Learning to sit on profits

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• 0:00Speaker 00

  Hey everybody, it's Michael Martin. Happy Thursday. So, I wanted to talk to you about sitting on profits today. There's a lot of back and forth about, you know, when to take your gains, when to move your protective stop. And there's a piece of it that I didn't speak about, and it's not because I wanted to withhold it, but I wanted to share it with you. You can go through charts and backtest and use the simulator. I think you should use the simulator more, in fact.

• 0:29Speaker 00

  But there was one little trick that I did. It was a mental trick that I did when I was starting out. And I started to grow my money. You see, I was... My account was very small. I had, back in those days, about 5K. In today's dollars, it's about 13,000. I've mentioned that before on the show. So I didn't have a lot of room. So I had to create a crazy goal, and I didn't know how to do it. But this is why this mental game stuff that I talk about works. I needed to grow my account fivefold, and I had no idea what I was doing. But you can't, when you set a goal for yourself, you can't say, like, "Well, I don't know how to do that, so I can't set that as a goal." If that was the case, we'd never make progress, right?

• 1:14Speaker 00

  So I had to think to myself, like, "How hard can this be?" I know that there are hedge fund people, and they're really good speculators. I had read the history books.

• 1:26Speaker 00

  So I knew it was possible because other people did it. So then I have this gene that says, like, "How hard could it be? If I can figure out that process, I can reverse engineer it and then make it work for me." Problem was, there wasn't any internet. Number two, I didn't know any proprietary traders. Three, I didn't know. I knew a couple of hedge fund guys that I had caddied for. But you can't go to them and say, "Hey, can you help me? Can you teach me how to trade?" I mean, you could, but that was a little bit out of bounds.

• 1:55Speaker 00

  So here's what I did. In terms of learning to sit on profits, because the thing about sitting on profits, technically, you know what to do. You can use volatility, you can use ATR, you could use highs. And when all those things occur, any of them occur, you just adjust your protective stop higher while you're in the trade, right? That's one way to do it. But the thing is, is like, when I think when people ask what they're not saying, and I always listen emotionally. I don't think about what people are saying. I'm always saying, "Why are they asking me this?" Or, "Why are they saying what they're saying?" And that's the part that I want to answer today. You have to culture the pearl and train yourself to feel comfortable with bigger numbers.

• 2:41Speaker 00

  Now, I came from a working-class background, and I had made a lot of money, you know, working hard. But I was exchanging my time for money. So by the time I got to Wall Street, it was a completely different culture. Because I didn't know how to use my brain. I didn't know how to create and effectively have intellectual property that I could put to work on any given day.

• 3:04Speaker 00

  So that was all very, very new for me. There's a lot of psychological stuff going on there. Cool, because I was like the first person in my nuclear family to have a white-collar job. So I felt like, "Wow, am I rejecting my parents?" You know, all this and that. I feel like a bit of an impostor. But at the end of the day, I had to learn to think about bigger numbers. And so you start thinking, like, "Okay, I just made 500 bucks on a trade." Okay, that's typically what I could make on a weekend, waiting tables and caddying golf bags collectively.

• 3:36Speaker 00

  So you're like, "Oh, that's pretty cool." I didn't have to do all that labor. I didn't have to put on the sunblock, have to put on my rubbers to go out early at a 6:43 morning loop on the golf course. So I just were able to create this abundance without having to do the work. And that was a culture shock for me as well. Because I knew I was bright, I was a good student, but I didn't know how to make that transition. So then you start growing your accounts. I'm getting a little ahead of myself, but I want to continue the theme, where, you know, you might make a couple thousand bucks a month. I think my starting salary was like 26K. Hello.

• 4:16Speaker 00

  And so when you start making those equivalents in trading, it could mess with you. So what I did was to help understand how this was gonna... how I was gonna feel, and then also what I was gonna do. Because it's not just like, "Okay, I'm gonna raise my stop, or I get to one ATR profit, I'll sell half and raise my protective stop to break even." Or, if you really want to make money, sell a piece at 3 to 1, raise your stop to break even, so this way you'll always at least make money, not just break even. So there's all those little tricks that you can do. But what I know... What I needed... What I know I needed to do at the time

• 4:56Speaker 00

  was to put myself in the spot of having really gigantic financial abundance. And think about, like, "Okay, what would that feel like? Because the feelings are gonna affect my judgment. My judgment affects my behavior. Behavior predicts where you end up." Now, over time, of course, you can learn to have the discipline to feel the strong feelings, but not necessarily take action on it. But I wanted to work that out ahead of time. It was a bit of a mental chess game with myself. So I took out my spreadsheet, which was Lotus 1, 2, 3, and put my numbers in, as I would always do anyway, and keep track. And I'd say, "Okay, if I'm looking at the chart and it goes to this position, what's my sugar or cocoa gonna be worth? What's my GE or McDonald's stock gonna be worth?

• 5:41Speaker 00

  And then, what's the profitability by position? What's the profitability by the portfolio? And then, okay, what would happen if these things pulled back on me? Where do I say, "Uncle," and get out, knowing that my commissions were 1% of the account for the most part, you know, transaction-wise? So I had to really do that mental chess game and condition myself to feel comfortable having larger gains, but with no evidence that the move is over, there's no particular reason to have to offset the trade. Right? So you go back, in our coaching, one of the things that we do, the first thing, in fact, that we do is set a goal. And the goal isn't to learn how to trade. You think it is, but it's not.

• 6:23Speaker 00

  What you really want, in my humble opinion, is some type of financial stability, where you can rely on yourself to have or to exhibit consistent behavior. Because that consistent behavior will start yielding consistent results in terms of trading profits. That creates financial abundance, and that creates kind of like a second or third version of you, where like, you can work for your money, but then your money can work for your money, right? So now you've got the best of all worlds. If your money works for you enough, you can get to a point where you don't need to work a job. You might want to keep it because they got benefits and this and that, and insurance expensive, and you might get retirement, you know, planning and things like that. That's all personal. But... So that's what I needed to do.

• 7:07Speaker 00

  I needed to find a way to get my money to work for me. And I always thought, like, "Okay, if I get from 5 to 6, that's 20%." In those days, the total return on the S&P was 12 and 1/4. Now it's like 9.8. I'm not gonna fight you on the decimal points, but it's down about... It's about 75%, maybe 5/6 of what it used to be. And so I was like, "Okay, well, let's think about the reasonableness, right? Because that's what creeps into your head." You're like, "Oh, okay, I want to be reasonable, because bulls and bears do well, and hogs get slaughtered." And you start to say that kind of bullshit stuff to yourself. There's no basis in reality. But when you don't know what you're doing, any idea sounds good, because you want to be reasonable.

• 7:51Speaker 00

  And I, as you can imagine, I am a tough dog to keep on the porch. I'm very unreasonable. And I'm very unreasonable with myself. I love the word "no." People ask me for shit all the time, and I'm like, "Can't do it, can't do it, can't do it." "Hey, can you help us build these fundamental models?" "Not my skill set." "Get AI to do it. Get AI to do it. What are you just giving me for?" So I needed to find a way to coach myself in the absence of not having other people who could do it, and put myself in the spot, and then feel those feelings in real time. So when people say, "Fake it till you make it," I had to act as if I had all this money. I had to act as if I had grown my account 100%. Because you remember, I wanted to go from 5 to 25.

• 8:36Speaker 00

  So I figured if I got to 25, then I would... I would be able to bifurcate my funds, have equities and futures, be able to hold, you know, maybe more reasonable positions. Because when you're small, you have to take bigger risks. That's just the way it is. There's only so much money that you have. So when I was looking at my 5K, and I had... I've told this story before. I probably had 50,000 of Notional, to be quite frank. And so I was very aware of the leverage, but I knew that I was gonna be able to add probably 200 to 500 to my account, so that would kind of help offset the commissions. Because I didn't want to not take losses, because the commissions would just add to the losses. And that kind of burned me.

• 9:21Speaker 00

  But... So what I would do is, I would go into the spreadsheet then, and I would mark those key inflection points and say, "Okay, if we get to a one-year high, that's gonna be this price. If that price is achieved, and I have the same position, here's what my equity's gonna look like." You know, when I sat there, I'd be like, "Okay, that would be, you know, $2,000 of unrealized gains that I'd have to sit with." But if you looked at the chart, there's nothing that says, "Okay, the market's turning. It's rolling over," right? Or, "There's a reversal day." So I was like, "Well, I just gotta keep it then." And so I conditioned my brain to not get psyched out when I had big gains, nor be in fear that the gains were gonna go away.

• 10:03Speaker 00

  I could count on one hand the number of times that I had a decent gain, and there was a surprise, right? And if you look at that over going on almost four decades, that would be like, once every eight years. So it doesn't make sense to be spooked out by something that's terribly infrequent, right? That's... In eight years, you have two leap years. So it's a very infrequent type of an issue. And I think that's why this channel seems to resonate with people, because I'm speaking about the things that you're feeling. And those strong feelings can undermine what your goal is. And if you start and you don't have a goal about what it is you want your money to do for you, then you're gonna have these hair-trigger responses about trading and being much more active than I think you have to be.

• 10:48Speaker 00

  Now, look, if you're working on a prop desk and you're a scalper, that's the environment that you're in. So, you know, you gotta probably do what they ask you to do, and you're part of that culture. Scalping didn't exist when I started. The only people who could really scalp were the locals, right? People who owned or leased seats on the commodities exchange, because they were the bid-ask spread, right? If they weren't grub-staked, you know, they could buy on the bid and sell on the offer. Obviously, market-making firms can do that. But those are extremely well-capitalized, you know, people who have lots of experience. When you're starting out this on your own... So the cutting of commissions, the compression or the elimination of commissions,

• 11:32Speaker 00

  in 2001, decimalization happened. So this is really what allowed scalping to happen. But if those two events, you know, the internet and,

• 11:44Speaker 00

  you know, decimalization didn't occur, the idea of scalping would have been very difficult. You could read the tape, and we did, when things traded in eighths, because there was only eight ways to chop up a dollar. And if you married that with your Level 2, it was a lot easier than it is today, I'll tell you that much, to read the tape. Anyway, I would sit there with my spreadsheet and start to look at, okay, here's my account. I'm up, but the positions don't look like they're rolling over. I can adjust my protective stop here, but otherwise, I'm keeping the whole thing, which was the goal. Because now it's like that entire position's gonna keep paying me. Why would I unwind it so soon in the process? Just because I made a little money and I met some emotional needs like,

• 12:28Speaker 00

  I made as much as I made on a weekend, waiting tables and caddying and golf bags. Call it 500 bucks then, not now.

• 12:37Speaker 00

  Okay, I'd make 1,500 a week cash those days. That's a lot of money back then, because if you do that at four times a month, you're at 6K cash. If I had to, I could live on 6K cash, for sure, a month. I'm, I have a very organized life. I don't need a lot of stuff, you know? And plus, I'm just taking care of me now. So at the end of the day, you get to that little bit of a mind thing where you're like, okay, I just made what I used to make in a month from caddying and waiting tables, based on my IP and my ability. It was a goal that I wanted to have. And now that I've hit it, I don't necessarily need to lock that number in to validate myself.

• 13:22Speaker 00

  And that's a hard thing, because it's natural to want that validation when there's...

• 13:29Speaker 00

  Where's my validation partner? Oh, that's right. It's the son of Sam, Red Dalmatian.

• 13:37Speaker 00

  The red gene, don't forget. Red Dalmatians occur in nature. It's a recessive gene. Actually, Rover's going away. I got more paintings I gotta have dry. So Rover's gonna go. Someone wanted to buy it. So we'll see. Anyway, and that mental exercise of conditioning myself to be like, okay, now I'm at 5K. I went to 10K from my futures trading and my stock trading, net of all the commissions. I'm like, okay, now I'm at a double. So what I did was, and this is a good little takeaway for you. You can meditate on this. I'm like, okay, 5 to 10 is 100%. But now, I only have to go from 10 to 20, which is another double. I've already done that. What did I have to go through?

• 14:21Speaker 00

  And I'd go look at my journals about the things that I did, also the things that I felt. What did I feel at these key inflection points? And how did I fight the urge to go to safety? Right? Because the urge to go to safety can sometimes undermine you. I have always said that if you're putting on a trade because you want to feel good, it's not a good trade. It's not a natural thing to go into risk. You know, when you think of our fight-or-flight mechanism. You see what I'm saying? So I had to condition myself through these mental exercises to put myself in that spot and say, okay, now you're up 100%. If you locked this in, you'd have the statements. And you could say that you're up 100% on your account. Obviously, it's 5K, so it's not a lot of money. But you did it.

• 15:05Speaker 00

  And if you want that validation, thank God, there wasn't social media where all these idiots are peacocking. Like, who cares? I thought, well, this is a personal goal. Yes, there were naysayers in the office who were parroting crap, but they didn't even know what they were saying. Like, you can't time the market. You gotta buy and hold, blah, blah, blah. If it was easy enough, everybody would be doing it. And I always just thought like, well, that's stupid, because now you're taking a generalization and you're putting it on me, as if you have an understanding of my expected value. See, I always knew what I was worth. I knew my expected value. Plus, you know, speaking about yesterday's, I knew what I was worth and I knew what I was willing to do. Plus, I had a track record of success.

• 15:49Speaker 00

  I had a track record of hitting my goals in almost everything that I wanted to do, from sports to academics and this and that. And so I had a high level of self-esteem and I believed in myself that I could pull this kind of stuff off. So I was like, well, how hard could it be? I'll just dive in. I'll envelop myself in the process. I'm gonna fail. But I'm one of those people who, I don't want to sit around and overthink everything and build out this, take six months to build out a strategic plan. I want to get into the mix. That's why I said earlier this week, like, I always follow my hunches. Because if nothing else, I'm gonna learn from it. I don't care about the money. I want to learn about myself, because self-knowledge, to me, is more important than what you could learn about the market, right?

• 16:32Speaker 00

  75 to 90% on average is like you in terms of trading. So you need to learn about yourself. And I just had that early understanding of how processes worked. A lot of it is determination, persistence, having grit, you know, being able to believe in yourself when you can't see the realities of what's out there. Right? That's, you know, what are we but for our faith? So I had faith in myself that I would eventually figure it out through nothing other than trial and error. And then, so I worked out the math. And I said, okay, if I did from 5 to 10, that's 100%, that's a double. But now, 10 to 20 is only another double,

• 17:15Speaker 00

  and I've already done that before, so it's scalable. Then going from 20 to 25 is only 25%. So I kind of built it out in my mind, like, that's really not that difficult if you break it up that way.

• 17:27Speaker 00

  And people were like, how did you do it? And I was like, well, I just set the goal. And I figured if I could knock this thing down in like, $1,000 to $2,000 chunks, how many of those would I need to get from 10 to 20? And when you think about it, even if you bought 100 shares of a blue-chip stock and it went up 20 bucks, there's your 2K, right? So then, when I had more money, I could buy more shares. I'd buy 200 shares, buy 250 shares. So now, it's like, oh, okay. I see where he's going with this. Every four bucks now is 1,000. So if, you know, if you'd had a $50 stock and it went to 60, that's 10 bucks. So, you know, 10 bucks on 250 shares. So I started to use, obviously, I was using Reg T. And with futures, you know,

• 18:12Speaker 00

  you were afforded the built-in leverage. So the, and I used the softs, coffee, sugar, cocoa, cotton. They weren't typically in the headlines. So I didn't have to worry about waking up in the morning and the newspaper having a story that would tank a market or make it move against me if I was mostly long. And in those days, the newspapers mattered again, because there wasn't any, there was like, The Economist came out every week. The Barons came out every Saturday. And then you had the D-section of The New York Times and the C-section of The Wall Street Journal. Those were your major information sources. There weren't screener, there wasn't Finviz, there wasn't a Trading View. There was a Bloomberg in the office, but that was, you couldn't sit there all day.

• 18:58Speaker 00

  So I looked at those. And then I just, I worked out the math, mostly with the associative property of mathematics, and just believed that I could pull this off and then made the numbers much more reasonable.

• 19:12Speaker 00

  Right? Even when 5K went to 7,500, I'm like, okay, that's good. I'm up 50%. If I doubled from here, I'm at 25. So I'd always work out those numbers and say, okay, how hard was that? What did I have to do? And I learned that, in many ways, the making of the money came from sitting on my hands. Yes, I adjusted my protective stops. And sure, I got knocked out of trades and it was a pain in the ass and it aggravated me. But I didn't sell big winners because they got too big, is the point I'm eventually trying to make. I wasn't afraid of the big numbers. I needed them, because that was gonna set me free to give me much more space, right? And later in life, you know, I do a bit of a webinar where I talk about how I took all of this information and when I had a rollover,

• 19:57Speaker 00

  a 401K rollover account with like 50K in it, and I happened to be in the right place at the right time, and, you know, the market ripped. I actually had three markets ripped. They just happened to be all commodities. But in 05, 06, gold, sugar, and copper all ripped. And that account grew like sixfold in nine months, using all the tools that I had built out for myself, you know, in this discussion that we're saying today. And the best part is that that part of it was tax-free, because it was a rollover account. And those instruments, they all ripped. They all went parabolic and doubled. So Zeno was heavily invested.

• 20:42Speaker 00

  So I go to that. That's the second stage where I walk through that, like, okay, what was I thinking? Because I was betting, you know, 2% to 5% risk units to start. Then, once that account doubled and I had the money to give, I was betting 5 to 10. So I had $5,000 to $10,000 losses on what was now, you know, probably now $100,000 account. But it teaches you when to scale, how to scale, and then think about it from an expected value. And then, what's the, how many times, you know, if you're pulling, you know, 40, 50, 60K out of markets as winners, then a $10,000 loss isn't that bad. But it's all the mental game part of it, to put it into context, to put it into perspective.

• 21:26Speaker 00

  That's, you know, that's one of the, a webinar that I teach. So you have to take the thick with the thin, just like I do. The market doesn't care about your background, where you went to school, this and that. But if you do the work and you take the actions, the results are gonna come. That's one thing I absolutely understand. Praxis is the belief, or marrying your belief with your behavior and then your inner mojo, your sense of determination, your sense of self-worth. Are you worth it? A lot of people have shame around money. They don't think they're worth it. So they sit around taking small gains all the time, living in a world of accuracy. There's nothing wrong with it. But it's hard to grow your money

• 22:10Speaker 00

  if every time you find yourself in this very abundant situation, you're going to cut risk.

• 22:18Speaker 00

  So know what your goal is. I didn't care necessarily. Once I understood expected value was the name of the game here, I didn't care. I just wanted to define my edge and then let my winners run and let the market do the heavy lifting and do the work. Because I had become exhausted from doing the physical work. Anyway, tomorrow, we're gonna talk about, and I'm gonna show you, when you're in these trades and they start to move, what do you look for in order to kind of stay in the trade? And, you know, if you want to see that webinar, you know, drop a comment in the video here. Thanks very much for being here. Please like and subscribe, and I'll see you tomorrow.