So the second part of yesterday’s email was the deeper issue is this. “After reflecting on it is that I think I am driven by fear of making too much too fast and then losing it all due to making impulsive decisions, driven by heightened emotions.” I think I answered that part yesterday. If you use protective stops, no matter how you feel you’re doing, you’re acting within discipline. Because you’re not in control of making too much too fast. That’s up to the market. I don’t know anything about you. We haven’t met, we haven’t spoken before, but it’s a common fallacy to think that you can control what’s going on. Now. I know some people have hot keys and mouses and 45 monitors, but that doesn’t make you profitable. That makes you – you’re buying things that have technical obsolescence that depreciate 50% the week after you buy them. That’s what I do know.

All right. So if you make too much too soon that’s up to the market. That’s you being in the right place at the right time, which could be good luck, good timing, or good analysis – or combination of any of the three. The best you can do is trail with your protective stop. So that’s not impulsive. That’s doing the same thing all the time. Then understanding if you have gains, if you have something at $20 and it trades to $35, how do you know it’s not going to $70 because you have to remember, what am I going to say here? Humans suck at prediction. Doesn’t matter about snap back trades. And all that prediction is not something that humans are good at. So what’s the best you can do. You can go to get 45, 60, 70, 80 years of data and say, okay, when did something go up 75% in a day? And how did it behave? And then back test your rules against it because otherwise you’re just talking shit.

So like most people, you don’t know what they’re talking about, but they go on social media and shoot their mouth off and they tell you shit like you could make a living and quit your day job by trading for only one hour a day. No you can’t. It doesn’t work that way. So you can feel good about making money. And at the same time trail with a protective stop and exercise discipline, those two scenarios can exist at the same time. The email continues. “So my thinking behind setting profit targets is to purposefully build the account slowly and to avoid a situation where I blow up my account because I grew it too fast, got super happy and over confident about it and then destroyed all my profits in an impulsive trade because I lost control of my emotions.” Well, you get what you think about.

So if you think that that’s possible, I think it could happen at any given time. What you need to think about is following your discipline. Can you put in stops? Can you trail with stops because it’s not for you to decide whether you’re going to build your account slowly or not. The market decides that the only thing that you can control is entering your stop orders, put your Buy stops above the market, let the market come to you. You get filled, you add the risk to your portfolio. You add a protective stop if you get knocked out. So be it it’s 1/2 of 1%, no big deal, not greedy, not anything market moves in your favor, adjust your stops higher, stay in the trade.

So you can still be super happy. You can still be overconfident. But you don’t have to change your behavior. You see, I don’t know. Maybe it’s an it’s , self-esteem thing is if, is that all your worth is you’re only available right now to grow your account purposefully and slowly does that mean what 5%? I don’t know what that number is. So that might be a limiting belief. You should grow your account, following your rules, with whatever rate of return the market’s going to give you, because you don’t have any power over anything that way at all.

So that’s a story I hear frequently that this is the email again, that happened to many successful traders in their early years of trading. And so I fear ending up in that situation. Well, yeah, sure. If you read Market Wizards, those people all got blasted and had to pay some tuition, but they were better for it. You know Michael Marcus – who I know personally – blew up and had to borrow money from his mom and his girlfriend. And then he became the best trader at Commodities Corporation – and one of the best ever. And email continues “And this fear is probably what primarily drives a lot of my trading decisions for steady growth or for worse leaving money on the table.” Well guess what? You’re never going to bottom tick if you don’t buy pullbacks. Right? So not even going to go there, you’re never going to top tick to the market in terms of you’re selling right. You can’t, especially since there’s a bid / ask spread and you’re selling at the bid, not the ask. So you’re never going to top tick the market anyway.

So the idea is can you capture a good chunk of the move? That’s the ethos leaving money on the table is doing what you said, setting profit targets at 2R and trying to grow slowly. That’s leaving money on the table. So I think you just focus on entering your stop orders. You make money, trail it every time and then set a new alert. The thing goes to $22. You raise your stop to breakeven. The thing goes to $23, you go to $21, then you set another alert for $24. It goes to $24. Now you’re stopped to $22.

Now there’s a lot of variations on that which are things that you’re only going to learn if you put them on and, and try them for yourself. So anyway, you asked me to do this and I told you via email ahead of time that I would do this because there’s too much to write in a response of an email. So there it is yesterday and today I appreciate everybody writing in. Please consider subscribing folks because I get really good feedback on from the data. I can’t see your name, it’s all anonymous, but I can see the quantity. And that helps me understand what types of episodes resonate with you. If you know some traders that are struggling consider sending them a link to this show to see if they might benefit from it as well. That’s all I have for you today. Folks. Thanks for being in here. I will see you tomorrow.

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I got a great, great email from someone named Kris. Thanks for writing in. “I recently found your show on Spotify a month or two ago, and I have since listened to dozens and dozens of episodes. [Thank you very much Kris.] And I am really grateful for the episodes you put out, especially the ones I’m dealing with, emotions that run deeper than trading and how they show up in real life. I get a lot of value when you challenge the way I think by providing examples of things I think about and reflect on, and it’s really transformed the way I see trading. Also, I haven’t come across any other trader who talks about the emotional mental factors in trading the way you do. And so I find your ideas refreshing. So thank you. [Okay, well, you’re welcome. I’m happy to help.] First part of it is I’d love to hear your thoughts on something I’m dealing with. I have recently become profitable. [Congratulations having green months now, I guess you, you color your wins green. Maybe your losers are red. You know, you can change those colors from a go to stop like neutral. I like pink and lavender myself.] I’ve recently become more profitable having green months now for the last few months, after over a year of break, even months and failing to get my account to move.

“I’m thinking about what it means to scale up at some point in the future…” Okay. I’m not going to read the rest of the question because I want you to stop right there when you’ve become break even for nine months and you have one, two or three green (up) months, you don’t know if it’s skill a randomness. So you shouldn’t be thinking about scaling up. That’s a day trader dilemma that you’re bringing into your world that you don’t need to bring into your world at all. You can continue to do things consistently. And you know, when you think in percentages, it’s always half a percent. So regardless of whether you’ve had green months or red months, your trading with 1/2 of 1% per trade risk. So as your account gets bigger, you will scale up by definition, because 1/2 of 1% of a bigger account is more capital at risk, but you set yourself up for large emotional swings by trying to scale up and aggressively trade more contracts or, or notional value of currencies or more futures contracts, or more shares by objectively trying to change that.

So the best way to do it in the way that the pros do it not the survivors in that space that you, I think you’re in always think of things in terms of percent of their overall overall account balance and that number doesn’t change. All right. I think you might run yourself into some trouble if you, cause it’s also an ego thing. It’s like, “I’m tired of being small. I want to be big.” Um, so focus on 1/2 of 1%.

So the second part is “And I remember on a previous episode, you mentioned that you thought setting profit targets was a bad idea because then you’d be leaving so much money on the table. Currently I set profit targets and that keeps me from being greedy since that is an emotional weakness of mine.” Well thank you for sharing it. I think it helps you heal to talk about it for sure. But you know, to me, good trading is basically running a book of stop orders. Figure out what you’re going to do Sunday night. You know what you’re going to trade Monday morning. There’s nothing to have to do Monday morning. If you’re doing it on the fly, you can create a false sense of urgency that something has to happen, or is going to happen. That’s my take on it. You’re much more levelheaded. If you know what you’re going to do coming into the day, the night before you get a good night’s rest, you wake up, you have your plan already written out.

You’re not waiting for earnings reports or other things like that. That’s for action junkies. And those people don’t last. I know there’s people around who’ve done very, very well. But when I look at the people who did that when I started 30 years ago, they’re painting houses now. So you know, more power to the people who are having success. But again, even if you’ve had success for three years, I can’t tell if that’s skill or luck. I can’t, there’s not enough data. So having profit targets to me is still something I don’t agree with because as you’ve heard me say, if you have a system based on the concept of R for risk and you risk 1R and you offset and you put cell limits above the market to offset trades, when they hit 3R, I can say with great confidence, you’re never going to have a 5R or a 10R trade, which is hard to digest when you might be in that winning trade already.

So a better way to handle that is to adjust your stops and keep a book of stop orders with technology today, whether you’re sitting at a desktop laptop, any type of iPad, any type of smartphone you can set alerts. And the example that I used was you buy something at $20, your protective stop goes at $18. You set an alert, not an order, but an alert for $22. So when it trades out through $22, you adjust your protective stop higher to break even. Now, in theory, you can’t lose money. Now also you could sell half and raise your stop to, break even. Or you could just keep the whole position and then trail every $2 – it goes to $23. Your stop is at $21. It goes to $24. Your stop is at $22. This way you let the market do the work for you. And you always have prudent risk management. That’s risking no more than 1/2 of 1% of your capital.

So I don’t think that’s being greedy. I think that’s actually being disciplined. You can label things how you want. We talk about good attitude and bad attitude. It’s a label that you put on a certain event that makes it good or bad. And I believe as a Buddhist would, that men and women are the cause of their own suffering is you. You can label things however you want. You choose to label them good. You choose to label them bad, but this doesn’t sound like greed. It sounds like fear actually fear that you, that what was a winner is going to come back and be a loser. So I think just put your stops in and let the market go where it’s going to go. You put your buy stops above the market to enter. If the market never comes to you, that’s great. You don’t get filled on things that aren’t going higher.

And two, you stay out of guessing and ego in thinking that you can actually predict things by trailing the market wherever it is with a protective stop. So even when it’s going up and you’re making money, you have a protective stop below you. It’s not stop loss because you’re not losing money. It’s a protective stop again. Be careful about the words that you choose, because you end up teaching yourself into, into bad habits. Anyway, that’s seven minutes of chatting today, which is all I really want to do. I appreciate everybody being here. Like Kris said, we’re on Spotify. We’re on YouTube, apple podcasts, this and that. You could check us out this way. You’ll download every episode to your device. You can listen to the show whenever you have time. I’ve also been giving away the audio book version of The Inner Voice Trading, which is the book I wrote for FT Press in 2011, you can get it for free at MartinKronicle. Thanks for being here folks. I will see you tomorrow.

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Everybody, Michael Martin hope you had a great week and that you have fun plans for the weekend. Today is Friday. And, so let’s talk about a lot of the things we spoke about this week. A lot of the answers to the questions can be more easily determined if you actually have a goal. If you have clarity about what it is you want your money to do for you, and then how that money is going to serve you in your life. That really helps you answer a lot of these questions. But as we’ve mentioned, you can’t immunize yourself against having to deal with the feelings that you would feel around uncertainty, and you don’t want to feel or feelings that you don’t want to feel in terms of like reluctance. “I’m reluctant to put in my stop, because I don’t want to get stopped out”, but that reluctance then becomes an invitation – is an appetizer for despondency. You see?

So you don’t want to find yourself in that type of a spot because if you lose all your marbles, you can’t come back and play tomorrow. So it’s better to trade super small on high quality names, risk what you can afford to lose and then learn about yourself. Most people want to learn about the markets about trading, about tactics, but this is easy. You can get that for free on Google. The hardest thing, which is what we focus on here and all our consulting, when we do consulting and have time away from the trading part is to help the person study themselves because your behavior predicts where you end up and the feelings that you don’t want to feel are going to have as much power over you as the ones that you do and your reluctance to feel those feelings might actually be costing you.

I don’t know, a hundred percent more rate of return, which means if you’re ready, willing, and able to do what to do, do what you needed to do to make 20%. You know, if you were trying to avoid certain feelings, as opposed to embracing them, you might find yourself up 40%. So then look at that on a spreadsheet and compound that over 10 to 20 years. And that’s the opportunity cost of the unwillingness of your unwillingness to feel all of your feelings. So that’s why I say like, it’s hard for the amateur, the new person to look at a chart and say, here’s how I would feel if I was in this trade because you have to do it, but starting with a financial goal and then all the feelings that you want to feel go back two weeks and listen to the episode. I think it was on a Wednesday about all the feelings that go with the moving parts of a trade.

How do you feel from the inception and the ideation to the raking of the data, to putting together your wishlist, to trade entry, trade management, trade execution taking winners, adding to winners. Another one we didn’t talk about, but we could mention is what does it feel like when you get knocked out and you feel the urge to want to get back in? What is that feeling and how does that feeling serve you? Are you bitter? Are you angry? Are you going to try to show up the market? Don’t come to the market with a Napoleonic complex because you’ll get your head kicked in.

I know that enough from having seen it happen. So be careful your, your job is to always play superior defense. If you’re lucky enough to have a trading grub stake, then treat it like a newborn child and just be cool, just chill. But ultimately a lot of the answers to your trading questions can be garnered from the back testing. So then you could scour the data and say, okay, this was a bad day in the market. How would my strategy worked? How would some unrelated incident in the S& P affected affect the names that I had? How if the fed tightened or eased credit on this particular day, how did the names perform? Because you can’t predict, although everyone thinks they can humans suck at prediction, that’s a starting point. Some people have intuition and there are some people who can, after many, many years have a feel for things, but it doesn’t mean they have any better idea of prediction.

And so I think that’s what people are trying to do. Well, it’s like, well, if I just see this head and shoulders pattern, I can predict the last leg up and that’s when I can get in, but it doesn’t always work that way. Same for any other chart pattern, including cup and handle. So I was again, spend the time thinking about what it is that you do. What do you want to do? What’s your goal? You know, what is ultimately your goal? And it’s typically not in and around tasks. Like I have a goal, I going to get new monitors or I want to turn my trading account into $1 million. That’s not a goal either. And I’m not going to say anything more about it. I’m going to let you meditate about that over the weekend. Hope you had a great week folks and you got some fun things planned for the weekend.

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So let’s talk about more reader questions – “But how do you find the balance between protecting your capital and not getting stopped out before a move in your favor is over?” Well, that comes from back testing. You can see how that would work. So once you start backtesting, you can look and see how the instruments that you’re trading move. Again. I’m not talking about one instrument, I got better things to do. And, then you could adjust your stops accordingly. It sounds as if here the person at first was dealing not wanting to deal with uncertainty, and now they’re trying to avoid the frustration. But I think I spoke to that yesterday in that you actually love frustration because it’s a better rate of return than having to deal with despondency.

At which point you have no capital or low capital and whatever nerve or sense of confidence that you had or excitement about the business. And so then what do you do? The whole fantasy is blown up. So that’s why I try to speak to the things that most people don’t want to speak to. So you have to deal with the frustration of getting stopped out. And then you’re talking about maybe trailing a stop. So now instead of buying $20 and having your your protective stop at $18, you could also have your buy stop in above the market. Say you get filled at $20 and then say the market starts to move in your favor.

The worst thing you can do is look at it because there’s nothing you can do to interpret the data. One tick by one tick. You know, it’s a curiosity, I get it. It’s infotainment, but it doesn’t help you make money. So at that moment in time, you could say, okay, well I’m going to leave my protective stop in until at least it moves one to $2 in my favor. So once you get filled, you put in your protective stop at $18, and then you set an alert for $21 or $22. And once that alert goes off, you can go back into, into your machine and you could do any number of things get it depends on how you’ve back tested things. If you are running a trailing stop, you could just have it always follow and be, say $2 below whatever that highest tick is. And if it does go back down, you get knocked out. If you’re a discretionary chart reader, which I think is a lot harder to do, it’s the cheaper way to go.

It’s what most, most rookies are doing because they can’t afford all the other stuff is, maybe sell half the position at $22 and then raise your stop to break even at $20, there’s a million variations on that, but that’s, again, something that you’re going to have to do, because you’re not going to know how it feels until you do it – after the fact.

Emmanuel Kant was a philosopher and he talked about a priori and a posteriori knowledge and I’ve always been speaking about a posteriori knowledge. Like what do you get after the fact. How do you feel after the fact. And that’s only something that you’re going to get by doing it. The simulation is good, because it gives you an idea. And if you test it over several decades, most of those models, aren’t going to turn on a dime…work for 20 years and then all of a sudden on the 20th year and one day it doesn’t work anymore.

So that’s just, what I would look at from that standpoint is use the technology in your favor and have the machine do the work for you. But I would definitely, especially if you start making money, I wouldn’t watch it all day because it’s going to induce you to do something that feels good, but is ultimately a bad financial decision and that’s cut your winners too soon.

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So we got another good question. What would be your what constitutes good risk management for you? You know, spanning from the tactical to the emotional viewpoint, ie, you know, what do you do practically to assure you play superior defense? So you have to have a regimen. And the first thing that you want to do is put in your protective stop and that becomes a ritual unto itself. A ritual, a routine it depends where you are in your career. At the beginning, it’s probably a ritual. When you get more evolved and you do this day after day after day, you want it to be more routine. You put an order in, you put it by stop in above the market. You let the market come to you.

If it doesn’t come to you, great, you didn’t miss anything because you don’t want to buy stuff if it’s not going up anyway. So that say you do get filled on something as like a hair trigger response. And I know what that means for men. You want to put in your protective stop automatically. You see, and you can easily do that because you’ll probably get all kinds of pings and alerts and this and that. Again, I don’t advise just from a quality of life standpoint as you’re younger sitting in front of the screen all day, there’s there’s too much life to go live. So you can see on your phone, if you get some kind of an alert that you’ve added risk to your portfolio. You can instantaneously put in your protective stop. So that’s how you place superior defense is that, are you doing what it takes to protect your capital trading without stops? Isn’t any defense whatsoever you see?

So you put in your protective stops and that’s both practical, tactical and emotional is it. You just have to do it because when you put in your protective stop, risking, whatever it is that you’re willing to risk of your portfolio to be in the trade in the first place, you’re actually buying insurance, both financial insurance and emotional insurance. The financial insurance says, okay, if I’m risking one half of 1%, my capital on any one particular trade I’m putting the stop in that says, that’s the point where I’m going to say uncle. And that’s what I can withstand financially to be in that one particular trade before I know I either have bad luck, bad timing or bad analysis, but I’m not willing to stick around to figure out which one it is while I’m losing money. So you get stopped. You might be frustrated. Perfect.

Say you didn’t put the stop in market moves against you down 10%. You’re sitting there trying to figure it out. Now you have all this indecision. You don’t know what to do. You don’t want to get out of the trade and have it rally back in your face so that you’re back to break even. And you’re already down 10% and this is the problem without using stops because good trades usually make you money right away. So the emotional benefit of putting in the stop is that you get out – you’re flat. And now you got a clear head. And so the insurance part for the emotional spot is that you, it lets you feel the benefits, the benefits and how you fall in love with frustration. You love that frustration. If you were married, you’d want to have an affair with frustration because frustration allows you and saves you from having despondency. So you’ll invite all the frustration that you want. Remember, we talked about having a bad day, dude. You’re not having a bad day, get over it.

So you invite the frustration because what’s on the other side of that. What’s below it. It’s despondency. It’s that you’ve lost all your capital and you should have known better. So unless you want to go through those feelings and let them teach you something, or if you feel like you’re immune from those happening to you, by all means, do what you think is best. But I look at the stops as a form of financial as well as emotional insurance. And you have to look at both because whether you like it or not, there are two outcomes to every trade, the financial and the emotional and that’s the deal. So don’t worry about getting stopped out. It could be the best thing for you. You just don’t even know. You don’t know. And there’s no way to tell ahead of time.

We talked about uncertainty the past couple of days. This is what it’s about. You don’t know what’s below your stop. You don’t know what’s lurking. There could be more sellers with enormous amount of size. So you buy something at $20, you risking $2, you have a protective stop in at $18. You don’t know that at $17.50, there’s another 40 million shares to go that are going to push the thing back to $12.10. How do you feel then? So that’s what I’m trying to tell you is like no one wants to get stopped, but they do want to get stopped because now you have a clear head. You have 99.5% of your starting capital and you can come back and play tomorrow with a clear head. If there’s a signal, if there’s no signal, it’s okay to miss a day, you don’t have to be double clicking your mouse. You know, like it’s a video game. That’s for people who want the action. Not necessarily those people who want the money and action is not necessarily a good financial decision. Anyway, please consider subscribing to the show. We’re on all the big platforms, including YouTube. And if you’d like a free copy of my book, The Inner Voice of Trading, I’m giving away the audio book version. It’s at the top right corner of the homepage at MartinKronicle. It is on me. It’s free. Thanks for being here, folks. I’ll see you tomorrow.

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