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Someone asked if I would do an episode on trading lessons that I wish I knew earlier, what I wish I knew before I started, right? Because so much of trading is experimentation and that makes people freak out. And so I kind of already covered it already in a little book called The Inner Voice Trading, where I had blind spots, what I had to overcome, what failures I had to endure, how I had to thicken my skin. And I think they’re kind of generational. The things that I had to go through you’ll never be able to experience. And emotionally, you’ll probably find new ways to feel those feelings. So we’ll have that in common. But the actual things that I went through aren’t really possible anymore, especially in equities in that they don’t trade in eighths.

But I think it’s like anything that can catch you off guard that you couldn’t have anticipated just because of, let’s face it, we’re all kind of ignorant, right? Every day something new happens that it’s impossible to anticipate, and that’s where there’s the emotional risk and reward, right? There’s the financial risk and reward. That’s the one payoff. And then there’s the emotional risk and reward and having to deal with the uncertainty. So there was a couple of questions that came in and around this theme. One was from AhaFX for the video, “What’s better – Trading the chart or trading the crowd.” Hi Michael. I’m struggling with taking profit, watching price in profit, and then back to break even. What can I do best in that aspect? Any advice? Yeah. Well, I’ll stop watching your screen. I mean, how would you know that it was profitable and then it came all the way back to breakeven unless you were watching it minute by minute, tick by tick, excited about the outcome of a trade, put it in your protective stop and move on to the next trade.

I mean, I don’t know how to say it anymore clearly, but for some reason people just seem to really like the action, which really tells you a lot about yourself. Are you doing this to make money or are you doing it for the excitement? Because if you’re watching it tick by tick to me, I’m thinking that it’s more, and I don’t want to sound this way, but that’s amateurish in my opinion. What do you think is going to happen by watching? What skillset with no experience do you think you can bring to the trade by watching it tick by tick. This isn’t about Monte Hall stuff either. If you don’t have a good feel for the markets in the short run, in the short run, minute by minute, the data are random so that it would make you a few ticks of profit and then come back to where your entry was. I mean, what’d you think was going to happen? I don’t know what advice I can give you other than to say, stop watching the screen. Stop watching your p and l, especially the newer you are, the more you should be doing that, because watching, it’ll induce you to do stupid things with your money. I can’t convince you to think longer term. So all I can do is kind of stay on message and say, stop focusing on the short term. Another question came in as a response to a response that I had made from a woman who I know named Angela. The video is what again? The same video. “What’s better – Trading the chart or trading the crowd. Hi Michael. Why wouldn’t you take the other side of the trade a countertrend trade if the market shows you that you’re wrong about the sentiment direction in your initial trade, what makes that dangerous? Well, a down day and an uptrend does not signify a reversal. It’s just a down day. Why would I be wrong? I know where my stop is. That’s the amount of space I’m willing to give the instrument in order to protect my cash because I don’t know where it’s going to go. But I wouldn’t say that if I’m long or if I’m trading an uptrend and there’s a down day, I’m guessing Angela’s looking at intraday data, which again, I don’t have any need for. So again, a down day does not mean a reversal, and it’s a quick way to lose a lot of money to try to trade against the prevailing trend that would be based on the weekly or the daily, what you’re doing. Intraday, I can’t help you. I just wish you godspeed. I hope you all do what you all think is best in that regard.

I came up with the “Fab five Rule” as well. Again, what did I do or what would I have wished I knew earlier on? This took me a little bit to put together, but I put together, I was just telling my friend JC Parets about the same thing as we were kind of laughing about it. He of course runs all star charts, great outfit if you haven’t checked them out already. And the Fab Five for me was the S&P 500, crude oil, gold, the yen, and the 30-year bond. I learned the hard way that I really couldn’t trade those five commodities earlier in my career. And you might be saying, well, Mike, you’re biting your nose to spite your face, blah, blah, blah. But what ended up happening was, again, you can’t can have duress and you can have strong emotions in and around your trading, but the way it presented for me was very different from how it would present for you. You have to remember when I started, there was no internet. And the way we would kind of get a lot of our information or how the me, the outside world would get their information was through the C Section of the Wall Street Journal. In those days, it had a fairly, I would say, on a grade, a letter grade in school, at least a B grade section on commodities.

Barron’s had a pretty good one too, but then they really weren’t focusing on commodities. I don’t know why it’s such an important sector of the economy because those are the raw that make their way into almost every company. And you’re like, well, how does crude oil Well think about if you’re trading FedEx or UPS, they’re delivery companies, so they rely on jet fuel a and gasoline minimum. So fuel costs are part of the deal. At any rate, the reason why I precluded and didn’t include those was because if there was a story that could move a market, lemme say it this way, esoteric types of commodities like oats or cocoa or sugar didn’t seem to have the mainstream appeal. So I completely gravitated towards those. I wanted to be in the ones that where professionals were trading IE hedgers and other CTAs like myself, because if a journalist was going to write something, they’re trying to get page views and reach a wider group of people.

So writing, even in the recent chocolate cocoa move, there was one article that I saw, and it was that prices for your Hershey bar are going to go higher. There was really no article or analysis as to what the hell was going on in mainstream media in the physical side of the cocoa markets. So I was like, I’d love those things. I can kind of hide there and I don’t have to worry about waking up in the morning and seeing an article that some Dow Jones Newswire analyst or author journalist would write about any of the commodities that I’m trading. I didn’t want that because most of the time, if they were going to write articles, it was about the Fab Five. It was because people could see that they were popular opinions in society about gold. And at that time, Japan hadn’t completely fallen out of bed and they were a big trading partner for the us.

The yen was much higher. I want to say it was 106. It was very different time for the US Japan relationship from a trade standpoint and a currency, the cross rate, so the dollar yen, s and p 500 gold crude oil and the 30 year bond. And if they talked about the short end of the curve, that was it too. But so I said if I stayed away from those, I wouldn’t have to worry about headline risk where you’d wake up in the morning and the journalist would’ve written a story that could have adversely affected your position. That had happened to me enough times where I was like, you know what? It always happens with these damn commodities in this particular group. So I just made a little sector and said, for where I was at the beginning with my account, I didn’t have enough money. And so gold was trading

That I think gold was under $300. The ounce, it was like $290, but still, you have to remember a $200 move, which was $2. So even a 1% move was $300, which was a 6% move in my tiny little account at the time. So I kind of figured I have to expect the unexpected. And so this is what I started thinking about having a view or an image of the landscape of the world that I was trading at the time. And it was also one of the reasons why I also did the same about foreign exchange. I don’t find it exciting to trade. It doesn’t psych me up. I don’t wake up in the morning and say like, man, I’m really, really excited that the markets are open today because it’s just part of my life. It’s what I do. I am the markets as far as I can see.

And so it’s just a natural order for me to say, okay, I have the markets open. I’m going to enter my orders. It’s going to go where it’s going to go. I know how much I’m willing to risk on any one particular trade, and I’ll put my stops in to add risk. And so if the markets come to me, I’ll add the risk. If I’m in a position and I have my protective stops in and I don’t get stopped, I’ll be like, okay, well, let’s see what happens tomorrow. I don’t look at the p and l and overthink things or try to make decisions based on my p and l. I’ve already done that before. I’ve put the trade on, so I can’t anticipate all the outcomes if I put on my initial risk unit, and this again goes back to the replay of the live stream, which you can see on the channel.

If you hit the live tab, you can see the replay. I still do progressive exposure. So it’s just like, okay, new setup. Add the first risk unit. Let’s see what happens. Add the second one. Let’s see what happens. I am not a risk on risk off type of trader where I put on my optimal piece and then I knock it off. I think some of you might be trading too big if you feel you need to watch the screen all the time, your position size might be too big to me, watching the screen doesn’t come from the excitement of making as much as it does from the anxiety of having the damn position on. So then you have to ask yourself, why the hell are you even doing this? Why don’t you just take all the crap that you don’t need and sell it on eBay and you’ll make a lot of money, buy something new, wear it for six months, sell it, and then go get something else. The good news for me too that I didn’t get distracted by was all the different ways people are trying to get your money. And by that, it’s like subscriptions to newsletters. Private X, formerly known as Twitter streams

Or Slack channels. Of course, the discords, and I’m really happy to hear many of you are writing in saying, my life is at much more peace. I’m not sitting here listening to these, so-called gurus who aren’t really making any money, and after five months I put a thousand bucks into my discord. If I put that money into my account, I’d be able to weather the storm a lot more. So in conclusion, all of this led to me being self-sufficient. The more self-sufficient you can be, the more it speaks to the emotional intelligence to me in the trader psychology area of who you are and what you’re trying to do, that should eventually boost your confidence and the confidence. Like I’ve said before, if you give a person who’s got average intelligence, a lot of confidence, they’re going to go out and they’re going to do great things.

I’ve seen it in every area of my life. I’ve seen people who say stuff like, oh, I should have went and I could care less. They can’t speak English, they can’t put a sentence together, and they’re very, very successful. Why? Because they’re brazen and they’ve got guts and they ask people for the business. And so you can do the same. To me, it’s like the opportunity. This business is so great. It’s such a great opportunity for you if you can get out of your own way. I don’t see what the benefit is to your trading. If you’re watching the trades live and watching them tick by tick, you’ll have to take a time out and write all of that out. What do you think is going to happen? So put in your cost basis and then say, okay, if it goes up five ticks and am at this spot, how do I feel about that?

And why would you feel bad if it goes down ahead of time from your trading strategies? What do you think’s going to happen? You know that if you’re a really, really good trader, you’re probably going to have an accuracy rate of about 40% right now. In shorter windows of time, you can absolutely have winning streaks. I’ve had winning streaks where my accuracy was 60, 70%. That was in like ’05, ’06. That has never happened since, and we’re coming up on almost 20 years. But that wasn’t me. That was me following my rules and the market being phenomenally amenable to my trading style. It will happen for you. But if you can be right 4 out of 10 times or 40 out of 100 times, you’re kind of in the range of where pro traders are. So you have to say to yourself, when you put on a trade, 6 out of 10 times, I’m going to lose money, and I’m emotionally prepared for that. I’m tired of saying, you can still be bothered by that because to me, if you can anticipate what all the outcomes are, then none of them should bother you. You shouldn’t necessarily get excited or related about making money, and you shouldn’t feel discouraged or depressed or do anything to internalize what happens the 60% of the time that you lose money. Those are just the numbers. So everything seems to be going as planned. It’s in model. There was no other reason to look at stuff. Now, some of you like to fade moves. That’s not my style. If you can do it and you have that sense of timing, great. I’ve heard lots of stories of people not believing the power of the market and be like, these people have to be wrong. I’m going to fade the market here. There are a handful of people, and again, I’m not saying handful of all the short-term traders, it’s probably the smallest group of them. And if they’re making money, like I said, I celebrate it all. But you have to know when to fish or cut bait. And if you’ve tried it and you don’t have a field, you’ve got to move on.

I just don’t like doing all the work. I can make more money sitting on my hands. I don’t want to turn trading into blue collar, into the blue collar, despair. Another thing, a trading lesson, I knew I wish I knew when I started because I came in with a blue collar mentality of working hard that meant long hours that didn’t translate to profitability. It made me feel good about myself. And I could tell everybody, yeah, man, I’m working hard, working hard. But look at that in your own life for all the hours that you’re putting in. Remember the little trick I said, and it wasn’t to put a stick in your eye. If you divide your profits by 20 and you get a number, that’s a single digit, that’s the amount of hours you’d have to work at Chick-Fil-A or Habit Burger or Five Guys, because that’s the minimum wage in California for working in a quick service restaurant. So I think in many ways there’s things that you can’t avoid because they’re just going to be experiential. They kind of go with the turf. There are things that are unexpected. The best thing that you can do, as far as I’m concerned about putting on a trade is put in your protective stop and then go do other things.

Like what else could you possibly do? You can’t sit there and manage the trade. You put your stop in. That’s the management of the trade. You kind try to shoot from the hip with no experience. To me, it doesn’t bring the best out of you. If you don’t have proper training, your emotions will induce you to do transactions. And I’ve said kind of jokingly, what does discretion mean? It means pulling some trade out of thin air to put on so that it makes you feel good today. You know what I mean? So that’s where I think there are things that will happen in your career that we can anticipate. There’ll be new evolutions of things. There’ll be data and news that come out. There’ll be mergers. There’ll be surprise announcements from analysts, the companies themselves, legislators, regulators, the markets. It happened in cocoa recently in the last several months where the margin went up from whatever it was, 5K to 30 K. It basically shook out all the small speculators. And a guy like me, I have to anticipate that.

So if something happens because of it, it’s really on me. I don’t really blame anybody. You have to keep the integrity of the marketplace, and I understand why the exchanges would increase the margin. It’s to protect everybody. It’s to protect the smaller speculators from themselves, and also to make sure, again, what is margin. Margin is a good faith deposit on the full notional value, the full value of the contract. So is it fair? Well, on some level, yes and no. In the no sense, I think an individual should be able to determine what it is that they want to put at risk. It’s their money. But I also feel like people should, there is an onus and a responsibility for the people in the know to protect those people as well, protect them from what they don’t know. And then subsequently, when the move in the cocoa, the upside move was over.

You saw a couple of days that had striking volatility that I had really never seen in my entire career in Cocoa, where each tick is $10. And so there were a few days in there on the July’s where the contract was down $16,000 and $17,000 respectively. So for a client who had $50,000 in the market and can afford the $30,000 margin, you could be short and certainly make a high rate of return to your account. But the goal is to, I think from the regulator standpoint, is to first do no harm. So you have to anticipate the unknown, which is very, very, very difficult. But that’s where those trading lessons kind of come from. So then the goal is like, okay, once you’ve learned that insight, how can you apply it going forward?

The post Trading lessons we wish we knew earlier first appeared on MartinKronicle.

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