You will get knocked out of trades when they’re in strongly trending markets. It’s just a fact of life. Why is that? Well, based on your position sizing algorithm, you might find that volatility can increase when you’re fully loaded. That might occur when you get into the trade. That might be your optimal risk unit. You stay with it. You might choose to add as the move continues, but one thing that does happen oftentimes most times is that the volatility is going to increase dramatically maybe between 25 and 50%. When that happens and you have your optimal position size on, you’re going to see your account balance moving in greater dollar signs. Then you might be comfortable with, even if you’re hell bent for election as a speculator trader, your number one job always is to protect your capital. Your job is to play superior defense, and you’ll oftentimes hear about traitors at my level and at the generation older than me where you looked at a certain move and they don’t talk about being in the move from the breakout from Victor talks about the gold moving up as much as it did when we came off the gold standard.
They weren’t in that trade like for one continuous buy here and then hold it and sell it nine months later. They were in and out of that trend, right? You don’t know what the trend is going to look like until after the fact. It’s super easy to say it after the fact, but in the moment, you have to manage risk. You have to protect your capital. I talked to Michael Marcus about gold in the late seventies coming into 1980, and it was the same type of a thing. They were taking gigantic chunks, $50 to $100 moves, which was big in those days out of that market at a clip, and then finding another way to reenter the market. So it’s not likely that you’re going to be using that as a protective stop, like the trend being broken. That’s not practical. Two, in futures, if the move moves enough, you’re going to have to roll anyway, right?
So how do you exit your winners? Well, you can use ATR or some other volatility measurement. You could and should be using or marrying that up with what is, what is the percentage of your account that you’re willing to risk on any one particular trade? That to me is bare minimum stuff. To me that’s like you don’t even put on a trade with real money until for sure that you’re going to be emotionally and financially okay? Losing that finite amount to capital, understanding that in some ways at the beginning in some way, that’s your tuition. Not in one particular trade, but in a string of them. So whatever you think you might want to risk on a per trade basis, my advice is this, and this isn’t being a judge using my judgment is cut it in half because you’re going to find new and improved ways to be wrong and to do stupid shit with your money. It’s just how it goes. There’s no judgment here, right? I’m not judging you, is what I’m saying.
There are so many unknowns, right? If you don’t even know what your trading style is, you don’t know what’s before. You don’t even know what kind of mistakes you could make besides the obvious ones of typing in the wrong ticker, fat fingering a price, entering the wrong number of contracts. You think you’re immune to all of this. Guess what you’re going to find out. It happens to the best of them. So what I would do is I would risk even smaller amounts of capital because at the beginning, what you’re really just trying to do is to develop a feel, especially if you want to scalp day trade or swing trade in those environments, I think you need to have a feel for the market. It’s not just based on the technicals. Whereas with trend followers and position sizing, you’re not so concerned what happens at the beginning.
It’s the beginning of a seven course meal and you’ve just sat down and unfolded your napkin and put it on your lap. That’s what your first position is for a scalper. That person’s in the trade and they’re looking to get out almost immediately where I’m like, Hey, we just got here. Why are we getting up? Where are you going? Right, the Maitre D hasn’t even come by with the wine list yet. We’re just getting started. So different strokes for different folks, right? I mean, that’s really what, interestingly enough, you can use the same entries, the scalper, the swing trader or the day trader, the swing trader, and the trend follower can all have the exact same entry. What really defines those people are their holding periods in many ways.
For me, I’ve had some success at all of them, but I’ve made the most money holding onto my winners for as long as possible and then over time using and developing a very, very strong feel for the market to know when the getin was good, at which point you have to offset the risk and majority of it. I have experimented scaling in and scaling out, but what I realized was is that that really came down to regret. People kind of scale out of winners because they don’t want to sell it too soon and have the thing keep moving. There’s a practical side that says, yes, you can take some money off, raise your protective stock to break even, and now you’re free rolling, but then if the move keeps going, you have a suboptimal position size on financially. That didn’t work for me emotionally. It felt good on a whole bunch of levels.
On a primal sense, as a trader speculator, you’re putting yourself deliberately in harm’s way, so you have to get used to that feeling that you’re taking on risk. Hopefully it’s a good risk, but risk is a lot like fire. Firemen don’t love fire. They’re just better equipped to deal with fire than you are. That’s kind of how I look at risk in the marketplace in many ways. I think I trade futures much more conservatively than some people trade bonds. Certainly investors have an open-ended sell strategy to me that in many ways you could argue that that’s reckless because no one can predict the future, and I started at a time when I watched IBM, which they called Big blue went from $140 to $40 a share, and that was the biggest of the bluest of all blue chips. It was the nickname had blue in it for the love of God, so no one, no name and no ticker is immune from a 50 to 90% pullback, right?
Look what happened to Cisco after March 10th, 2000. The thing went from $90 to $7, right? It got blasted and it was called the backbone of the internet, so you need to learn how to manage risk. The only way to really do that and to calibrate that with your system is to do it with real money. At the beginning, you don’t know anything, so I would suggest cutting what you think you should use in half because no one cares anyway. It’s not like you’re going to be sharing this stuff through social media or posting your trade confirmations on Facebook. Who would do that, right? That’s stupid, so keep your business to yourself. No one needs to know what you’re doing and this way when you take a kick in the head, you don’t have to go back and save face. Two, if you only put your winners up there, no one’s going to trust you, so keep your business to yourself.
You don’t have to talk about it to anybody. Just go do what you do and at the beginning, risk very, very small bits of capital until you think you have a feel. If you never developed a feel, then there’s a few choices. One, you could stop trading because you don’t have a feel or two, you might say, you know what? I don’t have a feel, but I do know that there’s a systematic approach to trying things and I’m going to go investigate. Looking at hiring a coder or going out and buying one of the more sumer style trading engines out there like mechanica or trading blocks and getting a data feed and just setting up an algorithm and following those rules religiously, those can work too. The choice is really yours. I’m not here to tell you what’s best. You’re only going to know from the experimentation part, but as far as exiting winners, when you have a mechanized system, those rules are hard and fast.
There’s nothing to negotiate about when you’re doing it. As a discretionary chart reader, I can see why you fall to pieces because you don’t know what tool to use. Should I bring a knife, a sword? Should I use a gun? Should I use juujitsu? What do I do here? And you haven’t been in the situation enough time to know what the right one is, right? Ultimately, you figure out the right one is one by which you’re both emotionally and financially. Okay? Getting out of the trade, you’ve made some money, right? You probably didn’t get out at the very top. That’s typically how it goes. You’re not going to top ticket if you wait for the trend to be broken. There’s a couple of things you need to consider for one is where is the trend line? Because drawing a line by clicking on some icon on your charting package and anchoring it to a low and then doing this and then creating another one, this just creates more confusion. There should be pretty much one trend line. If you want to be super objective about it, you can use some type of a moving average. A lot of folks use the 20 day, not 20 period, the 20 day exponential moving average for futures.
You can use anchored vwo. That’s a good one too because it takes into account price, time, and volume. I would look at that one for stocks and futures. Many equity traders look to have the 200 below, the 50, below the 20 and then have the price above all of that, and then they start to look for breakdowns and the thing rolling over. That’s a little sophisticated for the new person. Even if you are intellectually inclined, that’s a lot to kind of bring in and put into practice at the earliest stage, but again, who am I to say go out and experiment and try and see, but I think if we go back to whatever it was, Monday’s episode, today being Wednesday, your goal is to play superior defense, but with the simplest model possible. It’s funny because last week we had leaper and one of the jokes that I make is you can have so many overlays and rules that have to all be true at the same time that you get a trade signal every leap year basically, which means it’s very difficult to trade. Then there’s too many things to think about when you don’t have the experience to do so, and that can cause, again, emotional errors, judge versus judgment. You beat yourself up, especially if you’re really intellectual. You’re like, I should know this. Well, the intellectual side of trading is the easy part. The execution part is much harder.
That’s why people say truly that trading can be taught. It can be, but that doesn’t mean that you can do trading. You see, and some of you might be still wrestling with that, look over my shoulder, come into my live trading room. Oh my God, what a, come on. Again, discords and telegrams, they’re for people who want to bond and be in part of a group. I think learn what you need to learn for a month or two and then be done with it. See what you can apply. See what feels good for your emotional constitution and for your personality. If nothing, at least you only are only at a couple hundred bucks.
Support and resistance is another way to look at if something’s going to roll over. Sometimes a name after it puts in a high will channel sideways and create a base inside of that stage two up trend. You’ll have to get good at understanding that, knowing if it’s a fake out or is the move going to resume. Sometimes the moves, sometimes there aren’t four or five basis in a stage two breakout. Sometimes there’s just one, and that’s just the way it is. It’s life on life’s terms, but it’s only going to come through a lot of experience, practicality of being on the job where you’re going to learn all of this just like I did. I wanted to fail fast, but then I was able to make those decisions quick to make sure, okay, if I was looking at trading those four different asset classes, foreign exchange options, equities and commodity futures, I had to think about that as a portfolio management and say, okay, these two asset classes aren’t really helping our equity grow, so I’m going to cut those out, reallocate those funds to the two winners, which is effectively what I did.
The one winner first was commodity futures. Then the next was adding back equity. As my account grew, and again for my style of trading, there just wasn’t that many opportunities. As you understand, when you look at dailies and weeklies, most markets are not trending. They’re suboptimal. So your job is to say, okay, I’m looking at this one. It’s a blue chip name. Everyone seems to like it, but for my trading style, it has to ripen on the vinyl a little bit more, so that can go. It’s either a hard no right now or it goes on the maybe list. The maybe list is not your watch list. Your watch list is what can you take action on in the next day or two, right? So again, your job is to disqualify stuff. Same thing with taking your winners eventually is you have to figure out what’s the best strategy for you when you put on the trade.
You probably have to think of your protective stop. You can use the ATR for your position sizing, in which case you can use that same ATR then as the distance between your entry and your protective stop. But if you’re using tiers, you have to figure out another way to divide up your capital, and that too at the beginning is completely guesswork. If you set up a rule for yourself where you’re like, I don’t want to lose more than 2% a week than where those 200 basis points go, how much were you going to allocate on any one particular trade? If you’re doing five trades a day, you don’t have a whole lot of room to be wrong, and then how much room are you giving it 20 basis points? I don’t know. That’s what makes it super hard, especially for the short-termers, just that you’re looking at a lot of noise.
The short-term data are very random, and I think you put a lot of credence into short-term data. Now, look, if you’ve been trained, I’m not talking to you, I’m talking to the folks that are the ones that are writing me saying, I did turn my 401k into a 201k, and I wish I had seen your show two years ago, right? That’s the audience here. I don’t care about the folks that have made it. You don’t need this show if you’re here, thanks, but you’re already successful, so good for you anyway. By the time you wait for the trend to change a lot of reversal traders, we use some type of 1.2 or 1.5 or 1.8 times a certain moving average, and they’ll buy the crossover, and then when the price crosses below the thing, they’ll go from net long to net short, so there’s another way to do it.
I don’t want to get into talking about trading systems specifically here in the for pay content, and that’s not really what this show is about, but it comes down to experimentation. I know a lot of different people use the ATR or they use majority of ’em, use percent of their overall capital. Then once they start making money and they let the move occur over days and weeks, and maybe in some circumstances like months like you’ve seen in the cocoa market, like you’ve seen in Nvidia or SMCI where the moves have taken longer periods of time, those are names where you wanted to stay in them and let them unfold while you’re long because then you’re just ringing the cash register every single day without having to kind of come back and turn trading into a blue collar job. That’s not, you really want to keep this white collar regardless of what your dress code is, and for me, that means doing as infrequent amount of transactions as possible just because you have money and day trading, buying power, multiple screens and your hotkeys all set up.
To me, that doesn’t necessarily mean that you should be cranking and banging out trading wood, as we used to say, because all the trade orders on the floor were written on pieces of paper. You’d write your order, they’d get filled, you’d put your badge in it and you’d scale it to the middle. For some guy sitting there with ski goggles, they wouldn’t get hit in the face with a corner on one of these cardboard cards and they’d put that in and they’d put it on the ticker tape. So if someone did a lot of trades, there’d be a stack of paper of cards and they’d say, oh, the guy’s big, he’s trading wood. Really look at those trades and see how you can minimize them. How can you optimize your process to increase and trade the higher the expected value of a trade?
So I think if you’re looking for the trend to be broken, you might be leaving too much money on the table. Again, that has a lot to do with what your position sizing is. If you’re trading small enough, you can catch the bigger moves, wait for the trend to be broken. You’ll probably be okay if you’re adding to your winners and putting more substantial size on, not from a margin to equity standpoint, but just in terms of what your portfolio, what we call portfolio heat and your risk and a half a percent on a per trade basis, and you’re adding 3, 4, 5 different times. Now you’ve got over 2% portfolio heat going on for that particular name and your portfolio at any given time, and that’s with the ATR being a constant. If the ATR increases, like I said, between 25 and 50%, you might find yourself, again, depending on what your risk unit is, that all of a sudden there’s an enormous amount of volatility in your portfolio, and if you’ve got the stomach for that, I do, then good for you.
You can probably withstand it. Some of you can’t though. So a lot of times what you can do before the trend is even over if there’s an inverse relationship between the volatility of the instrument and the number of contracts or shares in that risk unit, so if you see using the at r as an example, if the ATR goes from 15 to 20 and you still have the same piece on, you might need to cut your position so that the dollar value still kind of equates. So you can do the math, but there’s an inverse relationship there if you want to kind of keep constant risk on and constant sanity, really that has to do with how you’re built. Some people aren’t affected by it. I myself am not, but that’s not the only way. You see, and going back to the original point here is that even in some of those bigger moves coming through the seventies and the moves that I was in, it’s okay to be and see in a strongly trended market to kind of get in and get out.
You don’t know when the trend is going to end because oftentimes the price moves first, the fundamentals follow, and you just don’t really know, so you have to kind of, sometimes you get, it’s not like you’re getting head faked out, but if you’re thinking about a prudent person, you have to protect your capital first to how do you handle exits? Me, myself, I tend to puke out the whole thing at once. When the party’s over, everyone has to leave at the same time. I don’t want you coming back in for one for the road or for a cup of coffee. I can scale in for sure, but when the move is over, it makes no sense for me to hold onto anything at that point. Why? Because typically it’s only going to decrease my equity.
How emotional errors impact your profitability
by
I think you’re your own worst enemy and you’re probably way too hard on yourself. This is a business where very, very few people actually make it. It’s trying to get in a black belt in Jiu Jitsu. 85% of the people who first step onto a jiujitsu mat never get to change the belt, meaning they don’t even stick around long enough to get promoted to blue belt. 85% just don’t make it. I think the numbers are probably very similar for trading because the losers never show up, right? What does the guy say? Yep, my expertise, tax loss carry forwards. I could blow up. I could turn your 401k into a 101k, click below to find out how. Right? It’s like I didn’t even have to try. It was a natural. You just give me money. I vaporize your cash. Set phasers to stun. How does this happen?
Well, you need to learn and understand the difference about being a judge and using your judgment. The problem is that the beginning of your career, you don’t know anything, right? So you’re trying to be a judge and figure out what’s right and you don’t have any knowledge. You don’t have any experience, so you’re sitting there trying to be judge and jury, right, and look at your behavior, but you don’t have anybody anything to go on. All you can really do is write down what you thought was going to happen. Certainly write down the feelings that you were feeling around each and every one of those steps beforehand, and then write in the postmortem what actually went down. This is the quickest way to calibrate your emotional constitution with your behavior because the two are matched and they both go together. There’s two payoffs to every trade.
There’s the emotional and the psychological, and then there’s the financial. Hi everybody. I’m Michael Martin. I am a futures options and equities trader based in Los Angeles. Thanks for being here. I’ve had 36 years of experience and I wrote a lot about how I failed my way to success in a book called The Inner Voice Trading, which came out in 2011. I give away the audio book. The link should be in the description. You can check it out. The judgment part comes up when emotionally you can’t handle the result of any one aspect of the trade. That could be what you’re doing ahead of time in your preparation, which in my opinion should be done the night before, not the morning of. Know what you’re going to do. Also know what you’re not going to do. That’s the benefit of preparation is that you shouldn’t be taking flyers at the beginning of your career.
Now, look, if you don’t care about your money, it’s a fuck all anyway. Just do what you want, right? I’m not here to judge you. I just know what I had to go through to thicken my skin and also eliminate the majority of what I thought. I knew what I was doing, which I can share with you on my p and l. I didn’t in order to kind of have any kind of lasting success. It all started with eliminating the things that I was working on and simplifying the process. I spoke about that a little bit yesterday and a few people have written in. I’m kind of tired of telling the story because all of this stuff has been said before, but just so that you have it in one space, when I went to Wall Street, I thought I could do everything because I had access.
I thought I could do foreign exchange, I could do options. I could do stocks, I could do futures, and I could also rely on the firm’s research. A hundred percent of that was wrong. Research is really the opinion that’s compliance approved that you can use to have a conversation with somebody in order for them to give you money. That’s what financial advisors are doing. They’re not portfolio managers. I don’t give a crap what their titles are. I alchemists and senior this and that. It’s all for marketing at the end of the day, and I don’t mean to sound that way, but I’m not going to bullshit people in thinking that the business is really way run any other way. If you work for Morgan Stanley or Bank of America, Merrill Lynch or you’re in Wells Fargo, any entity that would be a considered a wirehouse, you have FOAG.
Your job is to “focus on asset gathering.” That’s how you get paid. The more money that you have in-house, the more fees that you get. You’re not a portfolio manager. You haven’t been trained for that. Even the training that they do in-house is poor at best. It’s ultimately risk reduction through diversification, and that’s not risk management, so let’s not even get into that debate anyway. The thing is when things don’t go as you had hoped, right? Because at the beginning you don’t even have a plan. People say, well, when things, what happened, it didn’t go as planned. Well, at the beginning you’re kind of figuring out what the plan is. For me, I went into town thinking like, okay, now that I’m in the game, I’m just going to lick my chops and figure this all out. I could just throw money at anything that’s going to work because now look where I’m at.
I had four Nobel Prize winning teachers at school, so now I’m Captain America and I failed miserably. I failed. Why? Because I was all over the place, so I had to cut and think, okay? After I looked at all my trading results, this is judgment, not being a judge. I beat myself up for about a minute and I said, what I’m doing is failing. That’s for sure. The overall process isn’t working because I’m shoveling sand against the tide. Whatever I shovel, it’s coming right back up in the surf. Okay, where do I have a glimmer of hope? And that was in commodities trading. I had a knack for it, thank God. Second best was probably stocks, probably because I had strong sense of the fundamentals, no charting experience options, poor, poor. Maybe to break even foreign exchange. I didn’t like it because again, you have to remember, this is 36 years ago.
You can’t come look at today. Was he like, of course. Why is he not trading? Foreign exchange? Foreign exchange used to be able to trade 200:1 in the handful of places that were available. What I didn’t like about it is that I needed to be able to turn off. I didn’t want to. The big money centers are what? Sydney, Australia, Tokyo, London, New York. Then it goes back to Sydney. It’s a 24/7 market, and I didn’t want that bullshit in my life at that time. I didn’t care about the opportunities. I needed to have sanity. I needed to find a process that I could replicate day after day after day, not to have a big seven day day, if you will. So foreign exchange was out of the question.
Plus at the time, you have to understand that most of the scams now, it’s the AI stuff, but most of the financial scams were taking place in foreign exchange, so I didn’t want to have anything to do with that, and you can go look it up. Don’t ask me about it. I don’t want to waste time on the show about, because this show is about emotional intelligence and traitor psychology, especially geared towards folks who are beginning and haven’t found the consistency that they’re looking for. So to follow my own advice, that’s exactly what I had to do is to say, okay, where can I find the consistency? Now, you have to understand too, I was in a wirehouse and my branch manager was kind of less than enthused that I was going to start really trading commodity futures. The commissions were huge. Round turn on one contract was $125.
Hello, and day trades were, I think I want to say $75 to $90. So with very little capital under management, say you had a million dollars, your ROI, your ROA on your account balance could easily be $250,000 in commissions. Whereas if you were buying and selling equities and bonds because it was a stock and bond kind of joint, you could probably see, say ROA return on the assets under management. That’s what that means between maybe one in three, if you did more aggressive kind of trading, that might go to somewhere between three to 10 and commodities were easily 25%, so you could do a lot of gross commissions with a much smaller asset base. When you started to get into the folks who had done the fee for service kind of stuff, which was a very small sector of the economy at that time, their ROA would be anywhere from 0.5 to maybe two depending on what their fees were, and so I of course wanted to make money and I wanted to make money for my clients.
I had to marry those two things up. That was definitely both being a judge and using my judgment, and so I had to know that I was kind of swimming upstream because what they wanted me to do was to do the same thing that every wirehouse manager their people to do, which is to bring in more money. That’s how everybody makes more money is bringing in assets. It’s not trading the assets. Once they’re there, they want you to delegate that to the managers that they have in house. You’re just the umbilical cord to bring the money into the firm. They’re really not looking for you, even though that’s the fun part. They want you to delegate that to somebody else. Now, I wanted to get a trading job, but I couldn’t get it because in those days it was like, well, you have to have an MBA.
Now, that’s obviously stupid because it’s been proven mathematically that having an MBA doesn’t mean absolutely anything in terms of being able to create Alpha as a trader, but maybe it was a way that they needed to decrease the amount of applicants that they had. I don’t know. I never understood why that was the case or why you would even have to go to business school at night if you wanted to trade unless it was something bragging rights. But that was a really stupid call on Wall Street’s management at the time. It was wasted a lot of money and a lot of resources, a lot of wasted resources at the firm level. So I always bookmarked that too. I said, wow, they’re having all these people do that. They’re spending millions and millions of dollars on that and it’s not really helping their p and l.
It makes me wonder what they’re thinking about despite the power that they have. Sometimes not doing things is good just in trading the majority of what you look at has to be disqualified. Not everything’s an opportunity. So that’s what I did is I just said, I’m putting all this stuff on the side. I’m going to focus on what I can do well because really the only way I’m going to survive here is can I find something where I can make money where it’s as effortless as possible where everyone’s making money, the firm’s making money. Of course, the client has to make money first and then the firm. I get a piece of what the firm makes because I wanted to have fun. I didn’t want it to be a chore. I didn’t care about selling some muni bond fund. There was a great muni bond manager who used futures to hedge when interest rates were going up, and so he had the best performing muni bond mutual fund, and there were guys in the office who were cold calling people in New York City trying to get them to put up $50k into a muni bond mutual fund, and I was sitting there saying, this is the worst.
This is the absolute worst. Listening to these guys, they’re passionless. They don’t give a shit about the product. They certainly don’t care about the people on the other end of the phone. It’s just a numbers game for them, and I didn’t want to play a part in that. So I knew very early on that I was there just for the education, like going to the police academy or going through some kind of a hazing situation where I was going to learn as much as I possibly could, but I think I really think I was planning my exit much more early than I thought I would or I had previously disclosed because culturally I wasn’t a good fit. I am a tough dog to keep on the porch. That’s why I work for myself. I do my own thing. No hard feelings, but if I’m going to fail, I’m going to fall on my own sword. I’m not going to listen to some other guy start to tell me how to do things. So I had the perfect build to be a trader. I don’t care what anyone else thinks. I trust myself. I trust my own instincts. Everyone else can flake off.
Once I started putting points on the board, the manager started giving me a little bit more breathing room because in those days, they wanted you to go out and get five different licenses. After you got the seven, you’d get the 63. That was your blue sky, and then this is before the 66, so then you’d have to take the series 65 to do the fee-based business, which I had no interest in doing either. I wasn’t going to give the money to some other manager. I went to Wall Street to learn how to run money to be a portfolio manager trader. I wasn’t going to give it to some other jackass. I didn’t care about CFAs and my instincts were good. Most of that stuff is super political. Anyway. Then they wanted you to get your life and health insurance license to do estate planning. You could also do fixed and variable annuities as well as life insurance because if you had the securities license, I had the series seven, you could get it with the six.
You can do variable product and then very, very end, you got your series three, which is for futures. So I of course, being my own guy, I did the seven, the 63, and I did the series three right after I had no interest in Look, life insurance is a very, very important tool. I’m bullish on life insurance, but I had no intention of being that type of a person in a Wall Street brokerage firm. That was not anything that I thought about at all. So I eventually went and got it because I had to learn how to play the political game, which I did rather adroitly, but at the end of the day, it was more just to show everybody that I was a team player and it wasn’t exactly hard to do. It was no more difficult than passing the written exam for your driver’s license.
It deals with what are the uses and the appropriateness of investments, which is kind of like the ethos of the majority of the exams. They really allow you to market to the public. They don’t actually teach you how to do anything. You can take the CMT designation, you can get a CFA, you can get CFP. Now they have all these other designations because it’s a huge business to sell those designations, and they’re all probably very endow you with a lot of information, but then you have to find a way to go make money with it. You see what I’m saying? It’s not a panacea, no, like I’m going to anoint you CFP, and all of a sudden all this estate planning client is going to come to you or you’re going to pass a fantastically different difficult three part exam, the CFA world, and then all of a sudden you’re going to become Joe stock picker.
It does not work that way at all. You still effectively have to have a system with which you’re compatible despite what you know or what you don’t know about fundamental and technical analysis to create alpha, and if you can’t do that, you really have no business. Who cares about your analysis if you can’t make money? So I was able to make a shortcut and figure that all out. Then I added stocks back in because I eventually was able to take the field that I had for commodities into stocks, and then later I backed my way into options as well. They required a little bit more time, so I had to marry the amount of time that I had in the day with the amount of analysis that I could do effectively to be prepared for the next day. That was what I was juggling. How many different instruments can I look at to find trade setups to write out my orders so that I can go to work the next day, prepared to both be on the phone and find clients, but at the same time manage a book of orders and positions because you have your stops for your order entry.
Then you have your stops for the positions that you’re in. You’re either going to add to your winners, you’re going to get knocked out of your winners, or you’re going to put in your protective stops for your newer positions and get knocked out. So that’s a babysitting job that has to be done without any errors because errors cost a lot of money, you see? So I was very quick to not judge myself. I also didn’t have any help. That’s why I have the show. There wasn’t even the Blackberry two-way pagers at the time, which were the very, very early blackberries. There was no wireless technology. There were no discords or telegrams. Of course, there was no internet, and I made a promise to the universe and to God and said, if I ever had any whiff of success, that I would be ready, willing, and able to help anybody else who was in a similar situation and they didn’t know where to or who to turn to, which is why I do this show every day for free.
It’s part of my promise to God. It’s the spiritual, it’s think and grow rich really, right? And so if you can take any of this and run with it, go knock yourself out. Obviously there is more premium stuff, but you got to show me the money. At the end of the day, I’m happy to help point you in the right direction and also understand that a lot of what you think you need to be doing, you don’t need to do. So if I can help shorten your learning curve, that’s going to save you time, money, and effort. You hopefully can get to be a success or get that consistency that you want much more soon. So again, thinking about being a judge and using your judgment, I think judgment is like decision making in many ways. You have to figure what’s the opportunity cost. If you’re going to do something in lane A, you’re going to forsake everything else in the other lanes, and that’s just the way it works.
There’s opportunity cost everywhere. So I got lucky in that I stuck to my knitting and I stuck with futures and got super really, really, really good at that, and then built other practices really around that, and it took a lot of time. It took a lot of time, and unfortunately, there is no, the folks in the marketing world want to make it sound like, yep, you could make $2,500 working 20 minutes every morning and then go bang your girlfriend the rest of your day. Good luck with that bullshit if you’re susceptible to those types of pitches for the love of God. Here’s Mike Martin’s rule. If you see someone who’s your age pitching you something on Instagram reels, delete it. Honestly, they don’t have enough experience to know what works or what doesn’t work. They haven’t been around long enough. You have to be able to backtest things over 20 years.
That’s my judgment right now. If I’m sitting in my judge chair and you’re coming to me saying, I have this idea I can scalp in day trade all the big seven, the magnificent seven, I’m like, okay, well go back to ’07, ’08 and tell me how you would’ve done in those very dark times. You see what I’m saying? So you have to be around the block a few times. You have to have been around the block a few times to really sit around my table and have a conversation. Other than that, it just seems like a marketing come on and more power to you. I don’t begrudge anyone trying to make a living, but at the end of the day, most of these marketing pitches are there to separate your money from you and whether or not you can ever make money with what they’re pitching is up for discussion. So it comes down to why do they price things the way they do it? They price it because they know you probably don’t care about $40 a month or a hundred dollars a month for your discords, your $40 a month for your funding challenge, this and that. You got to remember the funding challenges. Again, this is me using my judgment.
I am hardest on myself or I was hardest on myself when I made emotional errors. And the reason I made emotional errors was because my intellect was limited, and I was a pretty smart guy. I was a really good student, but my experience with running money was limited. So I had a lot to learn by being on the job, and that allowed me to do a lot of experimentation. So tagging in from yesterday’s episode, you need to start to fall in love with experimenting, and that means your capital is input. It’s not something that you can sit and hover and protect. You have to use it to roll the dice in order to figure out you’re panning for gold, and sometimes you’re going to come up with a little bit of gold, but you’re really trying to find that vein of or that’s going to get you what you really need and that’s going to cost you money. You’re going to have to experiment, so you have to let go of where that money, where it is and how you’re going to get it. But I wouldn’t beat myself up because in the beginning, I think what think about trading is very, very difficult. Anti is very different from what you’re going to find out post.
My best advice for newer traders
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The best advice I can give to newer traders or traders who’ve been doing it for a while but haven’t met the level of consistency that they’re looking for in their trading is to simplify, simplify, simplify. Man, when I was starting out, there was a million things going through my head and I so wanted to latch into a vein of success. I wanted that for my self-esteem. I wanted to be validated. I knew I could do the work. I was doing the work. And I’ve mentioned many times before on the show, I come from a family that has a very strong work ethic, so my sister and I have an enormous amount of grit. So that wasn’t the hard part. Working hard came easy to us. We didn’t have a choice. It was work hard or get my father’s size 10 shoe somewhere near my back pocket area.
I’m Michael Martin. I’m a Los Angeles based futures options and stock trader. Happy to be here to help you all with stuff. I’m just fighting the tail end of a cold here. Apologize for my voice, but nothing stops me. I’m unstoppable. Just like you mofos, you have to understand that preparation, right? This is kind of key for life, right? Trading is a microcosm of life. Your emotional models that you’re running in your life, you will overlay in the market. And then how hard you want to work towards getting a goal will be probably a mirror image of what you’ve done in other parts of your life. And so if you’re one of these infatuation junkies, you’ll probably be enamored with everything. Every big mover is going to look good, but the follow through is going to be bad. And that’s what happens in those types of relationships.
It’s all super hot and heavy. Sex is kind of good, and then it fades. Why? Because really that wasn’t the goal. The goal is not to have a lasting relationship. It was to have all the heat been there, done that. It’s okay. It doesn’t mean either one of you are bad, but if you want to trade, you have to understand it’s a marathon. And I’m going to say this will probably piss off a whole bunch of people, but prove me wrong, lacking a strategy. Volatility does not equal opportunity. So if you’re watching SMCI and whatever the darlings of the day, Cardano and Bitcoin and Nvidia, all those things could move and double in a month for all I know. You see what I’m saying? Wheat could, soybeans could trade down to $9.00. SMCI could make it to, who knows, $1,500 by opening day baseball season. Your guess is as good as mine. But if you don’t have a strategy that you can follow day after day after day, it’s as if those names don’t even really exist. You’re just being a voyeur really with a lot of expensive technology looking in at other people, acting things out.
It’s like there wasn’t so much opportunity because a lot of the trades and the setups in those days didn’t really resonate with me knowing the names. They were all blue chip style stuff made it worse because then I brought bias to the table. So then you start thinking like, “Oh, of course this company makes Blade servers” and this and that, and you’re like, what are you, Peter Lynch? Now what are you a CFA? You don’t know shit about the fundamentals. Even the CFAs who I teach are looking at reading at income statements and balance sheets. Good for them. What can they break it down to best practices? Eventually they still have to make a judgment call. Is the company performing on all eight cylinders?
And so you kind of figure are you a fundamentalist or are you going to be a chart reader? And if you’re a chart reader, you really want to break it down to one thing, one pattern, and execute that for a long time. How long? I don’t know, a year. Probably not what you want to hear because in two or three months, it doesn’t really mean a lot. It feels good. I got you, I got you. And it felt good to me. Certainly was better than losing for three months. That’s for damn sure. But there’s just not enough of a sample space to know that you’re just not lucky. And in trading, you need to know that you have some kind of skill. What’s your alpha? What is it that you bring to the table that outperforms buy and hold? Because there’s really nothing wrong with doing.
Like Warren Buffet says, chucking your money into a zero cost S&P 500 fund and then going out and find something that you’re really good at. Trading’s not the end all, but what you don’t want to do is piss away a lot of time jumping from one lily pad to the other, trying to figure out where your frog wants to sit because ultimately it’s not going to work. You have to act consistently with one ideology, right? I talk about religion and politics to the extent that typically you have to be locked into whatever that ideology might be. You can’t jump from religion from day to day to day. The fancy word is apostasy. You can’t jump around from one belief system to the other, right? And if you’re newer trying to work on 10 different strategies at the same time, I think it’s very difficult to lock into one and to not get head faked, that just creates more mental chaos.
Now, admittedly, there’s probably a handful of people out there who just have natural ability. They can do it, but it’s very, very few. This came up in the discussion about some of these funding accounts. I’m pretty well aware because those people reach out to me. They want advertised. They want to be on the show. I tell ’em, no, thank you. I don’t really have guests, and to be honest, since it’s my show, the guests that I have are friends of mine. Why else would I bring a stranger in the house to hijack my audience? Do you want to get clients? Get your own fucking channel. Don’t bother me. So that’s why Brian Shannon and Sean McLaughlin, come on, and maybe a few other people because we’re buddies, I’ve known ’em for 20 years and they’re reliable. I’m very well aware of how the funding accounts work, and you can put 20 of them together and enter orders on one and they will replicate across the whole thing.
And that’s one benefit for sure, if you know what you’re doing, but that’s not the argument that I’m making. A newer person has no business doing that. No different than a newer trader trying to trade on margin too soon when he or she or they can’t make money trading cash. Why the hell do you? Oh, but Mike, I’m Long a call. I know your long a call option. Piss away $800 a month to have the accounts. It’s nothing. It’s better to lose that than to lose real cash. So now it’s again, it’s like buying a call option. I get it. That does make sense. But I would stick to just one account and one strategy. Spend your $40 and get your 90% off bullshit and make it work that way, and then if you get good, then you could scale. But we’re really talking about that’s a straw man argument.
I think it was Viking or somebody wrote something in which really had nothing to do with the topic, so I just deleted it. No hard feelings, but let’s stick to the issues here. What you’re going to see when you look at charts, a lot of it’s noise from day to day to day. A mistake that you can make is to downtime. If you can’t see it on the dailies, you have to make up your mind that you’re probably not going to see it intraday. You don’t care about intraday if there’s no trend or any significant move that’s starting at the higher timeframes, the lower timeframe data is much more random, so you should disqualify it. In fact, that’s a great word. Your job is to disqualify 95% of what you see to create a list of the other 5% where you might have 1% of those actually becoming trades.
That requires an enormous amount of work. It doesn’t require looking at e-minis or MNQ’s and changing the timeframe to find divergences. It’s a waste of time. There’s no money in it when there’s other good trades that might be right underneath your nose if you were just open to looking at them. So you have to create a watch list and then scour the news. I don’t even how you screen anymore. You can go to the 52 week high list because in order for something to make a hundred percent, it has to have been up 30, 40% beforehand. So it doesn’t mean the move is over, but ultimately simplifying things is going to save you a lot of mental energy as well, which means when you finally hit your wits end, you’re not going to go on tilt and blow yourself up because you haven’t pissed away a lot of time doing things that haven’t come to fruition or doing things that cause you to take action to get you the results that you’re not getting.
That’s what I mean by fruition. Fruition probably means making money with some type of consistency. The other thing you need to understand is that it’s not a game of accuracy and you can let go. The idea of needing to be right 7, 8, 9, 10 times out of 10, you can make a lot of money with three or four names in your portfolio. There’s countless traders who have done it, some of them compete, some of them don’t compete. I don’t really care for that doesn’t bring the best out of me. I like to just compete with myself. Might be different for you. Ultimately, if you find a couple of names that you can put in your portfolio, they don’t sound all that sexy, but if they’re growing and they’re moving, put ’em in your account and leave them. Let them go. Don’t sit there and keep watching like you plant the seeds.
You don’t have to go back and look at ’em the next day. Stay trade small enough so that you can keep the good risks in your portfolio, and then if they keep moving up, you can consider adding more and then you can consider moving or adjusting your protective stop. The third thing is I wouldn’t look and worry about what happens on any one particular trade. There’s a saying at the pro circles of trading, and that is you trade your equity curve now for the new person, you’re like, what the hell does that even mean? That took me 10 years to figure it out too. I went to an Ivy League school. Trading your equity curve means look at the slope of your balance isn’t going up sideways or down, and typically if you start losing money, you’re trying to trade more conservatively risk, less money on a per trade basis so that you can kind of decrease the impact of the magnitude and the duration of the drawdown, which is a pullback from any particular peak.
Then if you’re trading really, really well and you notice that your equity is going parabolic, there’s a few things that you can study. Are your positions really, really big? Were you in the right place at the right time? You know what I’m saying? Or is it just how you have skill? It could be a combination of all of that stuff, but that’s why I stay emotionally grounded. I don’t really care about the outcome of any one particular trade. I talked with Brian Shannon, we’ll talk about, I had a lot of recap. I can go over about that show in another episode, but I talked about getting two call strikes on me basically before finally getting the base hit. I had had some call options that I had made some money on, nothing really big, and then I had the 55 Calls coming into the week before earnings, which expired, and I didn’t make any money on that, and so it’s like I’m not aggravated because that was what I was willing to risk on a per trade basis.
I’m not really looking to say, okay, I put a hundred K into call options and I lost a part of it, or I lost all of it. I know where my risk is. I know what I’m willing to lose in order to be in the winning trade. The best thing I can do is to stick to my discipline. Point number four is just stick to what you know how to do and you’re powerless over the results. I can control the position size, I can control my entry, and I can control my protective stop where the thing goes once I’m in the trade’s, a whole other ball of wax. Some of you overthink things at the worst possible time, and that’s typically when you start making money, you start to freak out. It’s like being naked in bed with somebody for the first time. Just take it easy.
Enjoy the process. It’s not necessarily the outcome because what you’re going to learn through that whole process is the experiential part of trading. As I’ve said before, and I’m just coming from a trading coach or a guy who consults to it anyway, the best teacher that you’re going to get is you actually doing it. Of course, you got to make sense of your actions and this and that, and that’s kind of where I come in, but at the end of the day, it’s really between you and your higher power. For me, if I start making money on a trade, I’m like, okay, it’s the appetizer. I’m just getting started. Now I got to figure how can I add more if the market lets me? Sometimes they go parabolic right away very quickly, and it’s hard to get more on, but then you have to live with that.
But I think the biggest takeaway is to just keep things super, super simple and enjoy the ride. This is going to take you probably years to figure this out, to get to be where you want to be, and you have to have that level of patience if you come into this thing either with your own cash or trying to make it with a funded account and think that you’re going to be pulling down thousands and thousands of dollars inside of six months. Hey, man, it’s a good goal, but I don’t think it’s terribly practical and I’m not a dream killer. I just know how hard it is, and if the more practical you can be when you come sit down to your trading desk and understand that the learning process in and of itself is an arduous aspect because of the mental drain on you.
You don’t know even when you make money, you don’t know if you’re good or if you’re lucky, and that’s hard, right? It’s hard. It sucked for me too. I know it sucks. There’s really nothing you can do about it. There’s no one there to pat you on the back. You can feel good about it. You can take a screen grab and send it through X or whatever, Snapchat or whatever, and that’s good. It’s kind of young, immature, but if that makes you feel good, then knock yourself out. You have to celebrate it, I guess, along the way, but the idea is can you do that day after day after day after day and take solace and get the emotional reward in doing that all the time and not necessarily feeling bad when you lose and feeling good when you make, it’s all the same thing.
I really feel the same way. It’s like, okay, I did what I know how to do every day. That’s how I win the day. You see, I don’t worry about the outcome of any one particular trade, so there is zero probability of me ever on tilt. Is it aggravating Once in a while? Sure. Is it aggravating to have puts on Nvidia that expired the Friday before they had that big sell off before the earnings announcement? Hey man, bad timing. That’s the way it goes. I could have gone out and bought longer dated puts and I didn’t, so that’s on me. Oh, well, that’s the way it goes so I can bitch and bellyache about it, or I just come back and buy at the money calls on the day that they announced earnings, which is what I did.
So you take it all in stride. It’s really about a marathon. It’s not like there’s no destination. There is just a unique circumstances and set of behaviors that you want to repeat. That’s the destination. It’s all in your mindset. Everything else is kind of like self-imposed or things that you think are important that I can assure you. It’s not about making a certain amount of money. It’s not about trading a certain asset class or having a certain holding period. That’s all. No one really cares. It’s like some people have blue eyes and freckle face and red hair. There’s other people who were dark complexion. It’s just the uniqueness of everything. It doesn’t matter. One’s not better than the other. There’s only really one that’s best for you. Another thing that’s very, very frustrating is that people ask me all the time, Mike, what’s the best way to handle your winners?
And I don’t have enough information really to answer that question. If you’ve been around long enough, everybody knows that’s probably the hardest trade on planet Earth, right? Is when do you take your winners? So again, I’ll probably have more about that later this week, too much to talk about here, but if you’re starting out and you’re frustrated, that’s a good thing. That means you care, but you just have to also understand that it’s going to take a while. The key is persistence and determination. If it was just about skill, everybody would be probably making money. So there’s a lot more that goes into it. It’s sticktoitiveness. Can you keep a good attitude when you don’t know shit and you feel like an idiot, but you know, have to take attempts anyway. Just remember folks losing money says nothing about you as a human being at all.
It says, it’s just money. It’s just money. It doesn’t mean anything. Don’t put any importance on the money. You’re speculating. What do you think is going to happen? So let that go. It’s not like you’re going to take this money and take your winnings and go buy a house with it or something like that. Your goal is to follow one set of rules over and over and over again, and in the future if you grow your capital base, sure you can go diversify, but in the very beginning, it’s not like you’re missing out on anything. You wouldn’t take that money and go consume with it anyway. It’s an asset, so keep it in the asset column.
The only emotional fulfillment you want from trading
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Your goal as a trader is to follow your discipline, and if there’s any emotional reward for you, it’s not because of how much money you’re making or taking pride in how little you lose when you lose. I celebrate all that. The emotional feedback that you want to amplify is your ability to come back and to do the same thing day after day after day after day, without hesitation, without interruption, and having a great attitude about it. Great emotional discipline. So that’s the emotional payoff is being able to do the same thing over and over and over again. You’re powerless over the results. Most people are, they’re new to the business, they’re immature, they’re watching their p and l, and that’s absolutely the wrong thing to do. You have to trade your equity curve, and that has a function. It plays a role in your position sizing, but you can’t worry about any one particular trade.
If you plan on doing thousands and thousands of trades, you are going to have 5, 6, 7, 8, 9 losers in a row. It’s just the way that it goes. You don’t have to like it, but that’s why you learn to trade small and it doesn’t say anything about you as a human being. You might be smart, you might be stupid. I don’t know. I’ve been both in my life. Look at me. But you learn. There’s a saying in Jiujitsu in Portuguese, the English translation is effectively, there’s only winning and learning. There is no losing. Obviously, you have to keep your losses small. Anyway, I’m Michael Martin. I’m a futures options and equity trader based in Los Angeles. I appreciate you all being here. I talk a lot about emotional intelligence and trading psychology, and I’m giving away the audio book version of my book, the Inner Voice Trading, where I talk about a lot of these things over the course of my career.
What did I have to learn, the hazing I had to go through in that book? You can get the audio book version for free. The link is in the description here. So today I’m going to comment on something that came in from a guy I know Michael Walstead on the video I did with Sean McLaughlin, an Options Pro at all-star charts and how to optimize your options trading, learn from a pro and how to get better results. And his question is, our goal is to have no emotional objectives in the market. No, I just answered that. Or should they be aligned with life-changing money? IE only emotionally rewarding to make that kind of money, and I think you need to separate, like I said at the top of the show, your emotional response to the outcome of the trade. You’re powerless over the outcome of the trade.
So I expect everything from losing money to making money and everything in between. Whenever I put risk on the portfolio, I just take it all in stride. I’m not thinking about making the money. I’m not anticipating with my leg going 14 miles an hour when I’m in the trade. I don’t look at it. I put the risk on as soon as I get filled, I put in my protective stop. Then I literally walk away. I have my day filled with stuff that is full of non-trading stuff, but my risk is being managed at the pro level because I can’t do much more than just aggressively move my stops when need be. I put alerts in to say, okay, here’s where I want to add risk. If I can not to take profits, I don’t want to do that. I’m
Not to take small profits. I want to take larger gains. Sometimes they work against me, but I’m okay with that because it’s my set of rules. They might not work for you, but I’m not doing this for peanuts. I don’t care about scalping a couple hundred bucks a couple of times a day. It doesn’t move the needle for me and it’s too much work for too little money. You may feel differently. I support you in whatever you’re doing. I’m going to let your feelings guide you. Learn from them, right? If you’re comfortable making small bits of capital, that’s great, but investigate that. Why are you okay? Why wouldn’t you want to make more money for all the work that you know you’re already willing to do? That’s not a question I can answer. I certainly don’t have any judgment. Why? Well, we’re all products of our environment.
The money that you’re making now in the market might be big compared to what you made as a kid or in your first jobs. So more power to you. That’s all for you to investigate. But just like I said in last Friday’s episode in Trader Motivation, you have unlimited potential and unlimited upside. So why would you cap that? That’s a very philosophical kind of question. I think only you can make the answer for I knew what it was for me. I didn’t want to go back to blue collar despair. I had been really good as a golf caddy at Quaker Ridge and Wingfoot. I had waited at only five diamond places and I made a ton of cash, but that was as good it was going to get, and I knew for me my self-worth, my self-esteem, all of that emotionally and financially was much higher than what I was getting paid for.
So I needed to find ways to kind of break out like a stock to newer levels. So I needed to find the path. I knew how to work hard. That wasn’t the problem. My sister and I have a lot of grit, but I admit at the very beginning when I started to make greater sums of cash than what I had done in the blue collar stuff, my self-esteem went higher. My sense of self-confidence went higher because I proved to myself now that I could do it, and it was scary. Why? Well, you don’t know what steps to take. People say, well, write a business plan bitch, please. You don’t know what business plan you have to write. We just sit and write a strategic plan. When you don’t know your ass from hole on the ground, what is that going to prove? All you need to do is be willing keyword there and have all the feelings around that willingness to take the first step into the uncertainty without joining discords and without trying to lean on somebody else or be part of a group. You need to go by yourself. Don’t look back, look forward, take those steps. You’re going to fail. But like we say in Juujitsu, there’s winning and learning. You can’t lose. You can define what your losses are. Make ’em 10 bucks a trade. Who’s to judge you? I’m not. I’m going to be right behind you cheering you on, saying Go er. Knock it out of the park. Because when you do that, you can’t lose. You bring, I talked with Ed SKO about this a million times in the tribe. It’s like
There’s a big difference between being a judge and using your judgment, and I think a lot of you judge the crap out of yourself. I don’t even know how you get up in the morning. You’re too hard on yourself. This is a game of expected values and probabilities and uncertainty and the more emotionally mature you are that you can deal with your feelings around all of that uncertainty when you want certainty because it feels good, it feels safe. Again, fight or flight mechanism, the more money you’re going to make, the more you’re willing to feel your feelings around that stuff. The one way you can control it, the key is use your protective stops because that’s how you can take an uncertain situation and put a little certainty. That’s what you can do is just adjust your stops. You don’t know how much money you can make.
It’s probably more than you give yourself credit for more than you can even think. But at the end of the day, the best you can do is control the controllables. I talked about my friend of mine who passed away, Ken Za, he was the mental coach for a lot of people, especially the Chicago Cubs baseball team. He passed away, lived in the South Bay, and I’d go down to see him and he was like, all I try to, these guys all play at a high level. Even if you get drafted and you’re in the minors, you’re in rookie ball, you’re still playing at a very high level and every level you get up, the game gets twice as fast. So your instincts, you have to be able to trust your instincts and rely on your ability. The more you stop and try to think your game slows down, and now you’re sit and duck.
So the best thing you can do is control the controllables. I’m powerless as to whether I’m going to make or lose money, but one thing I do know for sure is how much am I willing to lose? Look at the underlying volatility of the instrument, calculate my position size, IE, the number of shares or contracts for my R. I know my entries and my exits after that. It’s a fuck all. You don’t know anything else after that. So now I can characterize all those other feelings because it’s like, well, what do I expect could happen? I’m going to put the trade on. There’s three outcomes. I’m going to get knocked out quickly. It might stall or it might break out and momentum kicks in and I start making money. Okay. Then what’s step number two? Well, once it goes up a requisite amount, you can use a TR.
You could use a portion of the standard deviation. Doesn’t matter to me. I wouldn’t use a set dollar sign. Small-minded. Again, you might think 10 bucks is a big move. 10 bucks is like the bid asks right on Nvidia for god’s sake. So I don’t know. Then adjust your protective stop higher. There’s your first two steps right away. Know what your risk unit is. Know your entry. Know your protective stop. That’s the best you could do. You put the trade on, it starts making you money. Adjust your protective stop to break even. Sit there, do it with one share, one contract, one mini. Learn to feel those feelings. See what they’re trying to tell you in the uncertainties where you make the money. IE reward goes with risk. How are you going to make money if you don’t want to take on the risk? So to me, that’s even better because instead of having 60% losers,
40% winners, if the more you can adjust your trades and adjust your protective stops to break even, you might have a situation where you win 30, 40% of the time, 30% of the time you get knocked out at break even, and then the difference is the number of losers. That alone is going to do wonders for your p and l on a monthly basis. You see what I’m saying? So to me, all this stuff is learned behavior that you can learn ahead of time, and that’s where rock and roll happens. You stay out of your own way. But the key to me is like, can you learn to feel all the feelings that you have to feel around the uncertainty and the unpredictability of the outcome of a trade? When you have price targets, it tells me that that’s the most heat you can take in the kitchen and you’re probably selling yourself short.
Even though you might be making money. It feels good. Yeah, I made money. Great. Three to one. No matter what happens, I’m taking it off. But if you take everything off at three to one, show me all your five to one winners. Where’s your 10 to one winners? You don’t have ’em, not all the time. Not all the time, but sometimes maybe once out of 10, two out of 10 trades, they can go on to five to one. So open yourself emotionally to the possibility that happened. It might mean that your three to one trade gets knocked out at two to one once in a while, but if you take everything off at three to one, you stunt your own growth
What you need to know before you put on a trade
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Trade management includes knowing what your R is, how many contracts or shares you’re going to trade, knowing your entry point and then knowing where your protective stop is and you know all of this before you even enter your buy order to get into the market and add length to your portfolio. Hi everybody. I’m Michael Martin. I’m a Los Angeles based trader of Futures, options and Stocks, and today I want to talk to you about how you can handle drawdowns and handle your profits in what we call trade management. Usually what happens once you’re in the trade, for some reason when people start to make money, they actually fall to pieces. It’s as if they have no self-esteem or they don’t think they deserve the money. Why else would you fall to pieces and your brain go to scrambled eggs or whatever it is once you start making money, isn’t that the purpose of being in the trade, right?
If intentions equal results, maybe your goal isn’t really to make money, it’s to put yourself in these really stressful situations where you have to think about your self-esteem. I don’t know why else that would come up for you. It’s really simple process. You put the trade on, turn the screen off, put in your protective stop, the market’s going to go where it’s going to go, whether you’re watching it or not. So Egg 7 9 0 6 wrote a comment on the show for the episode entitled How I Traded Out of a Drawdown, and he said, he’s actually in a draw. He or she said they’re in a drawdown right now after having a good Q4, but that this person doesn’t over manage. In quotes, my trades no stop at break even no partials, which I take mean they don’t lag or scale out of their winners, but to me it sounds like there’s no management whatsoever.
So you have to define first what’s the management of a trade? Then you could figure are you overmanaging it and perhaps overthinking to try to avoid the feeling, the feelings that you need to feel when you have risk on what do you feel like in your body when there’s uncertainty? You have to remember trading puts you in harm’s way. We are built in with a primal solution for fight or flight. We’re built in that a million years of evolution, so when you add risk into your life deliberately, it makes people freak out. Maybe that’s the scrambled egg theory. You’re not just cut out for it. I don’t know. I don’t know. Most of the people who write in.
I don’t really have enough time to get into all the comments. Nonetheless, I think you have to bottom line behavior, which means once the position starts to make you money, what’s your rule to protect your capital, your goal as a speculator, even if you’re hell bent for election or aggressive like I am, the goal is to play superior defense. That’s the key. Your winners are only going to look like winners to the extent that you can keep your losers small, so you have to be proactive in protecting your cash. The first way you do that is
Once have a trade that’s a winner. As soon as you can move your protective stop to break even, the better. You can’t be afraid of getting knocked out of the trade because the goal, that’s not the goal. You have to be willing to feel that feeling and if you’re not willing to feel that feeling, guess what happens? You don’t adjust your stops and then you returns are all over the place. Remember, consistent results comes from consistent behavior. If you can’t act consistently on your own outside of the discords and all that other bullshit, you’re not going to make it straight up. You’re not going to make it. I was lucky. I had a hunch that I knew trading was a behavioral endeavor because I understood the math. I understood expected values, I understood probabilities, I understood odds. I understood payoffs not because I was a gamble, but I was a math nerd. I had been keeping spreadsheets on things, weather patterns, humidity, Yankee records, batting averages, and I would look and see, okay, what could this person do to improve their performance?
You can’t really do much to change the weather despite the green movement, but nonetheless, you can control your profitability. Most people think that it’s random, but you’d be surprised how much of it you can control by using your own behavior and that means moving your stops. Basically every day I’m managing a book of stop orders. Here’s where I’m going to look to get in. Here’s where I’m looking to protect my capital and here’s where I have my protective stops and all I can do control the controllables. The only thing I can do is enter my stops. I’m powerless over the results. Sometimes they don’t get hit. Sometimes I want to add to a winning position. Market never gets there. It comes back. I get stopped out where probably at break even maybe for a small gain, oh, well, I can always get back in. Too many of you are emotionally invested in the outcome of a trade that’s got to stop right now.
One trade doesn’t mean anything. It’s like going on a first date. You can have all the excitement that you want, but there’s a lot more to come. You understand? So at the end of the day, you just have to take it as this is what you do. You job is to enter stop orders. You’re powerless over the results. Stop thinking about things. Stop looking at your P&L. I get the same questions over and over again from different folks. I know most of the viewers that come to the show are new, so if you’re here, thanks for being here. I appreciate it, but at the end of the day, I understand what professional behavior is and even if you don’t want to be pro or go pro or run outside money, if you’re going to try to make money in the markets, you still have to do the same things that pros do.
Swing traders, trend followers, day traders, guess what? You can use the same entries, you can use the same entry and just change your holding period. That really defines what kind of traitor you are. Anyway, so I don’t feel like this is a big magical system here that’s too hard for anyone to figure out. You could use the same breakout, offset the trade by the end of the day, okay, you’re a day trader. Raise your stop to break even. Take a partial, do a two for one kind of a deal and hold it till a couple more days. See if it brings you more money. Swing trader, right? Give yourself a little bit more room, trade it smaller on the entry. Maybe add to your winners, hold it for a week to a month or like me for a couple months if you can. Now, you’re a trend follower.
It’s not rocket science folks, the reason why people fail is because they can’t get out of their own way. They can’t make a decision, right? They can’t focus on one thing because they’re too afraid of missing out. They’re unsure of themselves. They don’t like the uncertainty of the trade, and they think that in short term they could figure out, well, this is working, therefore I’m making it. That’s what’s hard about this. It takes years. It takes years, so you might as well start acting consistently right now. The key to all of this though is don’t lose a lot of money. Raise your stops to break even as fast as you can. You can use the ATR for whatever period you’re trading and once the instrument is 1 ATR in the money, so to speak, from above your basis, raise your stop to break even and then let it go this way, you’re kind of free freeroll it.
You can’t lose money as far as taking risk home overnight over the weekend, very, very rarely do I get gapped very, very rarely. So if you’re afraid of that, to me it’s an irrational fear and it’s one that you should learn to really conquer if you want to make the big money. I know a lot of folks like to sit home and trade scalp units all day long, but that’s small timer. That’s peanuts, right? We talked, there’s an episode about making peanuts or making life changing money, and I don’t care if they can do that four or five times a day. I’m not turning trading into a blue collar job. I don’t care what someone’s intention is. They want to sit and get all their screens and sit in front of the screen all day. Good for you. You know what I mean? I’m not willing to do that kind of work.
I know where my orders are, I put my stops in and then it’s a question of letting the market come to me. That’s it. There’s nothing else I have to do. I don’t want to sit in front of the screen for hours and hours and hours, but you absolutely have to manage your risk. That’s what you are as a trader. You’re a risk manager, right? An investor is somebody who has an open-ended exit strategy. I don’t know, sometime in the future, maybe when I retire, I don’t know. That’s when I’ll get out. Okay, perfect. If that works for you. Maybe there’s a certain quality of your money. You have 401k, you have some kind of regular IRA traditional IRA Roth, IRA 401k rollover, and you’re a younger person. You have several decades that might work, but for traders, they’re going to make it and take it over some shorter timeframe, so you have to be very, very proactive at that point, and the goal as far as I’m concerned, is to be able to adjust your protective stops
To break even as fast as possible, so this way if something does come back on you, worst case, you get knocked out, you’re out the commissions and the fees, this and that, right? Some of you might want to trade a certain number of contracts and once it moves 1 ATR in your favor, you actually offset part of that position, lock in the gains. Then you raise your protective stop to break even now, you can’t lose money literally on the trade you’ve already booked a small bit of profits. You just need to know as the move advances, you’re not going to make as much because your account size or your position size is suboptimal, but it is one way to kind of live with all the uncertainty and that you are making some money. That’s not how I do it. I tried doing it. It seems you have a smoother equity curve, I believe, but ultimately that’s not the shape of what I want my equity curve to look like.
So you get to make that decision yourself ahead of time, and then you can meditate on what all the feelings are that you have to feel in order to run your system ahead of time so that this way when you’re in the heat of the battle, you resort back to your level of training, right? You already know what to expect. You know that if your expected value of a trade is x, y, z, that comes with an accuracy of maybe who knows, 30, 40, 50%. You know that ahead of time, so therefore you shouldn’t fall to pieces. If you know how many times you lose or what frequency with which you lose, what’s the losing percentage? You can calculate with pretty good accuracy. What’s the likelihood of having three losers in a row, five losers in a row? The math is already there, so again, if you can know all that ahead of time, that’s the type of preparation, right?
Victorious warriors first win, then they seek battle. You can figure out all this stuff to reconcile in your brain with your emotions and stuff before you even put on the trade and not doing so to me is immature and reckless. You have to be prepared. This is a game about being independent and being prepared. Know how things are going to unfold and be ready to take action because your job is to preserve your cash. You can take whatever chances you want to take. I’m not saying don’t take chances, and I’m not saying don’t even take flyers because you learn a lot about yourself when you do that, but you just need to know what it is that you’re going to lose and where the uncle point is and you have to know that ahead of time. Then you put in those stop orders and you don’t have to think about anything. They’re standing sent in your account to save your capital, and there’s been more times than not when I’ve been in trades where I’ve gotten knocked out and for two seconds I get frustrated only to realize there was an Nvidia trade last week where I don’t really scalp, but I thought it would strengthen into the close because I don’t know who wants to be flat. I know no one probably wants to be short, and it looked like it was going to break out over 8 0 2, and so I wanted to accumulate coming into the
Close Friday, my style. I know you probably have had seven heart attacks already thinking about buying long at the close on Friday, but that’s what I like to do. It usually means good Monday mornings for me, but it never gained any momentum and it failed and it traded off quite a bit and I lost money on it. I lost whatever, two tenths of a percent, wasn’t big, but my ethos was wrong, but what stopped me was the fact that I had a close stop. I think I was risking two bucks or something like that, but I lost, and that’s okay because it was a much better exit than where it settled. Now, look in six months, today is actually Saturday the 24th, so by the time you see this, it’s probably going to be midweek in six months from now. The stock could be 1200 bucks, but I’m not an investor and my job is to protect my cash.
I would more prefer to buy strength. That’s my style than to try to buy weakness. There are some of you that do just the opposite. The good news is that we can both make money. The key to all of it is knowing, where do you say uncle? Where do you know, and Brian and I talked about this on the show, if there’s a pullback to the line, that’s not necessarily the buy signal, it’s the reaction from the retracement you see, so you can figure that out for yourself what’s best for you based on your trading rules, but you need to understand that trade management. It’s like if you looked at pro football or pro baseball, they always have scouting reports. You need to have a scouting report. How do you think the thing’s going to behave? What are you going to do to get in?
How much can you withstand position sizing, which is where we make and lose all our money? The entries are kind of important, but the position sizing is the absolute key because that amplifies your gains and it also amplifies, it amplifies your losses, so you need to figure that out ahead of time. What can you withstand? If you have a violent move against you, and if you do have a violent move against you and you get knocked out, you would anticipate that that could happen, so there’s no reason to go on tilt because you knew that it was a possibility. You don’t have to like it, but then if you start acting out on that, whose side are you on? It’s hard enough to make money in good markets, you see, so this deals with the concept of emotional maturity and being able to handle and earn the responsibility of running your own money. You get to run your own money. Think of it that way. That’s a great responsibility, but you have to be mature enough to know what the hell it is that you’re doing. What’s the point of putting on trades and then just letting it be a fuck? All you need to know where you’re going to get in and where you’re going to get out because that’s how you stay solvent. That allows you to come back and play tomorrow, right? It’s one thing to be
Frustrated to get knocked out because you had a protective stop in and you got knocked out of a trade, but feeling that frustration to me is a thousand times better than being despondent because you got knocked out, you got back in because you were pissed, then you got knocked out again. Then you just said, screw it. I’m going to put the whole thing in, and now you’ve gone on tilt. How does that serve you? So to me, it’s like work on all of that stuff before you start trading, and if you can’t, then don’t trade because you’re your worst enemy at that point. You see, and I want what’s best for you. Typically, that means keeping your losses small, knowing where your protective stops are at all times. It’s super easy to do, right? If you’re in a trade and it’s working out for you, my opinion is you should let your winners run for days and weeks if you can.
It’s hard enough to find them in the first place. If you get knocked out, that’s the market communicating to you that for this period of time, the move is over. The market will tell you where the move is over. You don’t have to worry about price targets. Those are kind of feeble anyway. Most people don’t have a good sense of how far something could move, and if you’re in a trade and there is a rational behavior around that, the darlings of the day, chances are you’ll end up making more money. Everybody else is just recklessly buying while you’re com cool and collected in a position size that’s appropriate for you with very defined entry and exit parameters, right? So again, that’s pro behavior. You don’t have to go pro, but you have to act like a pro if you want pro results, and what the pros do very, very well isn’t have the magic formula. They know how to act consistently, and it’s the consistency in the performance, the consistency in the behavior that predicts where you end up in life.