Watch this video on YouTube

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.

Watch this video on YouTube

You can see the charts we’re speaking about in the video.

Michael:
Hey everybody, it’s Michael Martin. Thanks for being here. I have my good buddy, Brian Shannon on today. Brian, how you been today? How you been buddy?

Brian:
Good things are good. What a hot market we have, huh? It’s kind of crazy.

Michael:
It’s been a really good market. It’s definitely harder for me because I’m more trying to build into positions, which we’re going to talk about, but I have been finding myself like day trading and swing trading because in many ways it’s a make it and take it market. Anyway, for those of you who are new to the show, which is probably the majority of you, Brian wrote an amazing book called Anchored VWAP. Wrote it about a year ago. He’s been on the show before. I’ve known Brian for 20 years, and for those of you who are discretionary traders, which is again the majority of you not using say, mechanical or trading blocks to build a purely mechanical systematized approach to trading, this is as close as you’re going to get to helping you come up with a strategy to really understand. Two things that I think are very, very important if you’re going to speculate in stocks, and that’s supply and demand institutions. Brian and I are both friends with Scott Kaminski, who’s famous for saying institutions leave footprints. You know what I’m saying? So Brian, welcome back to the show. I’m really looking forward to speaking to you about a tactical approach to trading.
There’s a saying that there’s old traders, there’s bold traders, but not a lot of old and bold traders. And I think what’s great about this book, you can emphasize this is when you used your strategies in here, it helps you understand when you can actually be bold and then when you should actually back off. Is there truth to that?

Brian:
I think so. The base, the cornerstone is always you risk management, and even if you’re going to be bold, it doesn’t mean throw a caution to the wind. It means have your shoot ready in case something bad happens and a big gust comes up.

Michael:
Yeah, I mean, I’ve actually tried to incorporate a lot of this. We’re going to go over a couple of examples. There’s so many trading strategies that you can use with anchored V Wap, including how do you join an existing trend, how do you trade gaps? How do you look at short squeezes? Now, today is Friday, February 23rd. Carvana is getting squeezed today, and I had a small piece on, of course not enough, but I used, I can call up my chart. You can call up your chart or we can just, what I looked at was it was coming out of the pinch as it’s called, but then it also, I waited it to cross the 5 Day SMA, and I know you’re a stickler for the 5 Day. I kind of heard your voice in the back of my head going like this, but is it smart to marry multiple indicators with Anchored VWAP or is it kind of good enough on its own? What’s your take on that?

Brian:
I am not a 100% purist about the Anchored VWAP. In fact, the 5 Day SMA is my number one intermediate term indicator. So that to me, regardless of what the VWAP is, if a stock is below a declining 5 Day SMA, I’m not going to buy it. If it’s above the advancing 5 Day SMA, I’m not going to short it. So I think you have to understand market structure as a whole to begin with, and then use the short-term supply and demand dynamics based around anchored volume, weighted average price to really hone in and get your plan really tight.

Michael:
Yeah, on the discretionary side of my practice, I try to mix and match stuff. I take good notes of course too. There’s lots of chart patterns, but I try to find out for sure who’s in control of the instrument. I do not want to be buying, we’ll talk about this. One of the things that you can use this technique for is to understand pullbacks. Sometimes maybe you sell a house, you come into money. Now your account is plush with cash, but the market’s been moving. So how do you join an existing move? How do you join if you’re a short seller, how do you time your put purchases? How do you enter short into a protracted downtrend or with some of the names that have been screaming, especially in the chip sector, how do you join? Right? Can you use Anchored VWAP as an overbought oversold indicator? Brian,

Brian:
I can give you a perfect example with a screen share of a trade that I took just about 20 minutes ago. Let’s do it. So let me find that share button. Here it is, and we’re going to go to Trading View. And where do I’ve got it? Oh, there, share. Okay. So here on Trading View, I’ve got this dialed into a one minute chart right now. Let me back it up a little bit and go out to a five minute timeframe because what I want to show here, Michael, is we just had earnings in the stock and the earnings report came after the close that was right here. So as soon as the earnings come out, what do I do? I put an anchor to that point because that’s a catalyst that changed the supply and demand dynamics. It’s something that got everyone’s attention. The stock rallied huge and up until today, so this is the post-market.
This is pre-market yesterday. This is trading yesterday. This is last post-market this morning’s, and this is today Friday. So Friday we had the market gap up a little bit from the 4:00 PM close, and then we started to sell off below the volume weighted average price. So while it’s below the volume weighted average price for the day, I don’t want to be a buyer of the stock because it says for today, the sellers are in control, and I’m not going to buy the dip. That’s what I always preach, that don’t buy the dip, buy strength after the dip. So here’s that blue AVWAP from the earnings report. And you can see, and actually when we go down to a one minute timeframe, you can see it nailed it. I mean, you just cannot make that up. There are programs there. So I didn’t buy the touch of the volume weighted average price.
I never do because there’s nothing to guarantee. It’s going to slow down there. So it’s not a, a caution to the wind level again, but it’s a level of interest and it has my interest because it says to me, here’s where the supply and demand dynamics just shifted. And by the way, I put this on Twitter just as it was touching this level. I think it was about $779.50. So this isn’t a hindsight trade. This is actually out there in the public. So it rallied a little bit. I purchased right here, and my intended stop was below this low to me, it defended it, it rallied away from it. If it breaks below there, I’m out. I got a little nervous over here because I bought more than I probably should have, and in fact, I didn’t even buy this. I bought NVDL, which is the one and a half times long, but I trade it based on this chart on the underlying, so I bought right in here as it was rallying away from it.
I’ve sold some right in here at this point, and I’ve got a two thirds position left. I don’t really have a price target, but I think it’s possible it can make it up to the anchor from the day or maybe at least that round number. And if it instead breaks below this little low, this is my most recent and relevant higher low. So we have this high, we have that low, then we have a higher high. This is the higher low. So my definition of trend on this very short-term timeframe is if it breaks below there and I’m owning it down here, I have no business being long. If it breaks down below that. Now, if it breaks above this little peak here, seven, let’s just call it seven ninety seven. If it breaks above there, my stop goes up underneath this because this is the most recent relevant high or low, and I’m doing this right now in a one minute chart because that’s the opportunity Nvidia for a trader. I’m not looking to make an investment here. This is a day trade.

Michael:
Understood. Yeah. I mean, as charts go, this is a Playboy model right here. This is unbelievable.

Brian:
You can’t make that up. Look

Michael:
At to

Brian:
The penny. There’s institutions that want to buy a bunch of this and they say, wait a minute, we’re not going to chase it, so we need to buy this stock over the next week, next month, whatever it is. As it pulls back to the average price since earnings report that is so-called fair value, that’s where we’re willing to purchase this stock. So we’ve got bids in at that level,

Michael:
And that’s an important thing. My show is largely about keep this up if you don’t mind.

Brian:
Yeah. So I’m just going to point out here that now my stop goes up under here. We just made a higher high. This is the most recent relevant, higher, low, and yeah, it’s on a one minute chart, but look at how many points it is. I’ve got to protect that.

Michael:
Yeah, that’s awesome. That’s really good to see. So now you’ll just see if it trades up to the upper boundary there, just $802 or whatever that is, and see how it behaves. If it comes off and starts to reverse,

Brian:
You can protect, I’ll most likely sell half of my balance. I have a two thirds position left. I’ll most likely sell half of what I have right around that $800 round number.

Michael:
Understood. So can we talk about this for a minute? This is kind of coming just from the spontaneity of the chat. When you think of a scalp, do you differentiate between a normal position size, like one that you would take home overnight over the weekend versus a scalp unit? Do you differentiate between or you kind of constant use a constant size for everything?

Brian:
That’s a great question. Now, on a stock like Nvidia where the liquidity is unbelievable and the volatility is huge that you can get in a day trade, the types of moves that you would normally get from a swing trade, I go in a bigger size here. I don’t mind taking the risk on the day trade, especially when it comes down as it did here perfectly to a level that I have a lot of confidence in. And we know already that the fundamentals were super strong, and I know that there’s fundamental buyers in there. I don’t really care what the numbers are, but I know that there’s people who care about those numbers who are going to buy up as much of this stock as they possibly can down near that anchor.

Michael:
So to me, this is a great conversation because that’s what I typically do. I call it doing judo on the market. I understand the fundamentals. I’m probably 50/50 commodities and stocks, but I don’t poo poo what other people’s models, right? So I try to figure out where the other, sorry, Brian. Sometimes I have a tough time. What I, I’m absolutely concerned in trading the crowd. I’ve said before, one of my favorite books is extraordinary popular delusions and the madness of crowds. I know I’m small, we have a lot of money under management, but I’m still small compared to everybody else. And those people, if they decide to hit the sell button, they can put your lights out in three seconds. So I’ve been risking one half of 1% recently with this type of market. Again, I’m taking things home overnight over the weekend, and that kind of fits me for where I want my money to grow, but also if things work against me for talking to a guy who was in long cattle when Mad Cow hit the tape and it was locked limit down five, six days in a row, I think I spent a lot of time looking at position sizing all day long, just not dollar wise, but percentage wise, what are you typically comfortable risking on a per trade basis on something like this?
Is it 2%? Is it a half a percent?

Brian:
No, it’s closer to 25, 30 basis points. My risk is so tight in there that it doesn’t have to be a lot. Now that’s on a day trade. On a swing trade, it might be closer to that half to 1%, but I’m generally not going to put my theoretical risk at greater than about one 1.5%.

Michael:
Yeah, that’s great. And so folks, for those of you who are just starting out, you’re talking to a guy who, yeah, he has a CMT, but all that information only matters to the extent that you can execute, right? Brian and I have been around a long time. We don’t get paid necessarily to know stuff. We get paid to execute, you see? So sooner or later you have to kind of chitter get off the pot with what it is that you think gone are the days where it was when we started, there was no internet. There was no mobile technology. So you had books. And so having an encyclopedic knowledge of things helped because it gave you obviously total recall in the moment’s notice. But nowadays, everything’s a Google search away. You have to be able to execute for everything that you know, everything that you absorb.
Let’s talk about setting the anchors because there is an art and science to it. You set the anchors here and you took into account the gap from where the earnings were announced, and then today’s high, which was $820 something and change. But I noticed on my technology, I’m able to use either the open high, the low, the close, the high, and the low divided by two, the high, the low, the close divided by three or the average of the open, high, low closed, divided by four. Do you get that fussy with setting your anchors or help me understand that. I actually want to know myself. No,

Brian:
It’s a great question and it’s something that’s kind of misunderstood. The volume weighted average price in theory is the average price that every single share transacted at. So the only way to really get that is with a tick chart that represents every single trade sense. That’s just not practical. It’s just not practical for even on a one minute chart. I mean, if you’re day trading, so on a one minute chart, what do we want to know? We want to know the average price since it touched this volume weighted average price for instance. So do we do the high and low divided by two? And how much of that volume occurred at the high? How much occurred at the low? Does that give us an accurate measurement? The most accurate measurement is all the data tick chart. The second most and what’s practical to use is all the data we have access to open, high, low, close, divided by four. There really should be no other option. I see some people who just use the high or just use the close. You’re throwing away 90% of what happened even on that one minute chart, where does the average price occur? And open, high, low, close, divided by four should be the only option available. No one should use anything else.

Michael:
Okay? There is a little bit of an art and science to pick in the actual anchor days. Then you can fine tune it folks with looking at these prices. So to me, by marrying, I’ve said, you’ve said, right, there’s a million people who do this where we speak and say, look, if you can’t define your trading edge in many ways, you really don’t have any reason to put risk on. Of course, when you’re trying and you’re starting out, you need to do some experimentation, obviously know what your max loss is. But to me, by marrying price, time, and volume with your own position sizing algorithm, I think this can give you an absolute trading edge in knowing when to trade, knowing when to sit on your hands. What do you think about that?

Brian:
It’s definitely my edge. I mean, that’s how I use it to hone in on something like this in Nvidia and say, here’s a key level of interest at the anchor from a huge catalyst, the huge catalyst. So where do I anchor from? Well, what’s the catalyst? What changed the opinion of the people who are participants in this market? And it was the earnings report. So if we want to know the supply demand factors from that point, as long as we’re above the anchor from that point, it means the buyers have control. Since the earnings as it comes down to that level, it’s just a simple place to be aware and look at it as a level of interest. The daily VWAP is my level of interest on the upside. It’s not necessarily my price target, but it helps me define my edge and say, okay, if I’m buying down here and my risk is under there, it’s possible it can run back up at least to the daily volume weighted average price. So that’s a huge theoretical risk reward. That’s about a one to eight risk reward, and that gives me my edge and tells me exactly where I want to be involved

Michael:
In our mastermind. One of the first lessons that I talk about is what makes sense for you from a risk reward standpoint. So I’m really glad that you said that. You said eight to one. It might come as a shock to some people, but I’m not really interested in 2:1 or 3:1. So for me, the baseline is 5:1 because I figure even with everything that I know and everything that I learned from mentors and the guys that I’ve worked with in say, the first Market Wizards book, I always feel like I’m the idiot in the crowd. And I know that might sound weird. I do a lot of shows and I speak a lot about emotional intelligence and this and that, but those shows are actually like a flow of consciousness of my own thinking, remembering all the dumb mistakes that I made. So when I’m able to, it’s hard to read the tape anymore, right? Back when we started, things were in eighths and it was a lot easier if you had a level two. Now to me, at least for me, I find it very, very difficult. So much so that I’ve basically abandoned the process and I was pretty damn good at it back in the day. Likewise,

Brian:
Likewise, I pay almost no attention to level two.

Michael:
So it meant something back in the day. But when you look at for the risk that you’re willing to take, how many multiples of that can you get paid? So for me, I figure if I’m an idiot, and I’m going to be wrong 60, 60, 70% of the time, if I can fill my portfolio up when I’m accurate, say 30, 40% of the time, right? It varies. When you have winning streaks and losing streaks, if you can fill your portfolio with these 5:1 – 8:1 type of trade-offs, you’re cooking with gas, you’re going to do very, very well as a trader. And I think what Brian was kind of saying, and I don’t mean to put words in your mouth, is that by using this technology, it helps instill a sense of patience that you don’t have FOMO. You have to temper that obviously and go through that. But what do you think about that?

Brian:
Having structure around your trades is going to prevent or minimize the impact of emotions. And people are of various camps saying emotions are the enemy. Other people say, you need to feel your emotions. You need to listen to the feedback that the market’s giving you, physiologically, mentally, et cetera. I am not good with emotions in the market, so I need to have these guidelines to hold me in place to say if then if it bounces from here, then I’m going to purchase. If it breaks back below there, then I’m going to get out because that emerging strength that I was maybe imagining is not there as it makes the high or low right here, I put my stop under there as it makes this high stop goes under there, and now my stop goes under here and I’m looking to sell half of my balance really soon here.
I’m getting very itchy actually on the trigger to sell half of that balance that I have left or a third of the original position because it’s approaching that level of interest where it’s likely to find supply. I look at it and say, where has it come from? Well, it just came from $776 up to $799. We’ve just ran $23 points in 35 minutes. Where does it have the potential to go before it’s likely to encounter a source of supply, which might become resistance? We don’t know where resistance is till after the fact. Well, the daily volume weighted average price is that level. So we’re closing in on it very rapidly. So I mean, I don’t understand people who buy here what their risk reward is. Yeah, exactly. We have the potential for resistance right in here. Fortunately, not everyone understands this stuff. They just see momentum and chase it. Now’s the time to say, I’m going to get really tight on half of what I have. Take that third off. I took my first third off over here to satisfy my desire to take some profit and to reduce risk because I put a lot of risk on down here. I need to take some off to breathe easier and talk to you right now without having to stress about that. But it’s just about time here to sell half of my balance.

Michael:
So folks, for those of you who like to stay within trading ranges, this is a systematized way to kind of do that. Just sold it.

Brian:
I just sold, is it across $800? I just sold half of my balance. I don’t know if you heard the little ding that was the execution bell.

Michael:
I didn’t hear it, but for whom the bell tells Brian, good trade. This is a systematized way to kind of trade the bounce. Without getting into guesswork here, you can certainly get tied up. This is one of the darlings of Wall Street. Now that even my dead grandmother has a story on Nvidia. So let’s just say that it crosses over the line there at about eight hundred and eight oh two, whatever it is. Would you wait for it to retrace and then bounce off the upper boundary then and then on that retracement maybe considered going long?

Brian:
I think that what it’s likely to do is if it gets up through that level, I’m not good at drawing on here, but maybe it does. This has a little shakeout below it. And then here’s the thing is if it were to kind of consolidate around it a little bit, and then I would really like to see a little shakeout maybe down to the anchor from the beginning of this move, and then by strength away from that with a stop very tight from there. But I wouldn’t do that trade with as much size. So in other words, if I were to buy some right here, it would be maybe half of the risk unit I took over there because this was the big important anchor from the earnings report. This is just a little handoff anchor, and that’s just less likely. I think we’re probably, we need to digest this move a little bit that we’ve just seen $25 in just as many or just about an hour is that’s a good move. Even for an $800

Michael:
Stock, 3% move in the underlying. So that would be more of a pinch type of trade then, because in the book we have lots of examples, folks. Brian and I are kind of talking over it, but when the lines kind of start to converge, the tighter, the pinch the better. So you would, can we look at Carvana then? We’ll talk about a short squeeze. I don’t want to keep you all day. I know you’re busy and you were both in the middle of the trading day. I was,
And it’s legit. I sent Brian the confirmations. I don’t like making bets on just before earnings, although I did it twice this week. I just trusted my gut and luckily I got away with it. So coming in after the close yesterday, Carvana announced, I always know this name because it’s on one of the most shorted in the top 20 of the most shorted stocks out there, and I’ve made a lot of money with this in a squeeze. In fact, if you go back to the last show that we did a year ago, I’ll put a link to it. We talked about using anchored V Wap and marrying that with short interest, which there’s a whole tactical chapter in the book about how to do this in short interest coverage ratio. How many days, and you can get this type of information from, I know CBS MarketWatch, if that’s what it’s called, has it.
NASDAQ publishes it, but you have to be a pro subscriber fin, which I don’t have a financial relationship with, publishes it with the chart so you can kind of see where are the shorts adding the shares or removing shares based upon the price. So I knew that there was a squeeze potential, so that’s where my judgment kicked in. I waited. I knew if I anchored from the prior high to the gap that we were in a bit of a pinch. And so once the price crossed over that upper boundary, which I think it was probably like $52, $53, it was still below the five day. So I was sitting there, they had already announced the market started to move. I got filled at like $59 almost $60 bucks to share in the aftermarket, like 15 minutes afterwards. But I wanted to wait and not be, I can be impulsive. That’s not beyond me, but I knew that the squeeze was going to be on. I’ve already made a lot of money in the squeeze back when the thing was trading like seven, $10 / share. And so I like to make this type of a trade. To me, it’s not, there’s no easy money, but was I wrong for waiting for that 5 Day SMA, or should I have gotten it right above the upper boundary? Then the high anchor, the

Brian:
Way I always do it, Michael, is to look at that five day moving average and try to anticipate the direction of the 5 Day SMA. So if I see prices moving higher, I go back to where we were five days ago, and let me just switch what I’m sharing here and see if I can, how do I do that? Oh, stop screen share. So let me share my other screen, which will show you a little bit more accuracy how I view it. So on Carvana, for instance, you’re talking about the anchor off of this peak right here, and let’s just actually let me clear some of this other stuff up. So here’s the anchor from that peak,

Michael:
Right? It was like December. It was December I think. Yeah.

Brian:
Oh, the one, oh, on the daily timeframe right here.

Michael:
That was the one that I was looking

Brian:
At. That’s the daily on the left. Yeah. So we were cradling that nicely. So it got back above it, it cradled it nicely, and then the high over here, the five day moving average was declining. I think that’s what you’re talking about.

Michael:
It was declining. And then after the announcement yesterday, I was watching the price kind of doing things in real time, and it moved so quickly that that’s where I got, I didn’t get a great fill, but as they say, the worst the fill, the better the trade, right? It was a substantial, there was $2 a skid, but that’s the nature of the beast.

Brian:
The way I look at it, Michael, see this line right here?

Michael:
Yes,

Brian:
That’s exactly where we were five days ago. Now let me take the postmarket off first. So this is where we were five days ago. So I look at that and I say as we’re getting rid of this data on this bar right now, at the end of, in 26 minutes, as a new bar is created over here, this one drops off and it averages this in that moving average calculation, I think the easiest way to show it is to go to a one minute chart and put a 10. So here we have a 10 period moving average on the one minute chart, and what happens is this is what we’re averaging with this right now. That’s why you can see that 10 minute average starting to rise as this does. It’s flat now because that’s the same. So now we’re starting to see it tick higher because it’s replacing that data, which is lower. So what I try to do is say, okay, if we’re over here in the next minute, I know we’re getting rid of this data, then we’re getting rid of this data and this data, that means

Michael:
That they start to fall off.

Brian:
So I’m anticipating the direction of the moving average, and you’ll start to see as we are right now, that the slope of that increases more, and we’re going to get a new candle here in seven seconds. So we’ll see that, that, let me clear my stuff off. You’ll see that this line right here moves to right here and there it is. So now we’ve got that. So this is on a one minute chart, and I only did that to kind of show people how to anticipate the direction of the five day moving average, whereas right here, it was flattened out, and now we’re starting to really see that rise more. And that’s what I do by counting back on the five day and saying, well, we’re getting rid of this data. So of course that five day moving average is rising. Yesterday we were getting rid of this data and the stock was down here. So of course it was declining, but in the aftermarket, as soon as you saw it going up into this area where you purchased the five day moving average was rising for today.

Michael:
Yeah, lucky for me, I can do that math in my head. So I was watching the price knowing the thing was going to fall off, and I was like, okay, there’s going to be a squeeze. This is the aftermarket. It’s super choppy, so you have to have a cast iron stomach. It’s something that I can’t say that I do it all the time. And just to be completely frank with you, I had owned the 55 calls on Carvana a week or two ago, and I lost a half a percent of my capital on it. So not everything I touch turns to gold, but this one did. So just to be objective here, it doesn’t serve anyone to come on and just talk about all your winners. No, of course not. You know what I mean? So I do lose money and I lost on the calls.
I thought maybe it would spike in anticipation knowing that it’s always a short squeeze candidate. So my ethos was wrong, my directional trade was correct, but ultimately, you have to trade as Brian and I say, only price pays. Everything else is bullshit. So I appreciate, I’m not the world’s best day trader. I’ve kind of been forced into it just because of the nature of how there hasn’t been a lot of follow through on a lot of names. But man, I can’t tell you if there’s any takeaway from the show here today with you is that the five day moving average has really saved my life, and in many ways, knowing how to, I feel position sizing of all the things. Position sizing is probably the most important thing that I bring to the table in terms of defining an edge, but then knowing not necessarily a sniper entry, I don’t think you need those.
You generally have to have an okay entry. But the five day moving average has really saved my life and give me a moment of pause to not put on trades that I otherwise shouldn’t have been in the first place, only to find the things tank because they never achieved that level. And it’s important for me, even with 36 years to have that filter on because I’m not afraid of risk. I’ve made friends with all my feelings. So there’s nothing that really psychs me out of stuff, but there is a risk on risk off rule for me, and that’s the five day,

Brian:
I mean, that’s one of the most important discoveries I made in my trading years ago, is the 5 Day SMA. And let me say something really quickly about that. A lot of people will say, well, simple or exponential, as you just said, well, I can figure that out in my head about the way the moving average works. Yes, sir. Could you do that with the exponential moving average? What is the formula for the exponential moving average,

Michael:
Right? Yeah, exactly. Yeah,

Brian:
Exactly. That’s why I use simple moving averages. I can see you replace this with that. There’s no weighting, there’s no complicated formulas. So I always use a simple moving average. That’s something that a lot of people ask after hearing something like this, but the answer is simple moving average for me,

Michael:
And you can train yourself to do it right? You can train yourself to work with those bigger numbers. That’s what I did. And back in the day, probably 20 years ago, I actually found a hack to do the exponential, the 20 day exponential, but it just became too much after a while. And I was like, you know what? It doesn’t really serve me, and it’s easier, I think you pick this up if you want to read another good book, it’s called Simple Heuristics that make us smart. And I won’t get into the stories here, but it’s a good way to kind hack the data that you’re looking at so that you can make better decisions. So you used the 10 period on the one minute bar to kind of anticipate what’s going to

Brian:
Happen. No, that was just to show, that was

Michael:
Actually

Brian:
Just to make the example. But you can see here on my daily chart on the left, I’ve got those same lines. So I can just look quickly and say, that’s where we were 20 days ago. That’s where we were 50 days ago. That’s where we were 200 days ago. So I can anticipate, because I know that there are institutions out there that won’t buy with a declining 20 day moving average. They won’t buy with a declining 50 day moving average. So if I can stack as many odds in my favor as possible, then that brings us closer to getting a successful trade, where then if we’re wrong, we can just a risk, a small amount and move on if the market doesn’t agree

Michael:
A hundred percent. So in the book, Brian, Brian says something that I a hundred percent agree with, and that is that short sellers are actually very, very smart people. If you look at the names that are on the short interest list right now, you can see they’ve cratered. Some of them are down 90%. So there’s no sense in poo-pooing these people because terribly bright. But what I try to think about how do they operate? I teach teach CFAs, and they’re looking at valuation, they’re looking at channel stuffing, so they’re looking at fundamentals. Then they might even compare those fundamentals to whatever else is existing inside that sector. The technical analysis part really doesn’t show up in their way of thinking, not even to use it as defense. You’d figure if it starts making a 20 day high or a 50 day high, you’d think that they’d want to cover, they’d buy calls to hedge.
Yeah, this. And so for me, when they start thinking of valuation, my goodness, how do you protect your capital? And what ends up happening is if you understand how trading works, there are breakout system traders who are either using systems or looking at discretionary charts who are putting buy stops above the market. So when anytime you see something getting pushed into a new high, you actually know that there’s an enormous amount of buying pressure above the market. The way that you can filter that to just make sure is to use the anchored V wap because it takes into consideration not just the price, but the volume and the time. Again, this to me further refines your edge to help you trade against people who have more resources than you. They have more money. They have teams of people looking at research. They have Bloomberg’s are what – $2,000 a month with a two year subscription? And they don’t

Brian:
Have anchored vwp on the Bloomberg, which is insane.

Michael:
I know, I know, I know. That’s wild. So what are we looking at here? We’re looking at the, oh,

Brian:
Yeah, that’s just the spy, and there is the five day moving average. That’s all. When it’s below the five day moving average and the five day moving average is declining, I don’t buy dips down in here. And some people will say, well, you missed this move. And the fact is, I did miss a lot of it. But another chapter in the book, as you’re aware, is don’t chase the gap. Wait for VWAP. So yesterday, the market gapped up, and I don’t chase those gaps, but as it gets back above the volume weighted average price I bought right here, stop below there. And we had a terrific follow through, and I didn’t have to have the uncertainty of being below that five day moving average the day before. Because you look at this market and where we’ve come from overall and what people are talking about every day, we’re rising on lighter volume.
The rallies have been coming on lighter volume, and the heavier days have been selloffs, and that seasonally February is weak. Well, February has been phenomenal for the longs this year, and that the advanced decline line isn’t supporting it, and it’s got to fail for all these reasons, and those are things that I’m aware of and I’ll keep them in the back of my mind, but it’s not going to prevent and it’s going to get me cautious when we’re below that five day moving average thinking, well, if Nvidia missed, we would’ve done something like this. So rather than have that uncertainty in the possibility of loss, I’d rather be out and then get back in right here and ride that little trend and get involved in Nvidia today. So it’s about timeframe, and people really have to recognize that too. I’m not running billions of dollars. I don’t have to make the turns, so I don’t have to be two weeks before the market tops. I can be two days after the market tops to be out.

Michael:
Yeah. Now, this brings to mind the concept of handoffs because you have to kind of trade around the trend. I understand, especially for the folks who are doing it short term or doing it intraday. Brian strategies help you have a game plan for that without turning it into guesswork and having regrets. Regret’s the worst. What happens when you’re in a winning trade? If you bought the breakout when Nvidia broke out at $505 or whatever it was, and you took $50, $60 out of the trade, that’s a great trade. A thing moved, 10%, congratulations. But if you look at where it went because it ticked up to $800, $750, whatever, it still moved another $200 afterwards. So it’s not something you can feel good about having left the majority of the money on the table, and you only need two or three really big moves in the year to kind of make your year. You know what I’m saying? So if you don’t have a strategy on how to reenter, there’s a chapter in the book that talks about handoffs. I don’t know if we have time to get into it now, but it’s very complete process. If you don’t yet have your own trading edge or trading style, I would suggest that you look at this because it’s very, very valuable information.

Brian:
Yeah. It’s basically where a new momentum campaign begins. So if we have, for instance, this is where that last one really began. Now we have, it didn’t, and what we’ll often see is that the market will pull back down and touch that. Instead, we stayed above the rising five day moving average. I got involved, actually, Michael at $521.50 over here, sold some that very first day at $530 to reduce my risk. I sold another third somewhere, I think over here, I think maybe on this day right here. And then $681 or so was the final third. I don’t remember where it was, but something like that. So I took a third here, which looks like I gave it away, but you don’t know what’s going to happen, right? The second, third up in this area, and then the final third there, and then that’s my way of getting involved.
But where do the new momentum campaigns begin? It doesn’t always have to be an exact touch of the prior VWAP, but here you can see we had a gap down and then the market rallied. So that was a new momentum campaign to measure risk against. Nvidia has been just so strong that we can’t use that as a good example, maybe crisp. That’s been a good one. I got involved over here, but I’m trying to, so this is where this momentum campaign began right here. Okay, let’s go to a 15 minute timeframe so we can see it more clearly. So that began right here on this day, pretty much. Well, then we came back and touched it, and a new campaign began there. So from the touch and the handoff here, now the sellers have regained control from that point, but from this point, they’re still in control. So if you’re in later, somewhere in this area, you should be taking profits as it breaks below that. But if you’re in from here, maybe you’re raising your stop, maybe your stop is still under this high or low and you’re waiting for this to put your stop under that high or low if it rallies from there.

Michael:
Yeah. So what Brian’s kind of saying in a macro sense is that this can give you a trading system. If you look at and you know how to set your anchors, the market, as I’ve said it, the market will tell you when the move is over. You don’t necessarily have to think about price targets yourself. You can let the market tell you, even if you studied reversals outside of Anchored VWAP, it’s very, very valuable information. So Brian, man, really a lot of gems here. I appreciate everything that, the book is great. I’m starting to incorporate more of it into my, again, I don’t necessarily want to be a day trader, but again, I have to execute. I don’t get to sit it on my hands and boohoo stuff because the market’s not necessarily amenable to my longer term position trading style. There have been for a few names, but not really. So thanks for coming back on the show. I’d like to have you on again. Maybe one day we’ll live stream, something that would be a wicked pisser. I haven’t done that yet, but I want to try it. You’d be a good guy to do that with and we could talk about what’s going on in the market in real time, see if that works. Okay. But continued success. I appreciate likewise you being here again, and I’ll see you again soon.

Brian:
Alright, Michael. Great.

Watch this video on YouTube

Quit the discords and cancel a good number of the funding accounts that you are part of. If you followed last Friday’s video on trader motivation, that all stems from being a confident person and being an independent thinker. If you’re involved in several discords, how is your head not spinning? It’s like trying to be a Muslim, a Jew, a Christian all at the same time, and if you’re trading more than three, I know of a guy who’s got I think over 20 funding challenge accounts that he’s trying to pass. To me, this is an act of desperation and the only way that you ultimately traders trade their personality, you are who you are. Now, you can work on that over time. Typically, you can’t change overnight. Some people can if they take a lot of drugs, but at the end of the day, you are who you are just like I am who I am.
I’m constantly going to school on myself to understand why I do what I do. The good news though is I don’t let outside forces be it the television, any Twitter channels, any telegrams, any slacks, any of this or that to infiltrate my own thinking. Trading is a lonely business. If you want a friend, get a dog, right? That’s the famous line from the movie. I think it was Wall St. I don’t really remember, but I think that’s it. So you can’t build a community to help you trade. You can build camaraderie. Maybe you can build fraternity, but the idea that you have to be part of something as a trader is false, and you’ve been misled. The best traders I know who are solo artists, they’re free climbers, solo climbers, however you want to call it, and they do their own thinking and they go to bed with one foot on the floor just like I do.
You can’t buy your way out of your emotional discomfort, right? That’s just not going to happen. And if you have several funding accounts, the hell’s the purpose of that. You’re going to try to trade 20 different strategies to see which one works. So that one particular one, which is probably going to be luck, gets funded and then how are you going to replicate it? You see what I’m saying? So save your money folks. You could save yourself hundreds of dollars that you could be putting into your account, right? Is after a while these things, your ship is leaking. And the best part about trading and doing it yourself, if you followed Friday’s video of trader motivation is that it builds your confidence, and that’s going to happen over time. When you start to rely on yourself. You can’t go through life as a trader relying on other people. There’s no one there to help you. They say they’re going to help you, but you have to understand the premium telegrams or discords that you’re paying for are called continuity products. In the eyes of the marketers, their subscriptions, and they know there’s a certain amount of churn, just like the New York Times has a sense of churn, they’re going to lose a certain amount of subscribers every month. They’ll gain a few new ones. So the net difference is the churn, but ultimately they can count on that income, no difference than some financial.

With a hundred million dollars at a wirehouse making 60 basis points a year, paid quarterly, their income becomes very, very predictable. Now, I have nothing against the people who are putting these things on. They’re trying to hustle and make a living right? It’s the greater fool theory, but at the end of the day, if I have a gripe, it’s with the people who subscribe to them. If you’re going there to learn one specific thing, again, set yourself a time limit, one, two, maybe three months. If you haven’t learned it in three months, guess what? It’s not resonating with you. It’s time to move on. You see what I’m saying? If you want market commentary, you could listen to any number of people. Brian Shannon does a market commentary and he puts it out on Twitter. By the way, Brian’s going to be on the show this week.
I don’t know if it’s going to be tomorrow the next day, but I had a good chat with him. We recorded it actually last Friday, and we talked about Anchored VWAP. We also talked about how to trade that both long-term and short-term setups. We talked about Nvidia and the short squeeze on Carvano. I used a couple of the examples of my own trades in there and we went over. It’s very, very enlightening. Very smart guy, but that’s the kind of stuff you can get that for free on Twitter. You don’t have to pay for it. So as you move forward in your journey as a trader and as you evolve as a human being, you are who you are. Ultimately, your personality is going to come out through your trading, and yes, trading’s a lonely business, but you can join groups. You can do stuff after the markets are closed, right?
You don’t have to pay to belong to anything, right? You can come and watch all the videos on this channel. There’s a million things that you can learn here. The goal is self-knowledge. If the trading tactic parts are one part of it, for sure, you need to have a tactic, but you only need to have one. I would sit and chat with Michael Marcus, and it was one simple strategy that I had, and he would remark on how I wasn’t head faked into trying to do 45 other things like most young guys are because they’re afraid to miss out on the action. And I was like, no, I’m staying in my lane, and I used to talk about the 405 in Los Angeles. It’s five or six lanes going in one direction, and you always have these guys trying to play Pole Position weaving through traffic, which is terribly dangerous because it increases the probability of you’re having an accident by threefold.
Nonetheless, they do it, and I’m like, for all the travesty that you can bring in from weaving through lanes, I’m just going to stick in my lane and enjoy the ride, and that’s what you really need to do as a trader. Find one strategy, one setup, and stick to it and just realize that there are winning periods and losing periods, and that’s the way it goes. And losing period doesn’t mean you have to change anything. You just need to learn how to thicken your skin and understand that that’s part of it. No one’s winning nine times out of 10 regularly. It just doesn’t happen. There’s winning streaks for sure and losing streaks, and if you have

One, by all means, my hat’s off to you. This isn’t about putting a stick in your eye. The point is that most people who are trying to do this are all over the place. They’re acting out of desperation and they’re kind of coping. They figure that all these resources are available to them, but it doesn’t really assu or delay any of their emotional problems. And at the end of the day, it really comes down to you. No matter how much money you’re spending, no matter how many funding challenges accounts that you have, I get the emails. There are people who have not just 20 different funding challenge accounts. They have several of them with several different platforms. They’re figuring, Hey, it’s like lottery one of them’s going to hit, but what ends up happening is if you don’t stick to your knitting and find that one strategy that really resonates with you as a person, you’re never going to be able to continue to do that day after day, week after week, month after month and become a consistently profitable trader, right?
Sorry for the tough love here, but I’ve seen it before. I’ve seen every damn gimmick out there, and while I appreciate the younger folks hustling and trying to come up with great marketing schemes to separate you from your money, those people are both, they’re untested in both their lives and in their trading strategy. I don’t care about something that’s worked for two years. It’s irrelevant to me. I need something that has 20, 30 years. When you run a back test, they don’t change on a dime. I think blazen a long time viewer. Thanks for that. Blazen wrote in about when do you know if it’s time to change? Well, if you’ve back tested a set of rules, they don’t turn on a dime. They don’t go from having a positive expectancy of +0.8 to -0.7 overnight. They will need to be tweaked. And don’t forget, the expected value is a weighted average for the time period that you’re testing.
If you segment that, you might find that the same model over a certain window of time might have an expectancy of 1.2. There are other times if you took out the worst periods, you could see the expectancy might be 0.2, but you have to look at it over longer periods of time. That’s why if you’re going to back test to build your confidence in what it is that you’re doing, you want to include the periods of time that were tougher, right? I knew guys coming and showing me back tests between ’95 and 2000 where if the buying strategy was this, anything that had four or five letters in the ticker was a buy signal. That was, it didn’t matter. The price quantity industry didn’t matter because we were in a bubble. We were in a raging bull market. Didn’t matter. It was all about eyeballs. Internet was a new thing. It was like an emerging class of investor Now. So when you do those back tests, you learn to be able to say like, look, I don’t know a lot about a lot of things, but I know I can follow my rules and I just have to do that day after day after day. It’s a lot like parenthood. So much of

It is showing up in many ways. You can’t look at the results of any one particular trade or any one particular day and say, I’ve made it, or I’m a complete failure. It’s not a misnomer, but that’s a misconception of what’s going on in the business is you start to result. That’s called resulting. You look at the outcome of a trade, then you backtrack it and say, okay, here’s where I started. Here’s where I ended up. The result was good. Therefore, the system or the rules that I followed were good. So that’s why I don’t mean to sound like a cranky old guy here, but I’m telling you, when you look at the results of these funding challenges in the short run, you can’t look at a positive result as being good because in the short run, you don’t know. You don’t know if it’s luck, but you’re spending hundreds of dollars every month to be part of something that you could very well figure out on your own.
You just have to have the confidence to do it. I know you can do it. You have to make up your mind that that’s what you want to do. That’s the difference. It’s not like you can be me or I did it. You can do it. I don’t believe that. But what I do believe is that if you make up your mind and say, I’m doing this, then you’re going to do it. I don’t know how and neither do you, but that doesn’t matter. All you need to do is take the first step. You’ll figure out step two on the way. If you’re sitting back trying to let everybody bring their trading game to you, you’re already a failure. It’s not a question of you’re becoming a success at that point because traders are independent thinkers, right? Again, I’m trying to save you money here.
No one else is doing the voice of reason, but I’ve seen it happen a million times. Every year there’s a new thing that comes up. One year it was SOES Bandits. I’m not going to get into that. The next year, it was this and that, and then it was like, well, now you can mine crypto, so don’t get psyched out. Keep your blinders on. Focus on the one thing that you know can execute. There’s going to be a million distractions. It’s your job to filter those out and to block them. That’s one reason why I’m not active on social media, and I appreciate those people. I’m on StockTwits. I know Howard pretty well. I know everybody on TV because I’ve been around for a long time, but I don’t need them in my life. Trying to infiltrate my mindset. Trader mindset is the number one thing going for you, and you have to have enormous amount of discipline to trim the fat and cut the bullshit. If you’re relying on other people, that’s a failed strategy. It doesn’t get better either, so the only thing that you can do in playing that game of negative expectation is to stop doing it. It’s like, well, I don’t really miss the money. It’s only $40. I got 20 of ’em, so $800 a month, and the two Discords are a$100 each. So you’re in the hole $1,000 a month. What would it do for you if you saved $12,000 and put it into your account?
What makes that so scary? I don’t understand that. What’s out there? You can see the goods andThat other people are using. You can go to Barchart or any of these places, Yahoo Finance, they give you free charts. You can see things that are in Uptrends. If it’s not going up, don’t buy it. I’ve done lessons on position sizing, and if you don’t know, reach out through the blog and email me. It’s very easy to do. You have to become self-reliant. At the end of the day, save your money. Don’t think for any way that you have to. There’s no team. There’s no team. You’re not part of a trading desk. If you’re on a Discord or a Telegram, that’s you fantasizing that. You’re on a trading desk. You’re not. You’re with a group of people who are paying. That’s the truth to it, and I want to see you succeed, and long-term success comes on self-reliance. At the end of the day, everything else is bullshit.

Watch this video on YouTube

How do you stop missing big moves because your focus was on another area? You’ve got to use alerts. Hi, I’m Michael Martin. I’m a Los Angeles based stock and futures and options trader. Today I would like to talk to you about how to use the technology to your advantage to save you time, money, and effort. Man, when I was first coming up and my account was underfunded, like yours might be the worst possible thing would be like if I was in a stock and another one broke out to the upside while my other one was maybe up or languishing wasn’t making any money, it was awfully painful for me. The opportunity cost was gigantic and I got very frustrated in that I couldn’t keep track of all the things that I’d liked. I had to create a roster, if you will, of my start in five.
And so first I was doing that by hand and which is fine. I’m a visual learner. I like to draw things out. I keep notebooks. I got 45 pens in front of me. The idea though is that with the phone calls ringing, meeting with clients, there’s a million things going on. It was very easy to not have focus because I was one person trying to do everything and I couldn’t afford to pay anybody, and so I started to use the technology in my favor. How did I do that? Well, not unlike how you would enter a buy stop order, you can go to whatever platform you’re using and figure out how to enter an alert and it’s not terribly difficult to do. You find the ticker, it’ll say create the alert. It’ll say trade at or above the price, almost like a stop or below a certain price, and then you click enter and it stays there.
In the ones that I use, good till cancel. Now it’s not an order, so you don’t have any financial risk, but lemme give you an example. If you’re looking at a chart and you only want to trade, say cup and handles, you might need the security to appreciate to a certain level before you would be interested in putting on the risk, but it’s still too far away for you to want to put the trade on is a good till cancel, right? Because the last thing you want to do is put in an order and then forget good till cancel. Then forget that it’s there. All of a sudden you get a trailer and you’re like, where’d this come from? Now I’m in a position, I forgot all about it. So what I do is I put in alerts and that helps me manage all the inventory of the things that are kind of on my wishlist, but that I don’t have orders for. So just hear me out here. This allows me to save. A lot of times I don’t want to be sitting there scrolling through chart books all night, right? There’s just too many names and we have too much money to be sitting there.
We go through screeners, obviously we use all that, but then from the screener results you still have to go through. Again, if you’re a discretionary chart reader or that type of trader, if you’re not using a pure system, it doesn’t matter because it just spits out the orders for you, right? No problem. But some of you might be a little reticent to put in. If your accounts are underfunded, you don’t have that much money. You might want

To use your discretion to figure out which trade did you actually want to put on, which of course is a bias, which I’ve advocated against, but you’re going to do what you’re going to do and figure out what’s the best way to handle this. For me, it was putting in alerts because it allowed me to babysit dozens of names at the same time letting the technology do the work for me. Then you could set it up so that it pops up on your screen. Oftentimes you might have the app, some of them might allow you to do text. I don’t have the full Johnny McGorry on all of it, but man, I can’t tell you how many times that saved me because when you’re going back and forth between futures and stocks and then you might trade options on either one of those, it really helps you manage the inventory of what’s on your wishlist without having to put the orders in on the floor and have financial risk.
There’s just too many names out there. Now, some of you might be trading only one or two names or one or two instruments, so this probably wouldn’t work for you, but at the end of the day, there’s nothing worse than missing a good trade. And it’s happened to me plenty of times, especially early on because the technology really wasn’t there in many ways. So plus the expense of executing the trades was large, so it just really hurt. Nowadays, you could trade on Robinhood for free, and even if you don’t, the commissions compared to what I used to pay have compressed 99%. You got to understand how expensive it was to trade, even if you were kind of like an insider in futures. I was paying 60, 70 bucks a contract for a round turn. Now if you charge that to somebody gets shot equities, you were looking at maybe anywhere between two and 3% of the investment as a commission.
So you could buy a hundred shares of McDonald’s at like 45, 50 bucks a shares, $150 commission. That’s how it was, and no one really got a break. With the advent of the internet and these trading platforms, they’ve basically delegated the execution down to you and also the liability of churning your account. Now, you could just churn your own account and it’s up to you. So I would basically use those alerts to manage my inventory of the things that I was looking at, but they weren’t quite ripe enough on the V yet for the picken, if you know what I’m saying. And this gave me a great solace because then I might be developing other ideas because not only do we have stocks and futures options on both, but in the future space we also look at seasonal trades and int commodity spreads. So there’s a whole lot of computer power going on at any given time.
Risk management really where we make and lose our money, right? In risk management position sizing. So the last thing I want to be sitting doing during the day is scrolling through screens of charts and up timing and down timing. That to me is amateur land. The best thing to do is use the technology and have the technology do the work for you. You can effectively delegate it and it’s really awesome. It won’t miss anything. It won’t call in sick, it won’t let you down. It won’t be sitting there scrolling through Instagram on you. It’ll work exactly as you program it, and the ability to do that is a form of leverage in and of itself. There’s not enough time for you to be scrolling through charts every day with multiple monitors and all that kind of stuff. It’s much more efficient on your time and on your energy.
Two, by putting in alerts above the market, right? So say you were looking at something that was trading like $21 – $22, and you knew that you wanted to get long at say, $25, so we weren’t really there yet. You could easily put in alert at $23.50 or $24 and just let it sit there and it’ll watch it for you. So you don’t have to use the mental energy. This is especially good when you’re in existing positions that you have to manage the trades on right now. This helps probably for day traders and swing traders too, who are amply funded and have more than a couple thousand bucks in that you get to spend a good chunk of your time maybe watching the chart intraday for the things that you are trading, but you can’t go back and forth between what’s breaking out versus what am I trying to manage the risk for the trades that I already have in my portfolio. So this is a real pro move that can help you manage your time, manage your inventory, and try to keep what we call opportunity cost very, very low. Because if you’re sitting there trying to manage a trade, even if it’s a winner, you might miss the next best signal. That can be very, very painful.

Watch this video on YouTube

What’s the best way to trail your position with a protective stop? Is it percentage based or should you use the ATR? And the answer is “yes.” What does that mean? Well, it depends, right? If you’re using percentage based, it’s typically based on ATR anyway, that’s the way I would look at it. You could divide that into what your R is and then figure out the number of shares, number of contracts. I think the better question is maybe you want to use structure. That’s probably a better question. And what happens if the move starts to go up and there is no structure? So I think from my own trading, I use both and I go back and forth. If I’m in a name and it’s working out and I want to add more, I could add more above structure. If it’s kind of channeled sideways, put my Buys Stop in.
Once I get filled, obviously I have to change my protective Stop to account for the fact that I’ve got more inventory and you can price your risk to be right below support. I’m not worried about what the ex market makers used to say because most of that stuff is crystal ball stuff anyway. No one can really predict. Two market makers don’t necessarily want to own stuff that’s going down, and that’s what they’d be doing if they’d be hitting your stops. So I feel like that’s the boogeyman two, to be frank, your job is to manage risk. You can’t be worried about stuff that you can’t control, and once you start putting in Stops and Limits, everybody in the world can see them. So what I would typically do when I start is think in terms of percent, and that’s based on R. So say you got a million bucks and you’re risking half a percent, you risk $5k.
You could look at volatility for your position sizing mechanism and whatever that quotient would be would be the number of contracts or shares. And from that point, it’s super simple because then if it’s based on the ATR, you use that to calculate the number of contracts or shares. You can see the breakout price, which is above the market, and then the ATR itself becomes where you place your protective stop. So it’s super elegant, mathematically super, super clean. Not a lot of thought has to go into it. And you could do it on a spreadsheet. I have one for you, you can email me if you want. It’s super easy to put together. Future’s a little trickier, but this is the beauty of it, is that you can normalize the risk across all the different contracts. Why? Because they all have different standardized sizes, right?
So it’s hard. You need to figure out what’s the dollar vault of the instrument. Some of you look at your positions and then figure out how much in a kind of CANSLIM kind of way, are you going to give it 8%, 9%, whatever it might be. I don’t do it that way. I always take a look and figure out what is the risk that I’m willing to take for my own portfolio rather than the position. Then you look at the volatility perhaps by ATR or standard deviation to calculate what’s the personality of the contract. That’s kind of how I look at it. The ATR kind of tells you normally what to expect from the underlying instrument.

So that has to parlay into my R, like in what I’m willing to risk on a portrayed basis. So there’s an inverse relationship between volatility and position size, right as the vol goes up. If you want constant risk, which I typically do, I don’t try to get into hunches or things, although I’m very intuitive and impulsive in a good way, I think I kind of vacillate between using that percentage risk. And then as I adjust and the market shows me structure, then you could switch and look at support. Most of this stuff though is going to be case by case, right? Because you just might not prefer to do structure. You might want to always do it. So I would say do it however it feels for me myself, I think as the market activity unfolds, the Dutch auction process, it’s a dynamic situation.
And so a lot of times I’ll be in positions and I’ll trim as the volatility expands. If you look at even the darling of the day, Nvidia and volatility’s increased 33%. So you would’ve had to adjust your position sizes down as a percentage in order to keep that constant risk out there. And that’s how I learned to sleep at night. As far as I’m concerned, I don’t get hung up on the specific sniper entries. That’s not important to me. Heck, if you looked at half the stuff that I buy, you would look at me and think I’m an idiot. You probably might think that anyway, but in other words, there are names that have advanced quite a bit, maybe sometimes between 25 and a 100% before I even start to add, that’s the appetizer. That’s the warmup you see, because I’m not looking to buy fallen angels or things that are down or things under $10 a share.
You might feel differently. I respect everyone’s opinion. We’re all really just sharing ideas here. I have the best way for me. I don’t know. It’s the best way for everybody. That’s why I don’t sell trading system crap on the internet because who the hell knows if it’s going to resonate with you? It might be interesting to learn intellectually, but I think this work is much more important. So I don’t know, in my experience since I’ve used the ATR to calculate the percent or work that into the percent of my account that I’m willing to risk, you might consider vacillating and going back and forth seeing where is there support and in using that as you price in your stop. Because what ends up happening is if you’re going on a fixed dollar amount saying, I’m going to put on this trade, I’m looking at one minute bars and I’m going to risk two bucks per share, well that’s great, but if it’s still within a trading range that could be $5. You could still get stopped out at two bucks and kind of still be in an overall uptrend. Although within a base, you see what I’m saying?

And over the years that would aggravate me. So I wouldn’t try to trade the thing larger and need more impeccable timing is I would say, okay, here’s the base. It could trade through and that’s happened before and I get stopped and it kind of goes back up. But then I’m like, okay, well I could just get the next breakout. I don’t fall to pieces about that. So I think both are very, very legit. The key to me, if I can impart any wisdom to you, whether you’re institutional or whether you’re just starting out, is in order to know what your numbers are from an expected value standpoint, I would use a constant risk unit. And if it’s $500, if it’s a $100, it doesn’t matter to me what the number is. It’s all kind of congruent with where you are in your trading, how much capital you have under management. We’re going to talk about that this week, and what’s an adequate amount of capital to need to start trading? We’ll probably talk about that tomorrow.
There is no one best way. It’s really a feel play. I would get aggravated if I was smart enough or lucky enough to put myself in the right place at the right time and have my buys stop hit, usually letting the market come to me. I don’t like chasing and then using structure, I would make sure that it was a significant kind of line in the sand, whatever they’re called, maginot line or whatever, and say, here’s where I’m clearly on the wrong side of the trade because I don’t want to get wagged out of something by trading it too big thinking I’m going to get cute. You see what I’m saying? So that’s my 2 cents.