Watch this video on YouTube

In order for me to grow my account from $5k to $50k and then from $50k up to a quarter million. It all started with preparation. Remember, we had to read a few things. There were a few good books that they weren’t really required reading, but they were ones that some of the old timers and some of the guys that I met from Hayden Stone, it recommended that I read, and it wasn’t cheesy titles like where were the client’s boats really put me asleep. It was more like Art of War, Thorstein Veblen “Theory of the Leisure Class” on conspicuous consumption, extraordinary popular delusions in the madness and crowds. All those books had a really big impact on me. When I first started managing risk. I knew just like in playing poker, when you trade, you have to play your cards, but you also have to play the people on the other side of the trade because you don’t know when you’re putting on a trade that you couldn’t be part of a larger order. That’s where the Contra broker and firm could be tutor investments or David Shaw or Caxton or whomever. So I always knew that playing Superior Defense was the name of the game, but I also knew that what gave me confidence to attack the day attacking while also playing Superior Defense was my extraordinary preparation.
I used to come, in fact, when I would apply for certain jobs, they would say I was overqualified and it bothered the living crap out of me. But my level of preparedness was really what was one of my bigger attributes or characteristics as a person. Again, I wasn’t looking at one instrument over multiple timeframes to kind of sniper in to know for sure I didn’t use indicators. I felt that they were useless for stocks. Relative strength is important for sure, but on the commodity side, there’s really not that much that’s really worthwhile because ultimately if they use price or what have you, all the other indicators based on price become lagging indicators almost by definition you see. So I was like, okay, well, no predictive value on that. See, so what I would do is in planning my trading week is I would actually first of all envision enormous success.
I had an unbridled amount of optimism. I was like, if Paul Tudor Jones can do this, and he got smashed in that cotton trade when he was on the floor as depicted in market wizards, I can do this. If Kovner can lift a leg on the spread that he had done when it was limit up and then it went limit down on his long, then I can do this because those are very human situations. You see what I’m saying? And you live and learn. You thicken your skin, and so I just always knew I was going to win. I didn’t know when and I didn’t know how much, but I was unstoppable, and that type of optimism is what carries the day. You have to envision yourself winning. If you approach this with any type of trepidation, like, well, I’m just going to check it out, see how

It goes. To me, I think the fight’s over before you actually start, and I don’t mean to sound that way. I’m not here to hurt your feelings, but I always knew that I was a grinder and I was a street brawler, like no one was going to stop me because this was my ticket out of blue collar despair. One of my favorite writers is short story writer. Rest his soul. He’s passed away is Raymond Carver, and if you read those stories, it’s absolutely blue collar despair. I would highly recommend that you read some of his stuff just for the appreciation of, there’s some great books too. Off the top of my head is Will you Please Be Quiet Please and what we talk about when we talk about love, I think if you’re interested, Anne Beatty’s also very good. But anyway, I’m off the topic now.
I’m on a tangent. So let’s come back to the story. Michael, get back to the main point, dam it. So my preparation started Sunday night, and in those days you have to remember the data and all the information and the opinions and all that stuff didn’t exist. No wireless technology. There were no apps. There were no internet. So nowadays you have too much. You have to make yourself a bit of a sieve, one of those screen kind of filter thingies and probably mucking your cards at the poker table. The majority of what’s out there is bullshit and noise. So you have to, I wouldn’t consume everything that’s published because it’s like it could end up confusing. You can’t develop your thesis based on what other people think. You got to eat your own cooking. So that’s why I very quickly stopped following firm research or other financial advisors who were walking around the office telling me about their various stocks and ultra tick stepper and this and that.
These guys did. They were salesmen. They didn’t know their ass from a hole in the ground when it came to evaluating companies or what was going to make it good. They just knew that they were up. They were caught up in the hubris, and it was yes, like Nvidia and Bitcoin, it was an infinity or zero kind of situation. They had no risk management whatsoever, none, maybe, like I said, a couple of the Hayden Stone guys, but for the most part they did not understand risk management. So anyway, coming back to Sunday night, I always found it better. I wasn’t a one instrument trader and I didn’t believe in wishlists and all that kind of stuff. I think language has a lot of powerful, what does it mean when you have a wish list and you separate the words? It’s a list, but what does the wish part actually mean? Is there a better word that you can you call it your abundance list, right? So I was that way. Like I said, here’s Saigon and here’s Hanoi. I was very, very vicious with myself and chose very specific language that was always in the present tense and only pointed to my success in the future. It always had to feed my optimism.

I’m still built this way today. I have that gene that says, how hard could it be, right? How hard could it be? So the Sunday night preparation was more like, okay, here are the price structures for these various instruments, and the good news is that there’s really like three dozen commodities that trade. There might only be three or four of ’em that look like they could make a move up or down. Most markets probably true for stocks too. Most markets are non trending depending on how you define trend, but most stocks and instruments are not trending. So you’re sitting there kind of waiting to see how things evolve, and then I would actually write out my orders. I’d write out the position size, I’d write out where my protective stop’s going to be, and then I would say, okay, if it looks like I could get in and get a second risk unit on here’s the price, then I would go to a calculator because the phones didn’t exist, so there wasn’t the calculator on your damn phone.
And then I would go to a spreadsheet and double check everything because I’d multiplied through the contract size of this and that so that I knew my math was clean as a whistle before I even got to the point of entering my orders. So I knew exactly what I was going to do and how I was going to behave regardless of what I felt over time. I didn’t mind getting into the first and maybe the second risk unit in the same day, but what I didn’t do is add my third risk unit that usually cost me money because of the nature of if moves become too extended, you can have mean reversion within the day or within the next few days and you end up being fully loaded with zero P and L. What do I mean by that? So say you were risking $1 and you found the inflection points for this particular instrument at $2 intervals.
So you buy it at $20, your next unit was $22, your next unit was $24. These are all effectively 10% moves. It seems like it’s $2, but it’s still 10%. Again, I was thinking percentages. So what would happen if you got in the same day? You got $20, $22, $24, now you’re up 20%. It’s not terribly out of your imagination to think that it couldn’t trade back to $22 before it resumed. But the problem is, is that if you’re using consistent bed sizes, which I recommend that you do, so this way it tempers your greed and your sense of hubris and your fear. Your average cost is $22, so you could have three risk units on at $20, $22, $24 if it pulls back to $22, now you’re fully loaded and you have no P&L. So I was very, very, very judicious as to when I was going to add my third units and I vacillated between using a volatility measurement. In today’s day and age, you can use ATR and or structure and people would refer

To if you do stage analysis, you would be thinking about bases. I would live through the base. I wouldn’t worry about trying to sell or trade inside the base. I didn’t know what this was at the time. It just seemed like the natural thing to do. I didn’t know about stages and bases when I was doing this. I’m using today’s language, but I had no idea about, I didn’t even know if any of the books on it were written at the time. So the key to me was from the art of war, they say the victorious warrior first wins and then seeks battle. I didn’t know what the outcomes of any of these were going to be. I knew it had positive expected value because I had already grown my account quite substantially and other people were starting to take notice. They were asking me my opinion on stuff, which is very, very awkward because I wasn’t even done with my own two year apprenticeship or training program, and I was already teaching people inside the branch.
So then I would say, okay, I have existing positions. The next day was like, okay, where am I going to put my protective stops? Where am I going to add Now I’m babysitting a book of stop orders. I was in effect my own specialist. I didn’t use limits. It was always stops, stops to get in, stops to get out, meaning using stops to add risk and using stops to remove risk. I never wanted to do or shoot from the hip and get in at the market or say like, yeah, if it goes to $26 in the previous example, I’m just going to sell everything there because I wanted that discretionary slash emotional feedback. I can’t take the profitability, it’s too much. The abundance is too much for me, so I have to offset my winners by picking some number out of my back pocket that was stupid and cost myself a lot of money by trying to pick tops that way.
So I knew, and then I would say, okay, now I have excess equity. What can I do to add more? Or if the other name’s on my list, my abundance list showed some promise, I would set my alerts and wait for those alerts to go off and then just sit and wait, then add the orders and wait for the market to come to me. I was always in a state of being placated I was never chasing, and if the market didn’t come to me, well then that’s cool. I never put the damn trade on. Anyway, in that case, it saved me a lot of money by not chasing, and that gave me a sense of confidence because every day, sometimes, especially with stocks, there’s like 80,000 stocks. You’d see that one would move and you’d like, how did I miss that? And a lot of times it was like analyst upgrading, okay, you can’t predict that. Take over candidate rumors, that kind of stuff. That always existed, but that wasn’t something that I could know ahead of time. So I usually just kind of discounted that and say, okay, well based on my information and what I can

Garner from the things that I can observe, I’m not in that loop. I don’t know when things are going to get upgraded. I don’t know why anything would be a takeover candidate or a merger candidate. I wouldn’t know that ahead of time. So I didn’t worry about it. It was a waste of my time to put any thought to it. I only kind of held myself to a standard of what I could observe and what I was willing to do because then I would say, okay, I missed that one. How could I improve on it?
And so from time to time you would get knocked out. You would miss an idea. But the key for me was I was always in control of my own behavior, and that is why I say behavior predicts where you end up because there’s so much of it is unknown, all the outcomes are probabilistic. The best you can do is put your trades on and wait and see, collect the data, calculate what your expected values are, understand your portfolio heat because there might be that sweet spot, and then stay out of your own way. Let the market tell you when the moves are over.
That’s the way I did it, and that’s the way I continued to grow my account was I started with the winning attitude of optimism. I had a plan and I stuck to it. I didn’t waiver from that. Now over 36 years, especially in the first two or three, did I take flyers and did I pull things out of my back pocket? From an experimental standpoint, yes, but I never came in with a 5% risk unit because some guy down the hall was bullish on Amphenol or something like that, or thought gold was going to go up. I was much more objective. I was an opportunist, and I figured if I’m an opportunist who’s also an optimist, that’s a really good combination. As long as I have hyper defined risk management rules, I wasn’t like, I really love this company, or I love the analyst, and so therefore I’m going to put a 10% allocation to it.
This other one I like, but I don’t know the name. I don’t really know what they do, but the chart looks good, so I’m going to do 2% over here. That’s a recipe for disaster. If you’re Paul Tudor Jones, you can do that. If you’re just starting out, you can’t. That’s where your biases come out. You see what I’m saying? You think you feel something. Well, what does that mean? Is that scientific? Is that a chapter? Is that a part three of the CFA? How you feel? Maybe CMT has that. I dunno. I’ll ask Brian Shannon or JC Parets and see what they say about it. So that’s how you temper your enthusiasm or not, is to just use the same risk unit. This way. At the end of the day, when I would go home at night and say, okay, did I win the day? Even if I lost money, if I had followed my rules to a T, then I won the day. Then I could stay optimistic and stay enthusiastic about my progress because it was the discipline and my attitude that encompasses or is a huge part of my behavior and behavior predicts where you end up, you know what you should do behaviorally, go watch this video here.

The post How I plan my trading week first appeared on MartinKronicle.

The post How I plan my trading week appeared first on MartinKronicle.