t take that dirty risk home overnight because that’s how you go broke. Don’t be a broke ass bitch. And my mindset’s very, very different. I don’t walk into a trade and say, I’m going to be a day trader today, or I’m going to be a trend follower. Or today’s the day for scalping. It’s Tuesday. Tuesday is scalping day. So what I would suggest that you do, especially if you’re struggling, is to put the trade on and manage the risk. Let the market tell you when the move is over, as opposed to you trying to impose your will. You don’t even understand how many emails I get from people who are pulling out their hair married to some type of definition of what they think trading is, but yet they haven’t been able to execute on it and they’re like, welcome hell or high water.
I’m going to do this and I don’t mind going broke. And to me, that’s stupid, right? That’s ego talking. A long time. Channel viewer, Matija6884, I hope I’m saying the name right, wrote in a comment on the video that I wrote. I did called What You Should Know About Scalping Before you Start. Now, I’ve done my fair share of scalping and I don’t have any biases. I don’t have any group of traders that I don’t like. Some of my best friends are day traders, so I don’t have that type of bias. What I do have are the data, and I have a deluge of emails and requests to do things on how people can succeed at trading because they’re failing on the short end. So I’m not calling anyone’s girlfriend ugly here. I’m just saying based on the data and the requests that I get, the people who seem at least, okay, let’s say it this way for the people who have watched this channel might be a tiny, tiny group of people.
Their biggest struggle is coming to terms with trading with the most random data there is, which is tick by tick, swing trading, scalping style trades, and I think people can do that, but to me it’s not as much technical as it is. Do you have a good feel? And I don’t care if you’re in the box, I don’t care about all that bullshit. You can look at that all day long. Ultimately, you have to develop a feel for what that data is saying to you and know how to pull off the trade, the technical part, it’s like a person who has the same set of tools that a carpenter has. This is the same tools, but what makes somebody a great carpenter versus somebody to average to no skill at all? It’s the same tools. So to me, stop orders looking at level two, those are just tools.
They don’t necessarily make the trader. They can help them anyway. The comment comes in and says, do you immediately, I think they didn’t put the word in here. Do you also immediately put your stop loss protective? I use protective stop with scalping. And what are, that’s not easy to make five to one or three to one for a quick scalping trade. And if you can’t have a three to one, then why are you even doing it? So mattia, your whole comment to me is a truism. I’ve already made that point. You know what I’m saying? I don’t want to trade for peanuts. My intention when I put a trade on whether it’s cocoa, sugar, is to make it an investment. And what I mean by that is I’m willing to hold that trade for as long as possible throughout the day, overnight and over the weekend, I’ve got the track record to prove it.
At the end of the day, you don’t get paid if you don’t have risk. So to me, your success is going to be limited by not your trading techniques and what you can learn, but your willingness to embrace the uncertainty. The uncertainty means risk and risk is congruent with reward. They’re related like coke and Coke and pizza. So to me that means you want to be able to become friends with all of your feelings. How do you feel about having Coco on at these levels overnight when the markets are closed? Why does it always have to be bad? I don’t understand that because your bias that you’re bringing to the table, that person wouldn’t have a seat at my table because it’s not rational. They’re afraid of the boogeyman at that point. So typically when you scalp, my trading style is the same regardless of the holding period.
I don’t put on an optimal unit and just bet, put my ego on the spot right then and there. I kind of tiptoe my way into my optimal position and I know where my protective stops are right away. If the market starts to move in my favor, my inclination would be to add. Sometimes the market says, not today you are. It’s not going to happen today. So what happens? My trailing stop gets hit. Sometimes I win, sometimes I lose. And if you’re looking on the outside in, you’d say, oh, that was a scalp, and I’m like, I didn’t call it a scalp. I just put the damn trade on and put my stops in. Why are you so married to labels? The labels might be actually holding you back. They also might be truncating or izing your potential profitability. You can just let the winners run.
I don’t care what the box says. What makes that the tell all? You know how many times I’ve been in a trade where it’s gone up and down and up and down and up and down? If you were looking at the box, you’d knocked out of the trade 45 times and all you had to do is position size to the point where you could keep it on, let the market do the work. Again, go back to the broccoli thing. How do you know if you haven’t tried it? So you can solve your own problems if you just stop bitching, right? If you stop worrying about small moves. Now, I’m not saying that it’s easy to make five to one, right? That’s the truism part. I never said it was easy to make a five to one on a particular trade, but what I am saying is that if you take everything off at two to one, you’re never going to see five to one.
And then if you take everything off that you can at five to one, as rare as it might be, you’re never going to see 10 to one. To me, those types of trades, it depends what your R is. If it’s 20 cents, you could see a $2 move. That would be your 10 to one. That could happen in a day, I suppose, but then you have to figure out for the position size because we make our money not by the move, but by the position size, right? So what is that for you? I know for me when I’m wrong, I’m oftentimes early, so I don’t want to get knocked out with my optimal position size, you see? So I’ll tiptoe my way in and I’ll add, sometimes I’ll add as much as five times. I don’t mind that. So where other people are trying to scale out, they buy their optimal unit and they try to feed their orders into reading level two and get out and be happy with that.
To me, it’s not worth my time. You get to determine what’s best for you. I’m not going to, again, if you don’t, some people just don’t like chocolate ice cream. I don’t understand them, but that’s just their taste and preferences. Chocolate ice cream’s going to be more expensive coming up. So I don’t look and try to make up in my mind ahead of time, I need to make a quick scalping trade. Why would I do that? I’m here to make money. So to me, it would be better to scale into my winners with smaller size and let the market show me that it wants to continue to move. That style might not work for you, but it works for me. Now, if I get knocked out, if I get to add a second piece on and it goes and I adjust my protective stop up, I might be profitable on one. My first unit might be a breakeven. That’s just the way that it goes.
Not at that point interested in making a scalp style reward. Now, I know people can do that several times a day. Perhaps I’m just not for where I am in my life and the money that I’ve made, I’m not willing to work that hard for it. I think that’s a young person’s game. In fact, I don’t know anybody over the age of 60 who’s sitting scalping all day. So I think that’s a young person’s game. There could be outliers. I’m not saying that it’s absolute. I don’t say anything that’s absolute because I live in a world of statistics and probabilities and expected outcomes. But for where I am in my life, I don’t want to be sitting in front of the screen where you would have to do that in order to be a scalper. I have better things to do with my time, and I think as you get older and you see your friends getting sick, you see some of them dying.
Timely or not. I’ve had good close friends commit suicide. I want to live my life, so I’m not going to be at the screen from five in the morning Pacific time to 1:00 PM Pacific time, which would be the closing bell. I’m just not going to do it. I know where my levels are. I put my orders. I trust that my stops will get executed and then the market’s going to go where it’s going to go. The last thing I want to do is be sitting in front of the screen and that’s where the younger folks love it. They want to be in front of the screen.
So when I get knocked out of a trade for a win on the outside looking in, you could say that was a good scalp. And for me it’s like, well, I was really just kind of getting to the first course, but the restaurant was closing so I couldn’t get to the salad. I couldn’t get to the soup, I couldn’t get to the main course. I just got knocked out, and that’s the way that it works. So you might consider taking a look at what biases you’re bringing to the table when you’re starting to trade and letting go of those definitions. They don’t really give you the sense of security that you think they do. If they did, why aren’t you performing better? See what I mean? I’ve learned the hard way.
Don’t bitch at me. I wrote a book about my failures and made it public. This is isn’t about how I’m better than you. It’s not the point. The thing is, I believe the Buddhist doctrine, that man causes his own suffering. And so if you want to define yourself as a certain type of traitor before you’ve tried other styles just because so-and-so has done it, then you might be biting your nose to spite your face. How do you know you can’t be better off without trying? So if you make up in your mind metha that it’s hard to make five to one, I think you give it power. I don’t look at it that way. I just think the market’s random in many ways, especially in the short term. If you’re looking at one minute bars, it’s really, really random. I guess tick by tick time and sales would the most random.
But if you say, well, it’s going to be hard, then you’re going to see it as being hard. If you’re open to the possibility of it showing up once in a while, then you’ll see the abundance, right? I don’t do a lot of driving, but in California you have to drive. For the most part. We’re not a city of pedestrians like New York City where everyone’s largely on foot, albeit walking to buses, trades, Ubers and this and that. You don’t really have a need for a car of your own in New York City if you want. It’s a luxury, but it becomes a pain in the ass’s, kind of like having kids at the end of the day, you can determine your holding period based on where the price is going, and that’s what I would do. And then learn to define. If you need that to feel good about yourself for your self-esteem or for your validation, or because you feel more confident, who knows what the psychological reason is without labeling yourself.
You could look back over 6, 7, 8, 9, maybe 12 months of the year and say, from the data that I have, it seems that I’m a two day swing trader. Or from the data that I have, it looks like I’m an intraday scalper or from the data that I can collect, it looks as if I’m a short to intermediate term trend follower. So I would let your behavior indicate where you are in your trading rather than come into the table and say, come to the trading desk and say, oh, I just have to scalp, because you might be leaving a lot of money on the table despite the fact that other people can do it. Your goal is to find the best strategy for who you are, even though it can help you get started picking a role model, you still have to be promiscuous in your thought process at that point and try several styles, several holding periods, and don’t be so locked in.
It’s going to take time. I wish I could tell you that it’s only going to take a few months and you’ll find your path and you’ll be locked and loaded and you’ll be ready to go. Everyone wants to make money and succeed in two weeks. That’s not practical and it’s not realistic. It’s going to take a long time, perhaps years, and so you better batten down the hatches and get used to the fact that this is going to be a journey of self-discovery. In the meantime, you may or may not make money, but that’s what trading is going to do. It’s going to push your buttons, it’s going to amplify your biggest character defects. It’s going to ask you to feel feelings that you don’t want to feel, and it’s going to ask you to feel them at the times that you don’t want to feel them, right? When you want to feel good, you’re going to be faced with a challenge. And I’ve come to the conclusion through my own trial and error that my level of success in being able to execute every day, as well as my interpretation of the profitability comes down to my willingness to deliver with the uncertainty that comes with managing risk.
And by making myself my own lab rat, I can better determine what’s the best holding period. If the market says, for your temperament and for what you want to do, we don’t have those types of trades and inventory right now. We’re going to relegate you to stopping you out in what’s going to look like scalping trades from the passersby. And if it tends to work out that that makes me a little bit of money, I guess I’d rather make it than not. But at that level, the numbers are not that significant to me in terms of moving my p and l. Now, if I wanted to focus on that, I could make that my primary business, but then my hourly wage would go down, I’d be putting in a many, many, many more hours for a lot less money. So you have to figure out what trade-offs do you want to make? Are you here to make money? Are you here to feel good again? To me? The level of profitability that you have is going to come down to your ability to deal with the uncertainty.
How to be your own trading coach
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The one thing I do to check myself and to keep myself in line is to look at my habits, right? Because the habits reflect my behavior and my behavior predicts where I end up. So one way that you can completely steal this from me is go to school on yourself. It’s a saying that they have in golf, actually go to school. So what I do on any given week, I don’t necessarily look at the results, right? Because you can play a poker hand of aces really, really well and you’re going to get your aces cracked. You can’t look back and say that you did the wrong thing just because you lost the hand, as frustrating as it might be. So what I do to keep myself in check is I say, okay, are my habits today kind of parallel or congruent with the vision that I have for myself in the future?
Now, the future for you can be next week, next month, next year. It probably comes down to returns, but returns are a function of also like your behavior. Why? Well, if you think about it, whether you’re scalping or whether you’re position trading and regardless of your asset class and holding period, the winning trades are there. It’s up for you to kind of use your metal detector, so to speak and find them, and what I have found is that the reason why most people are struggling is not because of the how-to part of trading, right? I even found that out from myself. There was a world of information. I kept feeding my brain thinking that that was the solution, but it’s actually not. You find yourself in that spot when you’re dying for reassurances, and guess what? There aren’t any. There aren’t any reassurances. This is probabilistic, and that’s the feeling tone of what I mean when I say that.
I wish I could tell you that if you put tab A into slot B, the result would be exactly guaranteed and predictable every single time, but it doesn’t work that way. You have to get used to living with the uncertainty and unfortunately, that’s what makes people freak out and stop their habits not being able to deal with the unpredictability and the uncertainty. Whereas if you do more traditional professions, you can have a vision for that. You can see what the outcome is. If you go to school, you get an MBA, someone becomes a CPA or an attorney. That type of lifestyle is pretty predictable, especially the paycheck part. With trading, it’s very, very difficult because you don’t know when your winning streaks are going to show up. You don’t know when your losing streaks are going to show up. So you have to put yourself in the mindset that regardless of the outcome, I know my system has positive expected value. That’s my edge, and I’m only going to trade when I have my edge. I know when I do that. I know at some point in the future I don’t know when, but I do know that and I trust I that at some point in the future my dreams will come true. I’ve seen that enough in my life in everything that I’ve done, not just around trading, is you have to have the vision first. If you have the vision first, you can work backwards and get to the behavior part once you know who you are and what makes you tick. To me, finding the right trading methodology is then the easy part because those are finite when you think about it. And what do I mean by that? So just on the back of a napkin, there’s really when you slice it and dice it, what four asset classes. There’s interbank, foreign exchange, there’s commodity future contracts, there’s options on equities and futures, which include futures on currencies, and then there’s stocks. Right now, I suppose you could throw in rights and warrants, but to me, I don’t really look at those because they work more like options.
So at the end of the day, then what do you have? You have holding periods. So when you think about that and you start to come up with the combinations of are you going to scalp this? Are you going to position trade that? Are you going to trend? Follow this. Even with that, you have scalping. Then you have, we could call it swing trading or day trading. We have scalping, which is a really short window of time, could be seconds to minutes play with me here. Could be longer. Of course, you can define it the way you want to. I’m just giving you an example. Then you have day trading, which might be a longer period of time within the day longer than the scalp. The next step would be some type of a swing trade, which could be one day, three day, four day, even five days.
It really depends who you speak with. And then you would get into say, position trading slash short, intermediate or longer term trend following position trading. And then at the other far end you have investing, which is kind of putting on risk with an open-ended selling or upsetting risk strategy. So when you look at all of those asset classes and you say, okay, I have four asset classes and I have five or so ways to trade them over a certain time period, then there’s only so many combinations that you can come up with. That’s the good news. So for me, I’m like, okay, well I can quantify that. So now I just have to find for what I want my money to do for me, and what do I want to get out of trading? Do I want some kind of pleasure or how does that serve me in my life?
What’s the purpose of it? So once you get to that standpoint, you can figure out the right combination for you that should become habitual so that every single day you know how you’re going to trade and affect your edge because otherwise it wouldn’t make sense for you to put on a trade at all if you can’t affect your edge and an edge in, again, back of the napkin, kind of back of the envelope type of definition would be just in a situation where probabilistically that when you affect this setup or this chart pattern, whatever it might be, that there is a positive expected value. Now there’s a video on positive expected value. You can go look it up here on YouTube and there’s probably more resources At Martin Chronicle. It was hard for me. There was no cottage industry for helping people. The internet didn’t exist, and I know how hard it is.
I know how firsthand it is. In fact, I wrote a book about how hard it was. It’s called the Inner Voice of Trading. It’s got four and a half out of five stars. I give away the audio book version. You can get it for free, the links in the description. So don’t tell me how hard it is. I lived it and there weren’t the resources that there are today even on some of the things that I don’t necessarily poke fun of, but I want you to be conscious of telegrams and private Twitter channels, and of course we’ve got discords. My whole thing on the coaching and mentoring is like the same ethos that I have for doing any of these podcasts or these shows on video in that if I can’t say it in five minutes, then I really can’t say it. There’s really no reason why I would have to get to the bull pit like the monsignor at a church and preach the same damn thing day after day after day and you don’t get it.
You see what I’m saying? If I’m doing my job, which is to give back to the community, you shouldn’t have to pay me month after month after month to get the message. I should be able to communicate it to you in an effective and efficient way that you can take it and put it to work. That’s the whole point. I’m not looking to get a teddy bear to hang onto every night to fall asleep. That’s not the right coaching and mentoring that you should be looking for. There should be a finite window of time, right? My thought process is that if this starts to look like therapy, something’s wrong because so much of this you can figure out on your own. You don’t need a therapist.
It’s pretty basic in that regard. So while I’m not calling anyone’s girlfriend ugly, you have to look at that relationship because the coaching and mentoring that I do is finite. It runs six to 12 weeks, and if you can’t get it by then, then you can’t get it because after 36 years, I know absolutely how to prescribe if I do enough listening to guarantee you results. If you don’t do the work, you’re not going to get anything. You have to be willing to accept the risk. Are you able? Of course you are, but you have to be willing to live with the uncertainty and to get comfortable just knowing that that’s the way it works. But if you don’t develop the habits to go back to the top of the conversation, the predictability goes out the window because you know that over time, if you tell me what you’re losing percent is, I can tell you the frequency or the probability with which you’ll have a losing streak.
I can also tell you how you’ll have a winning streak and you don’t even need me for that. You can do the math yourself. You can predict what it would be like to have three losers in a row. You can predict what’s the probability of you having say, five winners in a row. That’s not terribly sophisticated, but what I do know is that behavior predicts the outcome and until you align your daily habits, your daily behavior with what your vision is for the future, you’re going to be a mess because everything’s going to look good because so-and-so did it effectively. I might as well try it and here’s Tommy over here. He did this strategy, oh, I might as well try that again. It falls into the parameters of the different combinations you can get between asset classes and holding periods. You’re going to find that there’s probably a handful of people across any number of those combinations that are doing well. But whether or not that actually works for you is yet to be seen because you got to try it on for size and then do it consistently. The consistency is the magic potion here is can you dig in? Can you lock in?
That’s the hard part. Admittedly, I was all over the place. I wrote a book about it. Like I said, now, over that time, I had enormous amount of success, but the gloating of the success part doesn’t help you grow. Like who cares? Then I’m just another one of these 26-year-old guys saying, Hey, how AI is going to change the trading world and how you can make thousands of dollars in 10 minutes of work, which is a, come on. It’s the new snake oil stuff. The key if you want to really ramp up your success is work on your getting comfortable with the uncertainty.
That to me is where the rub is. The more you are willing to feel your feelings, all of your feelings, the greater that level of success you’re going to have sooner. So it doesn’t mean you have to be fearless. I don’t think there’s such a person who’s fearless. I think there’s people who feel fear, but are able to take the steps forward despite what they feel, right? If I’ve talked to the best salespeople that I know on Wall Street and they’re sitting with a billionaire prospect, it’s intimidating, but they don’t let that intimidation psych them out from going in and making the presentation. If that was the case, I wouldn’t have made any success. So that to me is really the toughest part of trading, and if a person is struggling, I’m going to bet dollars to donuts. That’s where it’s at. It’s ability for them to not accept because they want validation, they want reassurances, and those don’t really exist in this space.
The only thing you can do is look at your track record, and I don’t mean official track record. Just look at the results of your ongoing behavior, judge yourself on the consistency on the ability to do the same thing day after day after day. That to me is winning behavior, and that to me predicts favorable outcomes when I don’t know, because it all depends on your trading style, and then it all depends on is the market amenable for that particular trading style? Where people get into trouble is they try to do different several trading styles at the same time. The problem is all those trading styles have personalities unto themselves, and so you’re going to be schizophrenic in your brain here, multiple personality disorder. That can come over time for sure. You can train yourself to do it, but in my opinion, you have to start with one and do that consistently before you’re going to sit and try to do several different types of trading strategies so that you can be a person for all seasons, because that becomes very, very difficult.
Then when you’re looking at trying to decipher what’s going on in the marketplace and then decide what type of tool, again, I think you can do it, but I think it takes several years because you need to live through those market cycles and then make those adjustments. But if you want just to summarize everything, you need to make sure that you have the vision first for where you want to be and for where, and what and why, and how you want trading to serve you in your life. Then break it down to what your daily habit, your daily behavior could be, and summed up all of your behaviors in what we call a habit or habits where you can really start to predict your success is based on your daily habits. If you don’t have any, then you got to start over. Start with the end in mind, right?
I’m not the first person to say that work backwards to today and say, what’s the one thing that I can do that’s super simple that I could replicate day after day after day? Because until your behavior is kind of congruent with what your goal is and what your vision is for the future, I don’t think any lasting success is going to happen. You’ll get random bouts of it, and I’m sure it’ll make you feel good. My hat’s off to you because I’ll take good luck any day too. Why not? But if you want to actually be in control, then you need to have a definable trading edge.
Learn to sit on your hands if you’re taking winners to soon
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There’s no doubt that taking winners is probably the hardest trade where you’re going to get in, you can automatically set your protective stop. That’s the easy part. But then what happens when you start making money? One of the most requested questions is this, where do I take my profits? How do I sit on my hands? How do I let my winners run? And I don’t remember having a difficult time with this. Again, it was a different day and age. Stocks traded in eighth, so wasn’t particular. I didn’t want to be active. It was too expensive. So there’s a few ways you can trail structure. You can trail by a percent stop. Normally you’re going to put in your protective stop based on whatever your R is, and that would be the percent of capital that you’re willing to risk on any one particular trade. Let’s just make up and say that it’s a half a percent. So for every million you have your risk in $5k. Now what happens when the trade’s up like $2k?
If you’re looking at your p and l, this is when you start to panic because you’re like, man, I can’t let this thing go back down to zero for my temperament and you might be able to benefit from this. I always look at those initial kind of green prints, if you will, as like we’re just getting started. It’s really the appetizer or we’re just getting even the bread. I’ve sat down, got the water, someone asked me if I want a drink, I got my napkin folded on my lap and now I’m ready to go. So I’m really thinking in the way I trade, where can I add more? At this point, I’m not trying to say $2k. Now you know my upbringing. I came from a working class background, so part of me still gets excited over a hundred dollars bill. I remember what it was like when I was a broke ass bitch.
You know what I’m saying? So don’t get me wrong, we’re all still products of our environment, but these days I don’t look at the dollar signs. I always translate it in my brain to think, okay, if the ATR is a certain number and that’s I’m position sizing based on that number at a half percent, so then I know how many ticks I need to see in order to make a half a percent to my equity. So I come to the table with the anticipation of trying to make one, two, 3% of my capital on every trade. That’s my mindset. So when we start making money and the thing goes green for me, I don’t start to freak out because it’s really just getting started. It’s like saying to your parents when you were a kid in the long car rides that were two or three hours and you’re 15, 30 minutes into the trip, how long till we get there?
You got a long way to go. So I would condition your brain to start to think like, okay, it’s showing me some profits, but it’s nowhere near where I want it to be. So much so that the next order of business isn’t even really to worry about taking profits. It’s getting to the point where the price has moved away from your entry to the upside. You could be short and it can go down and you still have upside in your account so that you can just basically move your protective stop to break even. And that doesn’t mean sell anything. That doesn’t mean sell anything and raise your thing. I’m just keeping the entire position that I have on because I don’t have my optimal piece on when I get started, but I’m quickly looking to move that protective stop to break even. So for that piece of risk that I have on, I’m kind of freeroll look at it as my money.
I just say, okay, there’s a bit of a cushion. That’s kind of how I look at it. It’s just cushion and I don’t get excited about it because I do know that probably half the time you put on a trade, you’re going to get stopped for the loss. Then another, I don’t know, we’ll make up the numbers. Another 25% I’m going to put on a trade that it starts making me money. I’m going to raise the stop to break even. I’m going to get knocked out flat. That’s part of life. I’m not trying to be right. Nine times out of 10, I’m trying to get fully loaded so that on those instances when the thing really starts to move, I’ll have enough risk on never having really taken all that much risk at the beginning. So I’m kind of feeding into my position. Sometimes it’s the same as my initial piece.
Sometimes it’s smaller if the chart ends up evolving the right way. Sometimes I’ve doubled the position after adding. I can remember in 2005 when I was first building into the sugar position when it was under 10, the account was like $50k. I had two on, one on, I added another two for five, and then when it broke out at 12, I bought another five. So I wasn’t doing it uniformly, and I’m still kind of that way too. You have to kind of read the tape and see what the market’s showing you. But the other thing that’s important is because one of the questions came in on the thing, what do you do when you have a solid gain? So we have to operationally define that, right? I’m not a psychologist and I don’t know why the hell anyone would want to be when anyway, but you have to figure out what does that mean to you?
Because a solid gain to you might mean something very, very different for me, right? Solid gain. Does that mean it’s in the upper half of all of your gains? I always like to think about it in terms of percentages. Then you could be objective. The last thing you want to do is to start to think dollar signs. So I would say solid gain. Well, what does that mean to you and why is it that number? Why don’t you make it higher? So whatever you think of as a solid gain, why don’t you double it? Make that the solid gain.
It’s all subjective anyway. Why would you limit yourself? The other thing is the part of sitting on your hands is very, very easy. The act of not doing something, and you should be looking at the chart, not your p and l, right? Because once the thing starts moving, you can either trail by percent or you can trail by structure. Now, sometimes with the cocoa market, I’ve been scalping the past two weeks, you have to kind of look for the intraday structure because the ATR is like off the charts. It’s up sixfold, right? From several months ago it went from $60k to $300k, right? You know what I mean? So it’s too volatile to price things based on ATR. So you have to think points. Then you have to think like, okay, where’s the swing low and if the thing keeps moving, so far so good.
I guess I’ve been lucky because it’s super volatile and I can remember speaking with one of my mentors about knowing when to take gains and thinking too short term, being a little bit myopic, and he was like, okay, so let me get this straight. Is your goal to make money or do you want to feel good? Right? Because I don’t know why it’s so painful for people to be in winners, and I wouldn’t want to equate taking small gains with feeling good. I’d want to kind of blow that up and say, okay, I have unrealized gains. That’s good. Once I have the unrealized gains, now I can turn that into a free trade because once the market’s appreciated above my entry point enough, I can raise my protective stop to break even. And I’m just here to say, if you can set up your portfolio like that enough, who knows how much you could possibly make?
You don’t want to overthink things and be like, man, I got to take the trade. I don’t want to take less than $500. I don’t want to take less than a thousand. Whatever the number is for you, you have to think bigger. And if you’re at that stage where you’ve been taking several hundred dollars, train your mind to start taking trades that have winners with a comma in it, it’s up to you. You can make that determination. You can say, okay, I’ve been making whatever it was, $350 to $750 a trade. Now I’m going to trade and I’m only taking $1,000 winners. You can raise your protective stop when you’re up $750 so that you stop out at plus $500. We’ve talked about this a million times. If you normally like to take winners at 3R, put your stop at 2R, see if it goes to 4R.
If it goes to 4R, raise your stop to 3R, right? Because sometimes they’ll go 5R, 6R, 7R, and all you really have to do at that point is just keep adjusting your protective stop. The market will tell you when the move is over. There’s really nothing to think about. So if your R is 50 points, whatever it might be for whatever instrument you’re looking at, your job at that point is to just continue to move your protective. Stop up as many times as you can. That should be the goal. Make a contest for how many times can I adjust my protective stop up? If I’m trading stocks and I’m scalping 25 cents, okay, every 25 cents move, I’m going to raise my protective stops up 25, right? Some of you might want to do it mentally, but I typically don’t advise on that because the markets can move too quickly and you can get smashed out.
Two, I don’t typically scale out of winners to lock in those gains. I’m much more of a position size kind of scalper where I’ll nickel and dime my way in to get to the optimum size, and then if the thing moves, then I’m fully loaded, and then I typically adjust my protective stop for the entire piece because again, in futures with the type of size that I can eventually get on one tick can end up being quite a bit of money. So I feel like you can coach your brain to start thinking differently. It’s really up to you. I don’t want to get used to making less money and turning that into a good feeling because I can’t take the pain of making money anymore. I have to get out of my winners, which is weird, right? Because stay traders that write me stay in their losers like, no problem.
They’re like, yeah, I’m just going to wait for it to come back. But the minute they start making money, they’re like, holy shit, Jesus, what do I got to do? I better check my social media, see what everyone else thinks about the name now that it’s making up. Oh, there’s a quote. Yeah, Carano to the moon, baby. You got the fan boys. So take it easy on yourself and try to convert the points into percentages and then make it your game plan to adjust your protective stops up as many times as you possibly can. If you give the thing room to go sometimes they’ll really go think about how great you’re going to feel. If you’ve been normally taken off trades at 2R or 3R the first time you take off a 10R trade, you can do it. I know you can do it, but you just have to give yourself permission to stay in those trades.
But Mike, it doesn’t feel good. Remember when I said the feelings that you don’t want to feel have as much power over you as the ones that do? Is your goal to feel good taking small bits of capital or go through some emotional development and make even more money doing the damn work? You know how many times I’ve been in cocoa in what’s today? So today’s Friday, you’re watching this Monday. It must’ve been Wednesday. I was scalping in cocoa, I was adding, and I sat there looking at the screen, which is not a great use of my time, but I must have canceled and replaced six orders, adjusting my stop up, edit the order. You click on the thing, you adjust your price, it says reenter. Boom. Then it’s done. Market turns back in my face. I did the best that I can do. Market continues to advance. Okay, I better adjust my protective stop, go in, edit selection, change the price again up whatever it was, 50 ticks, reenter the order. That’s the best you can do. I don’t want to overthink about it and start looking like, oh my God, it’s over X amount of dollars. Now I better take that. I want that feelgood moment. I would much rather go home. And here’s the takeaway. Before I shut up,
I take solace in the fact that I can sit in and adjust my protective stops. That’s the goal. The dollar sign, the market will determine. I’m not going to sit there and put judgment on what my p and l has. I’m going to judge myself and grade myself based on my behavior. I entered the order. I caught the swing low. I put in my protective stop in case I was wrong. That still happens, believe it or not. I’m wrong. Plenty of times starts to move in my favor. Protective stop goes higher, starts to move in my favor. I add a little bit more. Then I look at the average price, put in my protective stop accordingly. So ultimately, it’s like if you’re ready, willing and able to risk like five ticks on the einy or 20 ticks on the MNQ or a hundred ticks on cocoa, it doesn’t matter to me what it is. It’s just that every time you see that incremental move you can adjust, your protective stops up accordingly. And if that’s what you were willing to risk at the beginning of the trade, why would it be any different? If you were up 5R, you can still risk that same amount of points.
Chances are you’re never going to top tick the market. I don’t know why you’d want to do that. That’s where other buyers are. So again, I know some of you have very strong feelings about scalping and swing trading and day trading or what have you, but I want to buy when there’s other buyers, and I don’t necessarily want to sell into strength, and I probably have more size than the rest of you. I like when there’s more strength because that’s wind in my sails. So think about that. I’m not calling your girlfriend ugly. I’m helping you try to make more money for the work that you’re already doing. So I’m not the antagonist. I’m asking you to open your mind and to think differently. It’s your emotions that are getting you out of these winning trades. The math is easy. So are the trading tactics. It’s so easy. It’s like easier than sending an email.
What it takes to become a successful trader
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What does it take to become a successful trader? Man, that’s a hard question. It’s also very easy because looking back, I can tell I think this comes from a reader, so thanks very much. Hi everybody. I’m Michael Martin. I’m a futures stocks and options trader based in Los Angeles. I think you first have to understand that trading is a probabilistic outcome. I have four or five things that I think you need to own over time. You don’t get them right away. The fifth one, I think is the most important one, so wait till the end there. Understanding that this is a probabilistic game and that you’re going to lose that you need to control your losses so that when you do win your winners, pay for all your losers. That’s called the mathematics of expectation, also known as expected values. There’s another video. I’ll put the link in the description for that.
You need to know your math. You need to understand and be emotionally okay with the fact that you’re going to lose probably 50 to 70% of the time when you start, because you don’t know anything and you have no sense of timing. Even folks who’ve been around for a long time, their skills can kind of ebb and flow your sense of timing. Sometimes it works. Sometimes the market’s not amenable for your style. That’s the way that it goes. There’s going to be winning and losing streaks. You need to develop compatibility with your tactics. There’s a million things that you can study to trade as far as instruments are concerned. Then you have to get into timeframes. What do you care like emotionally? I have found that the folks who tend to hold their risk longer, get paid more, but that that’s a truism, right? Because they have more risk.
If you have more risk on over a longer period of time and you know what you’re doing, chances are you’re going to make money. You don’t get paid without the risk. They go together in some way, shape, or form. The key there is your position size. It’s not so much your entry or your exit. Even for scalpers, and I’ve been scalping in cocoa the past couple of weeks just because the volatility looks like my uncle Vinny’s, EKG, after two meatball parms and a liter of Pepsi. My God, even from my, I have a cast iron stomach, but even there, it’s berserk. You need to find a timeframe and a set of rules with which you’re compatible, right? And that’s tricky. That comes from trial and error. You can get a little bit of an edge. Well, no, lemme take that back. You can get a better understanding of how you trade by paper trading, but until you can conjugate it with your emotions, when you risk real money is when you’re really going to start the learning process. I coach and teach people on the side when I have the time, but there’s no better teacher for you than you actually doing the trading, and that’s taking money out of my pocket. You need to have a good attitude. If you come into anything in life with a pissy attitude. Think about it. Do you want to work with someone who has a pissy attitude? The market doesn’t either. The market knows and the tickers can sense fear,
Right? They can sense pain, not just dogs and bees. Patience. Everyone wants to become Paul Tudor Jones overnight. It’s not going to happen. Some of you probably have a fantastic sense of timing, and my hat’s off too. I hope you make so much money. I hope you’re trading off time in sales. I don’t have any ax to grind against anybody. I celebrate everybody’s winning. But the thing is, it’s life on life’s terms, and that’s a very sober way to look at things. And if you come into the market every day, I do, I assume I’m going to win. I assume I’m going to make money, and I come in with that sense of entitlement. Basically. You kind of have to. It’s more intentions equaling results. If you don’t come in with the winning attitude, even on the days that you lose, you’re kind of sunk because it’s just so hard.
It’s very, very competitive. And having a good attitude I think is important. Having discipline, of course, is important, but that’s knowing also when to sit on your hands. You don’t have to trade every day. I know you probably think you’re missing out on opportunities, especially if your account is smaller and you’re relegated to trading like the emini or the MNQ’s. There’s actually been studies that have shown that when you don’t have your trading edge, that makes no sense for you to put on the trade. There’s two outcomes to every trade. There’s the financial one, of course, that you can see on your p and l, but then there’s the emotional and the psychological one. So you need to make sure that you’re trading to make money. Yes, it feels good when you make, but when you do this enough, you could also kind of come to understand that as long as you’re taking losses that are within your model, those should feel good too because keeping your losses small, and if you’re really good, your max loss will be your average loss.
Honor your stops. There’s another one. No one wants to get stopped out of a trade, especially if you’ve been waiting hours and hours and hours for the damn thing to finally hit the criteria that you need to hit to add a position long and short. So the last thing you want to do is worry about getting stopped. But if you’re up $10,000 in a trade and you have your protective stop at a loss of a thousand dollars from your initial equity, you need to learn to adjust your stops. No one wants to get stopped, but you’re playing superior defense’s. Job number one. And I think the single most important thing that you can learn to do over time is have the willingness to feel every feeling that you can possibly feel. The feelings that you don’t want to feel have a lot of control over you, not just the ones that you think you’re seeking to feel. So as soon as I became willing to feel all my feelings and realize it’s not that bad, my trading really, really improved because then there was nothing in the market that was going to destabilize me.