I got a great email from a longtime viewer. He asked that I don’t use his name. He said, can you give me a list of the five things that you think that are required in order to make it long-term? And I was like, man, I probably can’t. I know that there’s a lot of things because everybody’s so unique. The five things that I might say might not be relevant to you. But anyway, the things that come off the top of my head are mental fortitude. I don’t think enough has spoken about this. We talk about trader mindset here, obviously all the time, which is kind of like another saying, the inner voice of trading, mental fortitude at the beginning of where if you’re just starting out, you might see trading as a bit of a grind. Once you do know how to make money, you might see it as monotony, right?
So I don’t want to call it grind because once you figure it out, it’s not a grind, but there is something monotonous about it, and you have to have the ability to do the same thing over and over and over again. It takes a special type of discipline to be able to do that. That comes with number two, having a good attitude. Things are going to happen in your life that are outside of trading. That could very well play into your trading. If you want to see what that’s like, go read Victor Sperandeo’s book “Methods of a Wall Street Master,” where he talks about a $4,000 hairdryer. You have to be in the right type of attitude to stay positive because the minute you start to turn sour, that’s going to find its way into your trading as well. Three, however you do it, whether you’re trading and scalping in two minute bars, or whether you’re a position trader or whether you’re even an investor, you do need to have a strong sense of risk management.
Entries and exits matter position sizing and the use of leverage to me are probably 98% and entries and exits are each 1%. That’s how much important it is. You need to understand risk management. You need to know where you’re wrong. You need to think in terms of percentages, not dollars. Retail, small timers think in terms of dollars. So don’t be that way. Think in terms of percentages, because then I think your upside is unlimited. Four, I’m going to put this in there, could be controversial. I think you need a good sense of timing. If you don’t run a full mechanized system where you’re buying 20 day breakouts, for example. You do have to have a good sense of when to add the risk or when to remove whatever risk is that’s appropriate for where you are in your life. That’s especially true the shorter term that you trade, that’s scalping, like I said, 1, 2, 3 minute bars.
I don’t know what you might be looking at. I don’t know if, could you go to ticks? I suppose you could. So if you’re scalper to say, I would say up to like a two or a three day swing trader, you need to have a good sense of timing. The rules are the rules, but in my experience, if you can’t find a way to get good timing around that and develop a good sense for the markets, it’s going to be hard to make money on the short end of it. And then five, this isn’t spoken about enough either, is that you actually have to have the intention of making money. You can’t come in and say, I’m going to try to wing it. You can, but you’re going to get wing it style results. You’ll make a little money. You’ll probably lose a little bit of money. But at the end of the day, what’s it all going to add up to? It’s going to look a lot like whatever your goal is. So before you start and intentions equal results, start to think about what is it that you want out of trading? How do you want trading to serve you in your life? I was very clear about that. It was for me, it was like, you ever see someone do the 800 meter relay where they passed the baton? Remember watching Flo Jo, those Americans were amazing, man. They were so fast, and I was kind of passing the baton on careers. I left from doing waiting tables, caddy and golf bags, having a landscaping company to going to a white collar job, and I knew that that was going to help me go parabolic and go geometric.
Once I figured it out. It was a grind at the beginning. Like I said earlier in this video, I didn’t know what I was doing. I didn’t have any reassurance. I couldn’t get any validation, and that was part of it. The struggle is what builds the character, because as you get on and on in your career, you’re going to end up being tested. So you have to have the intention of making money no matter what. You have to make up in your mind that you’re here to win and that you’re going to use trading as a vehicle to change your life. Doesn’t matter where you live, doesn’t matter your tax bracket, doesn’t matter your timeframe. Doesn’t matter what instruments you trade, it does matter. Leverage for sure, that’s a big part of it, but you need to have a very clear goal. I am surprised how many people I say, okay, well Mike, can you look at this trade and tell me if it’s good or bad?
And whether it makes or loses money doesn’t make it good or bad. The question is, well, what’s the goal? How can I say, here we are at point A and we’re looking out at point B. How can I say that this is a good or bad trade? If I don’t know what it is that you’re trying to do with your trading, it might very well be a good trade even though you lost money. But I don’t know enough about the risk management and your position sizing to know whether this will help you hit your goals or not, right? You might not know the math, so you need to know in and around your goal setting, you’re going to need to know how to calculate expected values. You’re going to need to know how to use bay in statistics. How do conditional probabilities? You should probably know Kelly formula and then be able to calculate if you’d have a certain expected value of a trade, how many trades were you going to need to hit your goal, and then kind of reposition yourself because you might not be taking enough risk. Some of you might not be. If you’re looking at one instrument, you might not have enough ammo to really hit your goal because there won’t be enough setups in that particular instrument for you to put those trades on even at X, Y, Z, expected value. So those are the five that I think can help you. There’s probably a million more, I admit, and certainly if you have a certain asset class or holding period, there might be five others that are much more relevant for you. But just generally speaking, I think no matter your asset class, your use of leverage or not, and your holding period, these seem to be come up for a lot of people. Strong mind mental fortitude, having a good attitude about the process and not getting stuck up in the results even when you’re in a losing streak. A very strong sense of risk management, because as I like to say, if you don’t define your risk, it defines you a good sense of timing and also clear intentions and very, very solid goals. They don’t even have to be realistic. Make them ridiculously fantastic and go from there.
Why tweaking your rules on the fly only hurts traders
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Another silent killer for traders in the carbon monoxide that’s out there is people tweaking their rules on the fly. I can’t tell you how many emails I get from folks who are like, my first two trades were a loser, and then I tweaked my rules and I’m like, how would you know to tweak your rules just based on two data points? And even if you have 50:50 odds or 50/50 win to lose ratio, half the time you win, half the time you lose, you know, can calculate the frequency where you’re going to have say, four losers in a row. So why would that be a material data point for you to want to change your rules, right? It comes down to the statistics. You can figure out if you know what the expected value of a trade is, that’s technically what you make on average every time that you trade. So it incorporates and takes into account the fact that you’re going to lose money from time to time. I’m going to say this, if you’re upset about taking two losers in a row, you don’t have thick enough skin to be a traitor. All this is just straight up.
It says nothing about you as a human being unless of course you traded too big and now you’re down 50%. That’s something I’m not going to know the criteria, but if you’re doing, like we spoke about Monday, and you’re using same consistent bed sizes, you don’t care from one trade to the next because you know what the expected value is of your trade and you take solace in the process, not the result of any one particular trade or several of them against you, it doesn’t mean anything. You are putting importance on something that you don’t have to put importance to on losing trades. F*ck, do I care about losing money? Honestly, I’m just giving you context and perspective here because in order to obviously make the money that you want to make to change your life, which is the whole point of doing this, no one cares about 20%. You obviously have to add the risk, but you’re on a strict diet, so you know what risk is affordable. You know what risks you can digest, so to speak.
Now, if you’re learning this the hard way, you don’t have a back test and you’ve been winging it all along, now might be a good time to, again cut your bed size. Your bed size is determined by how much you can afford to lose, afford to lose financially, but also how much can you afford to lose mentally because you might not get to that loss all at once. It might come in stages. For me, someone asked, well, do you have different rated bed sizes based on the setup? And my answer was no. Not even today. I don’t have a favorite setup. They’re all my favorite setup. They all work, so that’s my favorite one. Yeah. Mike, what’s your favorite setup? The one that makes 5R, 4R, 3R, 2R, or 1R? The answer is “Yes,” they’re all my favorite because the R payoff is something that’s random.
There’s no guarantee that any of them are going to pay off. There’s no guarantee. Yes, they don’t turn on a dime, but things that I made big money on last month might not work the same way this month. That’s why I’m largely indifferent when I put the trades on. Two, my style is also very different in that I start super small. So today I lost like $200 bucks or whatever. It wasn’t even a rounding error. What do I care? I spent more on sushi dinner in as much that I pretty much got knocked out at break even. And so that’s like slippage and skid and commissions and everything like that. So to me it’s just like it’s not even aggravating. You have to put the trades on to be them. And in terms of what I thought was going to happen, the exact, it was basically two trades and both went completely opposite the way that they normally would have both trades, basically very strong countertrend reversals, and that’s going to happen from time to time.
It’s happened before. Been doing this for 36 years. It’s going to happen a million times. The dollar value, like I said, it doesn’t even matter. It could have been $2K and it doesn’t matter because I did the right thing, I followed my process. The fact that the trade didn’t work out is nothing I can control. So I don’t get emotionally invested in that because I know if I come back and do that next week, the week after, if I do it this summer, if I do it in Q4, the odds are in my favor that it’s going to pay off. So that’s what I take solace in is that I did the right thing, I kept my losses small and I moved like that. It’s even the dollar value. I shouldn’t even said anything so insignificant in the grand scheme of things.
My style would be, so again, this ties into don’t tweak your strategy on the fly. I’m not afraid to add 7, 8, 9, 10 times to a position, but I’ve got the math already worked out. That’s not me shooting from the fly saying this thing’s going to the moon, Alice, I’m going to sit here and just keep ramping up. I know how to do it. I know how to adjust. My protective stops along the way. And again, if I get knocked out, I don’t care. I want to be at my biggest by the time I get knocked out. Sometimes it doesn’t work out that way. It’s just the way it goes at the beginning. I have very small risk on maybe one 10th of 1%, but I’m quickly adding. People be like, yeah, but you can’t make any money with that. Well, of course if you’re just putting on one 10%, no, you’re not going to make any money.
But that’s not the end all. That’s the beginning. So this way, if I get whipped around, it’s not even paper cuts, it’s tiny. And that’s what happened today. It was just like, okay, I put a few pieces on. I had my other orders ready to go in the system. When the market worked against me, I got stopped. So all the other successive buy order entries that I had in above the market, by the end of the day, they were canceled because they were only good for the day. So they didn’t get filled. And I had four or five other orders on the same instrument, all staggered in at different levels. And it wasn’t meant to be nothing to fall to pieces on, I’ll get to come back tomorrow. Why? Well, I didn’t take a destabilizing loss and figure that out. Some of you might be feeling a lot of burn because you’re putting your cannon balling as I would say. It’s like you’re risking 1% and you put that 1% risk unit on right away, and when it doesn’t work out, you take it as an affront. And so I would say uhuh, again, I’m not looking to day trade, so this probably wouldn’t work for a good number of you. I understand that. But that’s something you have to figure out. What is your time worth?
For me, again, I would much rather do it my way. If you have an idea and you can backtest ahead of time, you should also be able to calculate therefore what’s the expected value of that trade that you’re trying to put on. The problem with most simulators admittedly, is that it doesn’t allow you to test at the portfolio level. So you’re relegated to have to do one instrument at a time. And I know a lot of day traders ought to just focus on doing one instrument and that’s it. But it is a different conversation. I don’t want to get too far off topic here, but if you have a goal to take X amount of money and to grow it to a certain amount of money, you can calculate the number of trades that you’re going to need to put on if you know what your expected value is.
And in “9 times out of 10,” when I speak with people, I know there’s that generalization, again, they don’t, there aren’t enough setups for that particular instrument for them to put on the number of trades that they need to put on because the setups just don’t show up that much. And that’s what runs into, that’s how people run into a lot of trouble is that they’re like, well, I need to put on more trades. My margin is low. I don’t have a big enough account. I can really only trade these tiny little mini micro contracts, so I have to find 45 different ways to put a trade on. The problem is that there’s probably only one, maybe two that you’re actually with. And this is again, the beginning of the end. And this is what brings on the struggle is that you’re trying to do too much, as opposed to saying, my account’s unfunded.
I need to grow my account. I need to add money from the outside. I’m not going to be able to grow it organically enough with the level that I have. And so then you get into, again, the topic today is tweaking your strategy where you’re like, I got to trade because if I don’t trade, I’m not making any money. And you’re not thinking about preserving your capital. You’re not thinking about the fact that so many of these trades are actually suboptimal to begin with. So if you know that all ahead of time, then you can have the solace of knowing what to do. That might show up only once or twice a week, but at least it’s your trade the rest of the time. You got to sit on your hands and wait. And if you don’t have enough money, I’m sorry that you’re the small banana, but if you have books in your house, sell ’em on eBay and add that money to your trading account. You have 17 pairs of designer sneakers. You need 2, a dark and a light one, sell the rest. You see what I’m saying? Like find the money. If it’s that important to you, you’ll do it. Otherwise, you’re just bitching all the time because that’s what you’re used to doing, but that is not going to get you the results that you want.
And I’ve just found that when I hear people talk about trading and trying new things on the fly when they’re in trader mode, not when they’re in, I’m back testing mode or I’m in experimentation mode, in which case it is legit. But when you’re in full on trader mode and you start tweaking things on the fly because you lost money on two or three trades, to me, that’s you’re destined for failure. And at that point, don’t be hard on yourself. Just stop. Save your cash, preserve your cash and say, I got to go back to the drawing board. And if that’s not working for you, email me. Some of the comments are too long for me. It’s TL;DR. They’re too long. Did not read. I can’t create a whole episode over a person’s situation, but if you email me, I can put a little thought into it.
How to overcome your hesitation and stop missing trades
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I get a lot of emails from people who are very unsure of themselves and it’s part of the process. It’s how you thicken your skin. The emails speak around one or two things like I keep missing trades or I have massive amounts of hesitation and I get it. You’re not surefooted. You have lack of confidence. It, it’s part of the process of learning. There is something that you can do though to overcome that hesitation, right? Because that hesitation really isn’t, it’s like patience. It’s really something that you have to feel. What do you feel when you have hesitation? It’s probably anxiety about losing money or I’m going to guess it’s that as you’re about to add the risk, you realize just how little and how you really don’t have confidence in what you’re doing. How do I know that? I’ve always said there’s nothing that you’re feeling now or that you are going to feel that good old Michael Martin hasn’t already gotten a PhD in. It all comes down to your feelings. It’s not about scalping at two minute bars and it’s not about trying to make outsized gains with other systems and this and that. It’s do you have self-knowledge and can you control yourself in the heat of the moment?
So how to not miss trades and how to overcome hesitation. If you’re afraid of losing money, you have to cut your bed size because not taking the setups that in your heart of heart are the ones that you should be taking is a form of self-sabotage. Now, I’ll say this, you have the ability to change your life with this business. It’s practically in the constitution of trading that you could be born like me into working class situation and be a complete broke ass bitch and become something of a major figure in the industry. This is what you can do. You can do that right now. If you’re not thinking that way, then you might have limiting beliefs or you just don’t believe that you can do it. Deep down, and that just keeps coming up is that you think that you want to do it, but you really just don’t have it in you. That’s okay too. If you keep your bet size small, you won’t lose any real money, which is good because it’s better to start with $20K, lose a thousand and quit and say Trading’s not for me and walk away with $19K. That’s a huge win, right? No big deal. It’s not for everybody, but with hesitation, you also have self-esteem, right? And if you’re a person who doesn’t have a lot of self-esteem or confidence in yourself, you may deliberately or subconsciously not be putting on those trades because you just don’t really think you deserve the upside that goes with trading. The independence to being able to come and go as you please the eventual ability to buy whatever it is that you want to buy or make other investments, the ability to be your own boss.
You might be really caught up in your current situation and you’re used to that, so you really deep down you like the comfort of that because it’s very, very predictable In trading. It’s not a lot that’s predictable at all. You are on your own, you’re doing your own thing, and where the chips fall is really up to God or randomness, whatever your belief system is. So how to not miss trades. If you are really frustrated about missing trades and you really want a solution, you’re not just missing trades because you really don’t want this deep down, there’s a few things that you can do to not miss trades and to overcome that hesitation is that, again, trade it smaller if you have to, but then make the commitment to the market that you’re going to participate and advertise. What do I mean by that? Well, anytime you put up a stop or a limit order, you’re on the books, you’ve made that commitment. You’re saying with a sell stop that, here’s where I’m moving my inventory. If you’re interested, it doesn’t cost you anything either. Don’t got to pay Google or Meta or whoever these platforms are. And if you put your buys stop in above the market, you’re advertising that. That’s where you’re looking to acquire inventory. Here’s the quantity I want at around this price if you happen to be selling. Otherwise, I’m going to sit here and wait. Here’s me waiting. Did you ever have the feeling that someone’s looking over your shoulder?
So it’s not that complicated. When you really break down the process of trading, it’s like sending an email. So use your, I’m not big on limit orders because limits put a different type of qualifier on the price, and if I’m looking to add or remove risk, I’m not that anal about the price. In other words, I can take all the slippage and skid that I possibly can have because I want to remove the risk, not remove the risk at a certain price, or if I want to even add risk limit, say this price or better. And if it comes time to sell and I bought something at $20 and I want to sell at$ 18, or excuse me, $19, and I put in my stop, I don’t really care if I get filled all the way down to $18.90 cents or whatever it might be because if the trade’s going against me and I have the appropriate amount of risk on, then I want to get the hell out of the trade.
I’m not going to sit there and worry if I can do the calculations after. But when you make that commitment, you’re saying to the market intentionally like I’m a participant, my voice matters. I’m taking a stand. I’m going to change my life. That should be empowering, right? Because you’re doing, that’s what I mean when I say you’re doing the work, you’re feeling your feelings. You’re saying, okay, I got to have to put my orders in and if you looked over my shoulder, is it this way at my red dalmatian who’s always watching over me? That’s Sam, Son of Sam.
That’s intentional work right there. If you’re sitting there looking at the screen saying if this is a good time or whatever, stop, take the day off, give yourself a break. You don’t know what you’re doing. It’s very hard to make those types of decisions on the fly. Now, if you’re in some kind of a training program and there’s a million what ifs, yeah, but Mike, if you’re doing this and you’re working for some kind of trade funding account, you can still use stop orders and you should be able to see what those levels are before the market opens. Those material levels already exist. They don’t just show up that particular day. The intraday stuff is all random anyway, so you can put in an alert if you do want to heads up, but then you’re going to have to feel the feelings of what happens in between.
You get the alert and then what happens when you have to put in your order? I don’t do anything at the market. I don’t know if I’ve said that or if it means anything to you, but I never enter or exit at the market. I always have stops. My whole day is about babysitting a book of shopping orders. I want to add risk here. I want to remove it or add more if I’m adding to my winners, but ultimately I’m either adding or removing risk via stop orders. I’ve got a big book of orders and as the alerts hit, I move the stops up. If I’m in winning trades and that’s about it, just let the market come to me. I never have to think, here’s the time to get out. I let the market tell me where it’s time to get out. I don’t want to catch the very top because what I think could be the top oftentimes is not the right number, and if you’re up $4 on a trade, you don’t know that it can’t go up $6.
So I don’t all of a sudden get crazy and say, okay, I’m up 3R, I have to take my win now. I just adjust my stop. If I get taken out at 2R, so be it. If it moves up to 5R and I adjust my stop accordingly, then I let it happen. That way you’re too emotionally invested in the outcome of a trade. If you need to see 3R every time, I don’t know if that means you’re anal, but to me you’re too caught up in that. That means something because where’d you pick that number from? Why does that mean something to you? Why didn’t you pick 4R? Aren’t you worth it? Maybe you’re only worth 3R. I don’t know. I don’t know who you are, but since you just picked that number randomly, why didn’t you pick 10R? Because you don’t know the frequency with which they show up. And if you’re like me, 9 times out of 10, they pull back, you’re talking shit now, you don’t know the numbers. So stop you’re talking to a pro, do the back testing and send it to me. Otherwise, I don’t want to hear about it.
So that’s the cure. Put your stops in, you won’t miss anything. And the good news is this, when I put stops in and they don’t get filled, I’m like, perfect. I didn’t chase, which is that other little demon that’s running through your brain. You don’t want to put yourself in that spot because that’s always an emotional reaction. You know what I’m saying? So when you put your stops in to add or remove risk, you can trust that your clearing member, whoever’s going to ultimately do the trade, has a vested interest in doing that. They’re probably getting paid a commission, so in some level, they’re already working for you. So delegate that to them. You can put that on them. You don’t have to worry about doing it yourself. So this, again, if that process scares you, right? Because there’s a lot of metadata that goes around entering your stops. Mike, I haven’t done it before, therefore I’m afraid. Okay, well, if you’re trading 10 minis, do trade one to see how it feels. There’s a comment on YouTube where a guy stopped looking at his p and l and he practically described it as the best day of his life. Actually, I’m going to read it to you since you can see it yourself. I got too many screens open. Sorry. 3KingsMedia was the contributor and the video where you can see the comment is, which do you prefer? The pain of discipline or the pain of regret? And three King’s Media says, thank you so much. Today was the first day I promised to trade without looking at the P&L at all and just follow my rules. And it was great in all caps also. Well, it’s a misspelling here, but I was given a new sense of relief, right? Because you’re not all caught up in the trade at that point. The market’s going to go where it’s going to go, whether you’re looking at it or not, right? Again, this is an important lesson. So I said keep it up, but that’s where you can kind of see it. So I know that it’s possible for you to make the change. And again, the feelings that you want to feel might be on the other side of the ones that you don’t want to feel.
So it might mean that you pull back and you trust the process. I’ve been using stops for over 30 years and they work. If there was any caveat, I would’ve already explained it, which I did. And the one caveat is, is that your stop is at the price. When the trade goes at or through your stop price, it becomes a market order. So then you’re filled in line. There may be some slight slippage, your skid, but if your trading to make the bigger money, you don’t have to worry about that. There’s not like there’ll be times when the slippage and skid works in your favor and there’ll be times when it doesn’t. So I can’t say that it’s going to even out because that’s a generalization. But the point being is that when it comes time, especially to take your losses and you have say your position size suggests that your protective stop is, say, a dollar below your entry price.
You don’t know when you get stopped out at $1, and then the last piece might be at a $1.05 below. So you have 5 cents slippage on a fraction of the position. You don’t know that the thing’s not going to go against you $3. Look at what happened with Tesla recently, right? How far that thing has fallen. Do you think those people who got stopped out $60 ago cared about an extra 50 cents slippage or skid? No, because they removed the risk at the right time. So save your life, save your capital, overcome the hesitation and how to not miss trades by putting in your orders ahead of time. It shows your intention to be a market participant. You’re going to lose some money, but as long as those stops are already there, then you don’t have to worry about reacting to something and then getting all psyched out at exactly the wrong time. The order is already there. Once you get your fill, you know would already have it written out. Know what your protective stop is and then you enter that accordingly. Don’t look back, don’t change it. Double check it. I do that every day. I have a whole process.
How to control your mind in trading
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How to control your mind when trading Well, if you listen to yesterday’s or watch yesterday’s episode, we talked about constant beds, size, people don’t get it. They think they need this kind of zen, Yoda Buddhism thing going on beforehand, and then they can come to trading. The big hint, the big secret to everything is that if you used constant be sizing, you actually trained your mind to quiet itself down, which is a huge advantage because it’s hard not to get hung up. If you get hung up on the dollar swings, you can very much destabilize yourself or get yourself off base, and that can cause you right now because the churning of your account has been delegated to you. You used to be able to do it at a wirehouse, but now they’ve delegated the execution to the end user, which I don’t necessarily know is a good thing.
There’s a reason why they never publish what percent of their client base is actually succeeding. They have to replace two thirds of their client base every five months. I have friends on the inside so I know what the numbers are. Remember folks, features aren’t benefits. Hotkeys clicking your ticker symbol and then seeing it over multiple timeframes, that doesn’t mean anything if you don’t know how to trade and if it did matter and it’s been in existence for 25 years, how come there aren’t more people succeeding? Why is it there are only 5% of the folks actually doing this and making some money? So I would argue that having all that stuff actually works against you because you’re a 19:1 favorite to fail. By controlling your mind, you control your behavior. Right now, folks like to read stoicism and talk about stoicism, and I think it’s good.
Certainly very interesting some of the career paths the folks who are writing about stoicism have done. Nonetheless. This is going to take years though. You can’t just read a book on stoicism and have it affect you immediately. It certainly can resonate with you intellectually, but again, you’re going to have to put it into practice and get used to doing it, and I guarantee you, you’re still going to have very, very strong feeling when someone pushes your buttons, and that can happen when you’re trading as well. You can get emotionally invested in the outcome of a big trade and all of a sudden gets smashed and you’re like, wow, that wasn’t supposed to happen. Everyone’s so bullish. This is supposed to be a can’t lose situation. I put all my money too big of a bed size and now I’m all over the place and now you’re angry.
Now you’re pissed. You’re all over the place. So the best way to control your mind again is to start with a constant bed size and to say, your goal then is to get through the entire week, maybe the entire month doing the same thing. That in and of itself is going to quiet your mind, the practice of doing that, right? People say, oh, Mike, I can’t sit as an analogy. I can’t sit, I can’t meditate, I can’t quiet your mind. Well, I don’t think we’re born knowing how to do that. Only a handful of maybe His Holiness the Dalai Lama is like one in 6 billion people. The point is, is that if you do it, do it for 15 seconds, try it for 30 seconds, then try it for a minute. You don’t have to go zero to a hundred all at once, and I think, I don’t know if it’s people are too anxious or they don’t have the patience because they don’t like what they have to feel when they have to be patient and realize that it’s life on life’s terms, that their mind is already out of control before they even start to trade. They have no discipline, they have no mental discipline. This is a game of mental discipline. The more you think about it, and if you’ve listened to this show, it’s not about entries or exits. It does come down to position size for sure, because if you have too big of a position on even a small move against, you can hurt.
And I always think about this, and this is shame on me for not saying it. If you can’t make money trading the SPY, I don’t think you have any business trading the EINs or the Nqs. There’s no point in trying to use leverage, even if the point size is two, it just isn’t. But people just make up their mind and they go, yeah, screw it. I’m just going to try it. It’s only money. But to me, when I think about what gave me solace when I was trying to figure it out, it was that I could commit to a process and not worry about what it looked like today because I knew it was going to be ugly. And I remember they say, fake it till you make it. I remember going early in my career, going to work dressed to the nines and putting on really good clothes and feeling like I was a phony because I didn’t have any experience.
I didn’t even know the language that you would use to speak to other people about money. I had no idea what I was doing, and I certainly looked the part, right? Which when you hear other people say that, well, he looks the part, but you don’t have anything to show for it. It’s humiliating, right? I know that I’ve been there, but the minute you start doing these crazy things is really the beginning of the failure or a long period of failure. I know that too. I practically invented it, I think so what eventually gave me solace in myself despite all the noise, because don’t forget every quarter you’re going to have a new wave of favorites out there because the media needs something to sell. They need to keep your eyeballs focused on the screen or in the magazines. Why? Well, because they’re in the advertisement business. They don’t care what you do with your money. That’s just incidental. It’s just a hook to commit your attention so that you’ll buy things from their advertisers. Perhaps you’ll support the patronage. But that kept me. If there was one secret to what kept me going over the years when I was collecting the data, which is really what you’re doing for the first years, you’re panning for gold and saying, okay, where are the places where I can raise or find the best spots? Was that I was able to do the same thing over and over and over again until I could see the results. And then I would go to my spreadsheet and I’d put in the open, high, low, close look at my position and say, okay, if this was a big move that went from say $20 to $32, what would I had to have lived through to feel my feelings in and around those ebbs and flows? Those little pullbacks, you can call them a drawdown. Drawdowns are really not what happened on any one particular trade. Mind you, I think people are misusing the term. A drawdown is what happens between months of trading. So if you are up X amount of percent in a month and you start losing money, that’s not a drawdown until the month is over, at least in terms of building your track record.
So you lost a few bucks on a couple of trades, even if it’s two or three in a row. To me, it’s not a drawdown until you book it at the end of the month. That’s technically how it’s done. I think people fall to pieces far too quickly about losing, again, control your mind. You put importance on things that don’t really have to be that important. So you cause yourself all the duress that you have in your life because no one else is looking at it the same way. You need perspective. But again, like me, when you started, there was no one there to help give you that reassurance to give you that perspective. Maybe you’re getting some from this channel, hopefully you are, but controlling your mind is the most important thing so that you don’t act out of emotion. You don’t act and go into revenge trading.
You don’t go on tilt. You don’t say automatically because something that you’re in is up $10 and you don’t have enough, and then you come in at the end and start buying more without knowing how that strategy would’ve worked out ahead of time. You see then you have no discipline. You can’t be trusted with the loaded gun, so to speak. So how would anyone want to ever give you money? You have no mental control, and this is a business of knowing how to control yourself. It’s too easy to put the trades on anymore. One of the reasons why I stuck with phone executions on the future side is because I had another human being on the other side of the phone who could say, what are you crazy? Or what would happen frequently would be like, okay, I got your order. You want to buy 50 March sugar, this and that, but next week is First Notice, so you could get delivered against. And I’d be like, oh, damn, I forgot first notice. Let me think about the May case or something like that. And so I had to build that into my discipline. I had to build that into how to control, how to quiet my mind, how to not get caught up in the hype. And I say, I don’t care who’s on the tv. I don’t care who’s saying what. I don’t care what big broker in the office is saying what, because they’re all just talking shit. At the end of the day, they have no skin in the game as to what happens with me. They already know what’s in it for them, good for them, but they don’t have any idea what’s going on in my world, and I can’t take their word for it. I have to do this on my own. So quieting your mind also means in order to control your mind, I think you need to quiet your mind in that. I mean, you need to focus on one thing. Then everything that’s outside of those parameters, anything that you stay in your lane you think you don’t have enough risk on, there’s no trade there. How would you know it’s a good time to add? Now, if you’re in experiment mode and you’re buying one contract and you’re trying to know when to add a second, that’s different because you know ahead of time that that’s what you’re trying to figure out.
What you don’t want to do is put in on a trade and then all of a sudden out of the blue star taking flyers. If you’re in experiment mode, then stay with experiment mode. You see? And then this way, you don’t end up falling into those bad habits because once you build them, they’re very, very hard to break, and there’s no one there who’s going to crack your knuckles if you just start taking flyers. The only thing that ever happens is that people get blasted. They lose a lot of money, then they’re pissed or they’re scared. Then they can’t come back to the market. And it’s not even like they blew up now, but they’re head shy. And you don’t want to put yourself in that spot because you want to find yourself in a spot where you have total control of your mind, therefore total control of your behavior, and every day you can follow your same setup so that when you see your setup, it doesn’t matter what the ticker is, right?
Because you’re not going to be sitting there trading just one ticker forcing trades. You can put your trade on knowing that even if you lost on the last two, the fact that you were in consistent position sizing saved you and you expect to lose from time to time. What you don’t want to do is put on too big of a position, get destabilized, get knocked out, and then have your mind go crazy. Then it puts you on the sideline when the very next trade that you see that you could put on could bring you back to break even or help you recoup some of that money that you’ve lost, but you’ve lost your nerve.
It’s one thing to lose your nerve. It’s another thing to lose your confidence, but this is what it all ties into. It’s a very deep conversation. Some of you might be sitting here saying, what the hell is this episode about? But in many ways, this is really what trading is about. It’s like, what do you do in between the time when you’re not getting signals? You have to sit on your hands. You have to wait it out and wait for there to be one, because unless you have a specific rule that says, here’s the setup, there’s no reason to put on a trade. Doesn’t matter what anyone else is saying. Doesn’t matter if you’re someone you look up to is trading that it might be appropriate for where they are. You see?
Benefits of consistent bet sizing when you’re starting out trading
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If you’re just starting out, you should keep a consistent bet size. Consistent bet size leads to consistent behavior, and that leads to consistent results. I know you probably have strong feelings about whatever your favorite names are out there from the cryptos to the magnificent seven, even in my world in commodities in coffee and cocoa, but that’s how you let your bias creep in. If you’re sitting there saying, oh, I’m really bullish on AI and so I’m going to lean towards doing that, this is what leads to regrets, right? If you vary your bet size and try to have too many trading strategies when you don’t have one consistent strategy that you know could nail every time you’re setting yourself for years, look at the comments of the videos that I’ve put out there. There’s one guy just wrote and he’s been struggling for five years, and it doesn’t make me happy.
I know what that’s like. It didn’t take me quite that long, but the feelings are the same. That’s what I can identify with. So this way, if you have constant bet size, it doesn’t matter how screaming bullish you think you are on something that you might not even know a lot about but are excited about AI, for example, or crypto. And then what happens is this, by having a constant bet size, you’ll always have enough on because if something really tears and you don’t have enough, you’re going to have regret. If you put too much on and the thing goes against you, you’re going to have regret. So we talked about discipline versus regret. I’d say feel the feelings of having the discipline right now because they’re trying to teach you something and they’re trying to save you two with that. If you’re struggling, it makes no sense to try to trade five different setups.
I know some of these online journal places are like, have your overnight set up. Here’s your morning pre-market setup up. Here’s your lunchtime set up, here’s your earnings trade set up. It’s too much. You’re trying to be a hero, and that’s a typical guy thing. Try to focus on one thing with one bet size and do that consistently for six months and see what your results are. Markets are always going to be there if you’re trying to be too many things, right? There’s that saying, don’t try to be everything to everybody. The same thing in your trading, you’re going to be one style of trader, so pick the one that feels best and go with it. Stick to consistent bet sizing and watch your trading improve. When I started, I was all over the place and I told you the story a million times. I’m not going to repeat it here just for the purpose of saving time, but man, everything I did was wrong. I didn’t have someone to give me the reassurance though that I was on the right track. I’ve talked about that too, which was a little discouraging at time. I couldn’t get the validation, nor could I get reassurance from people, so I just had to kind of go by the seat of my pants. But the one thing that saved me, the one thing that kept me hopeful and the one piece of data that led me to believe that I was onto something was that I had consistent bet sizing.
And if something went against me, I was like, okay, I didn’t sabotage myself by trying to be a hero, and then if I made money, I’d say, okay, I made some money with this. Was it enough? And then I have to calibrate that with what happens when it doesn’t work, which is typically how I did it. I always calibrated my position sizing to what I was willing to lose. I don’t care about the winners. The winners will eventually show up if you do the same thing consistently over and over and over again. But I never really varied my be size and try to go back and forth or trade larger in certain circumstances. And I have the track record. So even to this day, I don’t encroach and let my biases take over because I have a really good feel for the markets, especially in the softs, for example. But I do notice that as soon as you start to feel the hubris and then that becomes like, well, look at my results. Therefore, I must be really, really bright, therefore I should trade bigger.
And for those of you who are smart enough to look at Kelly criteria, Kelly formula, no one can really use that as a bet size because it’s impractical and the equity drawdowns with that are usually too much for people to stomach. So more about that perhaps in another lesson. But my thing here, for those of you who are struggling, and if look, you’re making money trading already, this channel is probably not for you, so thanks for coming by, but there’s the door for the folks who this channel is for the folks who are struggling and who are enjoying the process of learning their craft, it’s going to come down to consistent behavior. As much as you want the results tomorrow, it’s going to take time and the way that you get the results that you think you want today is going to come from you doing the same damn boring thing every day.
And that’s why the pros folks like me, and then the guys who are a generation above me say, good trading is boring. Why? Because there’s nothing to think about. You do the same damn thing. You see your setup, you know what your risk unit is, you put the orders in. That’s all there is to it. There is not a lot of sex appeal to it. Folks who are purely systematized and use mechanized trading rules have it programmed in their trading engines to calculate what their bet size is. And so that consistency is built in you as a discretionary trader because I think 99% of you are discretionary chart readers can learn so much from that process by just sticking to the same damn thing all the time. Make the trading uneventful. Don’t look at your p and l and just follow your process day after day.
The results will show up. They might not show up immediately. The results that you get might not give you the emotional rewards that you want, but that’s not the point that you think that is, but that’s not the point. What you take solace in is your ability to do the same thing every day. That’s the struggle. P and l is a function of leverage. It always has been entries and exits. People make a bigger deal of them. Here’s my rule on entries. If it’s going up, buy it. If it’s going down, either liquidate your lungs or short, and it doesn’t get more sophisticated than that. You can look at all the bells and the whistles and divergences and whatever, but it’s overkill when you backtest it like I do against the simplest rules, like if the slope is positive, buy it. If the slope is going down, sell it short. You’d be surprised how close to getting good better results you can get by keeping it very, very simple. But that’s a little bit of a tangent. I want to keep pounding this in your head because it seems that a lot of you are kind of finally catching on that it’s not about looking at your p and l, getting upset and then tweaking your rules, right? You can’t do that on the fly. You don’t know enough.
Two, no one cares. What can you execute? Can you make money? That’s why I don’t like going up for these meetups and talk about stocks. I don’t care about anyone else’s opinion. It’s not that they’re not good people. They’re all really fun people. It’s nice to meet new people and all, but even the CFAs that I teach don’t fully understand how the companies are run compared to the people who are on the inside. They are highly skilled people, but they can only see it from the outside looking in. And so their analysis has limitations. Your analysis is going to have a much greater limitation, your source of information, the internet, some discord. When you think about it, when you really look at your behavior, where’s your source of information and what you think? So that’s what I mean, become enthusiastic about ai, but you can’t sell your soul to it already because it’s unproven.
And don’t forget, things do change, right? Cramer’s four horsemen, they’re basically dead. And the stuff that made people money in ’95 to 2000, those companies have been renamed and hidden. They change their tickers. The companies bury the bad performance. They get regurgitated and get married up with somebody else. The only thing that’s going to save you over decades and decades and decades is your position sizing you make, and you lose your money by your position size. So start small, use a consistent size, and then get good at your process. Once you have that down, scaling up is the easy part. Right now, you’re just changing your quantity. And by the way, when you think about R, we’re going to talk about that this week. Think of it in terms of a percentage of your overall account balance. Don’t think of it in terms of 50 cents or $2.
You have to think about it in terms of a percentage of your overall capital. What percent are you willing to risk on any one particular trade? This will further help you understand and conjugate your actions with your feelings and your emotions, and then your behavior, because they all, it’s like an anchored vwp of you. You have to know how you feel. You have to know what you think, and then you need to be able to execute. So you need those three things in alignment. When you have constant bet sizing, you’re playing it safe in that you’re not letting your emotions get the best of you, and you’re not letting your biases creep into your behavior, which scuttles all your results. I’ve seen a million stories. I get emails every day about someone who said they thought that this was a sure thing, and they bet bigger with no particular skill, with no particular track record of being able to act consistently. They got caught up in the hype. Leave that for your relationships.