Mentally prepare for larger gains

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• 0:00Speaker 00

  Hey everybody, Michael Martin. Thanks for being here. So, let's take a look at what I meant yesterday when I was saying like you're sitting on large gains. There's nothing reckless about it.

• 0:14Speaker 00

  You can systematize the rules. So let's take a look at a few things. Let's say that you were able to buy like right in here and you got that breakout. And you set your initial protective stop, let's say below these lows. Not terribly uncommon, right? So, let's say that every one of these bars is like, say it's $2, right? So after a breakout, after the second day was a big range day. Look at this day right here.

• 0:46Speaker 00

  What's weak about that particular day?

• 0:50Speaker 00

  So in my mind, what I do with days like that, it compels me to take everything home overnight. Some of you are going to look at me and say, "You're damn crazy." But let me clean this up a bit. My thinking is this. Here's the low. And if you look at that, the high and the close are virtually identical. The wick is so small, you can't even see it.

• 1:17Speaker 00

  So in my experience, although yes, you can have days where you give some back, like here,

• 1:26Speaker 00

  more times than not, it works out for me. So, I don't mind risking some of those gains, like maybe half, right? So that if I do have this type of a structure, and this is obviously a reversal, so it's not the best example. Here we're in a run. But think about where you would put your protective stop. Now, at the same time, when the thing is ripping,

• 1:59Speaker 00

  what I'm talking about is adjusting your stop up at least once, and then adjusting it up a second time. I'm also saying, "Don't sell anything." Right? So that's the difference between what I'm saying here and what you might see on other channels is, depending on what your goal is. If your goal is to grow your account significantly, it's hard to do that when you're constantly reducing risk. It doesn't mean you have to be reckless. And as you can see here, I've changed my stop, you know, severalfold. Twice, changed my stop twice.

• 2:44Speaker 00

  In the old days, I'd also have added, right? But if you look at the way this market is working, look here, on these particular days, market closed on enormous amount of strength. And if you look at what happened, let me remove some of this stuff. Look at how strong those days were. And even the next day was nothing. This thing was on a rip. It was on a real campaign. So if you're in a make it and take it world, right? You can't buy this breakout like here, and then sell like the next days. Because this is all now opportunity cost. You've left a lot of money on the table.

• 3:27Speaker 00

  You won on the trade, but you should have low self-esteem because you handled the trade poorly.

• 3:34Speaker 00

  There's no reason to get out of your winning trades when they're making you money. Because sometimes they might not happen all that frequently. So what you can't do is get in here, for example, set your protective stop here, have the market rip, and then you keep this same protective stop in. I see this all the time. Bought a stock at 40, the thing's at 70, I still get my initial stop in at 35. Can't do that, right? You have to make adjustments, which goes under the chapter of the book of trade management. You know, what do you do when you're in the trade and you're making money? I think you got to learn to be, keep your calm, and not freak out when you're actually making money.

• 4:20Speaker 00

  So, if you buy this breakout, right? And the market is on a campaign of strength, you can see that it pays you to take it home. Now, in that sugar trade that I did a while back, and the market was going parabolic, like it kind of is here, my goal was to try to keep at least half of the previous day in keeping with my style of trading, and also with my wanting to stay in winning trades for as long as possible. Yes, I know that by not taking off profits, I subject myself to these types of days.

• 5:03Speaker 00

  But I have very strict rules that, you know, and I'm watching the market. It's not like I'm not paying attention and just, you know, being reckless. So at each of these instances, you know, I would adjust my protective stop up so that as I came home overnight, I like, "Okay, I know that this is where I'm going to get out." Then if the market opened slightly lower and then ripped, I'm like, "Okay, now here's my new spot."

• 5:31Speaker 00

  And every time it would go up, I'd keep making these adjustments so that if the market did come back on me, I would just get knocked out. Now, in that case, it probably wouldn't have happened until this particular day. For example, um, why? Well, because this is the actual, that first, let me clean this up a little bit. That's the first real reversal day, when you think about the campaign, right? That's the first day where it failed to put, it put in a new high, it opened here, put in a new high, but then came back.

• 6:07Speaker 00

  So then you wiped out the entire day. I would, I don't, I have a rule that says, "Don't give all that money back." Whoops.

• 6:17Speaker 00

  So I try to keep at least half of the previous day's bar if I can. Because I have to get paid. I come from a working class background, and I know I need to have a certain amount of money coming into my account for the work and the risk that I'm willing to take. Now, it doesn't have to be big money, but that's what I do. And I constantly adjust my protective stops higher. You can finesse this to make it work for you.

• 6:50Speaker 00

  What I do is I try to say, "Hey, is half reasonable?" Some of you might be able to get better timing, you might look intraday, this and that. But my take is, I want, I don't, I'm not smart enough to know. Because right, there's no structure here, right? There's no Stan Weinstein base. There's no structure. So you have to use a dollar or a percent-based stop. And so what I'm looking for here is a reversal day. Where is the reversal day? The first one shows up right here.

• 7:29Speaker 00

  Right? So, that's kind of what happens. You know, in this case, I probably would have gotten knocked out on this particular day here if I was part of this move here, right? So let's take a look at that one.

• 7:49Speaker 00

  It wouldn't have been out over here, because look at this wick. I would have gotten wicked. I probably would have gotten knocked out somewhere here, which would have been the low for the day. That would have pissed me off. But that's the way it works. And then all of this is kind of messy to trade anyway. And then the market finally gives way, puts in a lower high here, a lower high there, and then it's off to the races. So sometimes pictures can be more helpful than just words.

• 8:16Speaker 00

  But that's what I do, is once I have my entry, your initial protective stop, once it starts ratcheting up, definitely going to go to at least break even, and then I'm going to trail. If there's structure, then great. But in this case, there wasn't any, so you had to use a price or a percentage-based stop on your equity. And you know, lo and behold, that's how it would work. So that's kind of how I think you can carry larger gains when you think about, you know, putting these types of trades on, as long as you're measuring your protective stop.

• 8:50Speaker 00

  You can have a runner with a bigger position. You don't necessarily have to take off half or a third or this and that, as long as you're acting in concert with what your goals are. My goal was always to grow my money, you know, in a larger fashion, because I was so broke. So, over the years, I developed a system that made sense for me that yeah, there were instances where I gave more back, where if I had sold half or part of the position, okay, I would have probably kept more.

• 9:34Speaker 00

  But the thing is, that's, to me, it's when you think about the expected value. If the thing didn't show weakness, I'd want to stay with the trade for as long as possible. Because I didn't want to try to say like, "Again, oh, okay, the market's up here. This is a reasonable amount of return." Like, "This is as, whoops, this is as good as it's going to get." "Oh no, this is as good as it's going to get." So you can see, trying to guess where market tops are is a bit of a folly. And if the market's closing on strength, it pays you to take the risk home overnight. Obviously, you got to pull a Stan Druckenmiller and you got to watch it. You know, and he said, "Put your eggs in, you know, a few baskets, and then watch the baskets very carefully."

• 10:18Speaker 00

  So again, depending on what your goal is, if you want to be right, you can focus on taking a lot of trades, this and that. But the idea is, is that sometimes the market gives you these runs that you have to participate in. You know, I'm not talking about using excessive leverage. You know, you can follow it with, you know, Bill O'Neill's advice. But let your winners run, so that when they do run, you have the whole position on, not only a quarter or a half, right? You might find that you, even though from time to time, you might take a bigger loss than you want. If you do that over 20 trades, you're going to have more money. So think of it that way. Anyway, have a great weekend, folks.

• 11:01Speaker 00

  And don't forget to get your copy of The Inner Voice Trading at Trader Mindset. And I will see you, have a great weekend, I'll see you Monday.