Holding winners longer equals higher returns

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• 0:00Speaker 00

  Everybody, it's Michael Martin. Thanks for being here. So I'm responding to a comment on a YouTube video that talked about like, hey, I find the names that I get in get to 2 and 3 R away from my entry point, but I'm only walking away with 1 R gains. And we know, what can I do? And you know, how can I learn to make more money? Generally speaking, so I have two things to say to that. One directly answers the question. The other one to me is a little bit different, but it's really, really important for traders to understand. And that is the concept of delayed gratification. I, when I let go of the need to be right,

• 0:41Speaker 00

  I realized that that actually could impact my holding periods. Because the minute you buy something at 20 and it goes to 25, whatever the damn number is, doesn't matter what the rate of return is, and you lock that in, you now have a winner. It validates who you are as a person. It validates the hard work that you're putting in to learn your craft, right? And if you're a pro and you've been doing this for a while, sometimes you need that win, right? You know, I was just recently coming out of a drawdown, and I'm a human being. So I'm not immune to having those same feelings that you have, you know, when I'm in, you know, 4% drawdown. Then I cut that in half and I was down, I think, like 2.1%.

• 1:24Speaker 00

  And since then, you know, with the sell-off in the market and some long soybeans trades, you know, I've recovered the full drawdown. You don't know when, right? Because drawdowns have magnitude and duration, and you don't know when it's gonna end. So when you're in a losing, but what did I do? I followed what I preach. I cut my position sizing. I had small pieces. I did take the risk home overnight. And when I talked recently about having that OCO order, that was a real-life example. You know, the specifics are a bit of a bore. That's why I don't talk about it. You can, plus, there's a million other places where you can learn. You know, for me to get into the tactics, there would be a 90-minute video.

• 2:06Speaker 00

  And who wants to sit and listen to me for 90 minutes? All right? I don't have that sense of self-importance. My theory here is to be bold, to be brief, and then to be gone. Bye-bye. Bye-bye. I don't need to blather on here. The delayed gratification part was something that I had to learn to do. How to make it last. Listen to your girlfriend. And that was how to hold winners. And how to deal with the fear that I needed that validation emotionally, which is not a trading decision when you think about it. Remember, there's two baskets that are sitting on your shoulder, two angels.

• 2:48Speaker 00

  One is the psychological and the emotional one. That's impulsive, right? That is, needs constant feedback, needs immediacy, needs, it's that needy, needy partner. And the other one is the practical finance that's black and white and straight-up numbers. And you have to learn, like, if the market's moving in your favor, and we're coming into Wednesday's close, and you're up 5 bucks on a $20 purchase, and you're up 25%, unless you've back-tested it and you know that when you're at 25% up for your particular trading style, that that's peak equity for that position, you're just guessing, and you're offsetting that trade so that you can feel good.

• 3:32Speaker 00

  So I had a general rule that I used to say to myself, and I had a Post-it note on my computer, which is big CRT things. Now you've got all these flat screens. And it said, if I'm putting on, if I'm putting on this trade or offsetting this trade because I want relief. I want emotional relief. I want psychological relief. Or I want that validation that I'm now, I've stopped the losing, and I'm in a drawdown, and I'm starting to recover. I want to be able to mark that line in the sand and carve it, and carve that out of stone. It's probably a bad trade financially speaking. And so you have to learn to combat that when you're in these trades, right?

• 4:14Speaker 00

  The original comment was, I am, you know, like, I think I said this in a previous episode. You buy something at 20, your initial stop goes to 19, the market goes to 25. You can't keep your 19 stop. That makes no sense whatsoever. You have to protect some of your gains. Now, how you do that is nuanced, right? A lot of people use ATR. You could also use structure, if that would give you a better exit than using the ATR number, right? If the ATR is, say, like a dollar, but the structure below, like, support of what you're looking at, or like a nine-period EMA moving average, might be 80 cents below the current market. So that gives you a better exit by 20 cents.

• 4:59Speaker 00

  And you're like, who cares about 20 cents? Well, if you're trading 10,000 shares, I do, right? And if you, if you, if you do that over hundreds and hundreds of trades, when you think about it, you know, and you do get stopped, you're only giving back 80% of what the, otherwise the move would be if you used a $1 ATR, right? So it doesn't matter necessarily for one trade, but if you're doing it hundreds and hundreds of times over the course of the year, it all adds up, right? And if you save 2K on 50 trades over the course of the year, you know, that's decent money. You know, you could hire an analyst assistant with some of that money. I'm just saying.

• 5:43Speaker 00

  So I had to learn delayed gratification. And to say, like, I'm making money. I have no way of knowing that this can't go to 30. And I used to have those park bench days that Peter and I would talk about, Peter Borish. And we'd be like, you know, sometimes we get in our own way even when we're making money. You know, that was like the wisdom of having all these mentors, is that they would say these things about human behavior. It was never really about trading tactics. That's easy enough. You could learn that by yourself. It's more the evolution of the individual that matters most here. Because managing risk is a not-natural, it's an unnatural act for many of us, right? When you think about evolution, it's fight-or-flight mechanism.

• 6:28Speaker 00

  We've done everything we possibly can to not have risk to our existence. So when you want to trade, you're going against the grain. It's not a normal thing psychologically. We're not necessarily built for it. We can certainly learn it. You could learn it intellectually. I think the learning part of it emotionally and psychologically is where people get killed, which is why that's what I focus on here. I think, I've always believed that this is, you know, 75 to 80, 75 to 90% of it. The tactical part of trading, you could teach to a ninth grader. So, so learning to not suppress, because suppression, you try to suppress your feelings,

• 7:10Speaker 00

  you're gonna have a blowout in Chamber 3 somewhere else. So instead of, and I don't think I'm in it, right? I'm just with my feelings, because they're part of who I am. And so you have to sit and think and say, okay, why am I feeling this way? If, if I bought something at 20 and it rallied to 25, and that was a top, but I didn't get out at 25, how am I supposed to know that right now? Now, there's technical indicators that you can use that help you create your edge. But even that, it's a probabilistic endeavor. It's not guaranteed 100%. So I had to learn to live within the probabilities, which was, which required enormous emotional growth. Why? I came out of a world of being a phenomenal student. That's an accuracy model.

• 7:55Speaker 00

  So all my whole life was based on accuracy. And that gave me validation. So I had to unlearn all of that emotionally. How do you do that? Right? So that's the kind of stuff I'm speaking about here is like, how do we have that type of self-awareness? And, and know, why do we do things? In a previous episode, what was it? A week ago, Tuesday, I think, I talked about having a plan for every possible situation. So my thought was like, look, if you're willing to risk a dollar on a $20 purchase, what would be any different than the market being at 25? Now, I know the symmetry can change, right?

• 8:39Speaker 00

  But sometimes you find these markets that don't really show any pause. Like, a lot of times in stage-two-up trends, you'll see bases. There could be like four or five bases normally, and a very pronounced move. But what happens if it doesn't create any base? And you just see this nice, it goes up and down, but small, in like a 45-degree angle. So there's no structure. There's no base, right? So therefore, there's no structure there either. So you're really thinking like, I have to think in terms of either percentages or ATR as my trailing stop, and I can ratchet that. So what's the difference, right?

• 9:22Speaker 00

  If you put on the trade, your protective stop goes in automatically. You're long at 20, your sell stop, your protective sell stop is 19. So what's the difference if it's at 25 and your protective stop is at 24? What's the difference? It's the same, assuming you have the same number of shares. Isn't it the same risk? Now, it might be a little bit off from a percentage standpoint, because you might have other positions moving, and your account balance might change a little bit. But to me, that's splitting hairs. So what I'm trying to say here is that if you have a $20 buy, a basis, and a $19 protective stop, that to me is the same as being at 25, up on the trade, having unrealized gains

• 10:07Speaker 00

  with a $24 stop. Why does having the money in unrealized gains make you freak out? Don't you think you deserve it? You're doing all the damn work. You're taking the damn risk. You need to get comfortable thinking or knowing that you're worthy, and that you deserve financial abundance, again, which is not greed. Don't you deserve it? You're doing the work.

• 10:33Speaker 00

  Right? Because to me, getting stopped at 24, rather than selling at market 25, figure out the psychology for you. How do you know at 25? In my humble opinion, you don't. And if you put on that trade and sell at 25 market, you want the emotional feedback more than you want the financial reward. And that's okay. But it would help you a lot to learn about yourself in those moments of why do you do what you do? Because the biggest thing that you have to figure out in trading isn't chart patterns and crossovers and ATRs and nine-period EMAs. It's yourself.

• 11:16Speaker 00

  Why do you do what you do? And if you're a pleasure seeker, oftentimes the answer is, I want the emotional appeal of it. And there's nothing wrong with it. There's no reason to judge it. I'm just saying that it would help you trade better if you know specifically why you do, you know what you do. And go back to that Tuesday episode. What's the damn date on that? And just so you can apply that, I want to tell you, I think it was from Tuesday, the 28th. Anyway, this is the stuff that helps make you better.

• 12:00Speaker 00

  Because when you know what your motivations are, really what you're deep down, like, say, I want to make a million dollars. This is a flaccid bullshit goal, right? Because you don't know what it takes to get there. So what's the behavior that you have to exhibit in order to do that? That's where you can really learn, you know, how to make the money. It's more about what do you have to do behaviorally? And when you think about human behavior, you have to talk about feelings and emotions. Because most of the time, that's what's governing the decision-making process. People want to feel good, or they want to avoid pain, right? And that's okay. There's nothing wrong with it. It's just that when you think about making bigger money decisions,

• 12:45Speaker 00

  and this might be life-changing money for you, you need to learn to get comfortable with this stuff. I had to learn to get comfortable making 10K a trade. I had to learn to get comfortable making 20K a trade. And those were all little milestones that you go through in life, right? So you're worth it, and you deserve it. And if you're doing the damn work, think about it. And if you're in a name that you've bought and you're up 3R, why can't you move your protective stop to 2R? And stop getting or walking away with 1R gains? Why is there such a pullback? Because tactically, that's easy to do. Emotionally is the issue. Like emotionally, why aren't you doing it?

• 13:30Speaker 00

  Are you watching it? Are you stalking it? Because you can't steer it, right? So just put your stop in and let the market go where it's going to go. But you can double your gains if you just move your protective stop to 2R when you're in a 3R situation. Or you're up 3R from, you know, like if your R was 1 and your $20 stock went to 23, don't sell at 21, like move your stop to 22. So again, all the tactical things are super easy. You could read them, they're black and white. It's like, you know, looking at a spreadsheet. It's dispassionate. But what's key here is to understand why do you do what you do?

• 14:14Speaker 00

  What emotional needs are you fulfilling by taking the actions that you're taking? Because if you're doing a trade, you know, how does that help you financially? If your goal is to grow your money, then feeling good about it is not really part of it, right? When you think about your goals. So learn delayed gratification. There's a lot of stuff written about it psychologically. I'm not a psychologist, but I know, because I've been doing this coming up on 40 years, right? So I know that that's a huge part of it. I don't need a PhD to talk about it. Anyway, please like and subscribe. And if you haven't already, getting a copy of the audiobook version of The Inner Voice Trading, go to Trader Mindset, you can get it for free. Thanks for being here, and I'll see you tomorrow.