How cutting winning trades hurts you

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• 0:00Speaker 00

  Hey everybody, it's Michael Martin. So following on yesterday's conversation, which was, you know, what's the hardest trade in the market? I don't think they meant it literally. It's like, just from a figurative standpoint, what's the hardest trade to pull off time after time? I wanted to speak to now about your long-term success and what the impact is of, you know, cutting your winners too soon. And the first thing it does is that it absolutely destroys your long-term progress. It destroys also your expected value, the expected value of a trade.

• 0:40Speaker 00

  It feels good emotionally, but it really destroys your long-term expected value. What do I mean by that? Well, let's use a simple example. If you find you're in a position and, you know, you're constantly taking things off at 2 to 1. You're risking 50 cents, and every time it's up a dollar, you just take it off. Well, when you quarterize your wins that way, you know, look, can you make money doing that? Absolutely. And there's people who do it all day long, scalping. But on the other hand, if you went and you said, okay, look, you had the ability... See, because I look at entries, you can use, as a long-term trend follower, you can use scalping entries.

• 1:25Speaker 00

  They mix and match. You know, people kind of get confused when they're watching folks on YouTube, that, you know, there's specific things for scalping. The difference is, the rules can be applied to anything. The question is, how much time do you put in between your entry and your exit rules? That's really the only difference. But you can use scalping rules to enter. You could use overextended rules to liquidate, right? You can use your intraday scalping rules on having a runner and apply that to swing trading. The rules are easy to do. The question is, what's best for you? And what is your goal? If your goal is to grow your account, then the question becomes, at what pace?

• 2:10Speaker 00

  Because if you're kind of, if you're always taking your winners off at 2 to 1, you're never going to have a 3, 4, or a 5 to 1. And it doesn't matter what the frequency is. Saying that it's easier to get a 2 to 1 payoff misses the point, right? Your goal is to maximize every scenario that you put yourself in. You're already taking the risk. Why would you say, like, "I'm going to try my best, but if I get to 3rd place, that's when I'm going to resign." You know, you go to a jujitsu tournament, and once I get to a point where I know I'm in 3rd place, I'm not going to grapple anymore. What the fuck does that mean?

• 2:51Speaker 00

  So don't take 2nd or 3rd best if you can avoid it. Because, you know, especially when you're starting out, you don't know what your optimal trade is. You don't know what your A-plus setup is. The only way you know that is by experiencing it. So that takes into account what we spoke about yesterday with, what's the hardest trade? The hardest trade is to sit in your winners and to let them run as far as you possibly can, to sit on your hands, not look, not look at your P&L. I know there's been a 45,000 other people on YouTube who've said something similarly, who trade all different types of styles and asset classes. If you take your P&L off the screen, then it just becomes a question of the conversation that you're having with the market.

• 3:36Speaker 00

  Market's going to go here? Oh, and your answer is to, "I'm going to just adjust my protective stop over here." Then, okay, I'm going to listen and see what the market tells me. Market's going to go sideways. Okay, I don't have anything to say about that. I've already made my statement, I've put in my protective stop. Day or two later, the market resumes its uptrend. You're like, okay, now I'm back in conversation, and I'm going to adjust my protective stop higher accordingly. That's how I look at trading. It's just a forces that you're having a conversation with. The money part of it isn't something, anything, isn't really anything that you should use to determine your behavior. Your P&L shouldn't be part of it. But people get so excited about making money in the market full-time, it's hard to not

• 4:20Speaker 00

  peak to see what your parents got you for Christmas, if you know what I'm saying, or whatever, you know, holiday that you get into or celebrate. So, we always try to think about higher concepts here, rather than to look at stupid chart patterns. Because it's the human behavior part that's going to really make you the money, not the chart pattern, you see? And that's where, plus, it's all relatable. I've been in these situations, right? There's nothing that you're going to have to go through or feel that I haven't already gone through and had to, I don't want to say master, but feel so many times that it's become something that I've had to contend with.

• 5:04Speaker 00

  And so, when you're sitting back, trading however it is, because these rules are applicable to any trading style, any asset class, any holding period, and any use of leverage. That's what makes the message on this channel kind of universal. Again, I'm putting together a four-week cohort that's really going to accelerate everybody's trading. It used to be a 12-week program, and I'm constantly in touch with all my students. One of the things that we talked about was like, is there a way that we can accelerate stuff to kind of make more progress? Because most of the people are highly motivated. And I used to think that going it over 12 weeks gave everybody a lot of time, and it time matters.

• 5:48Speaker 00

  There are parts, though, that we can push to the back end, because they're more psychological, and they do take more time. So I've broken it up into several parts, and I'm putting together this four-week cohort that's going to really smash. The link is below if you want to get on the waitlist. But at any rate, let's come back to the, why that matters, is, your goal is to accelerate your growth as fast as possible. And so, cutting your winners is antithetical, right? You're cutting your winners, it might feel good, but that good feeling, in the short run, is kind of costing you from a better, bigger feeling in the days or the weeks to come. You see what I'm saying?

• 6:31Speaker 00

  And I had to learn that, because, again, it was a different environment. I know everyone, you know, thinks that it's different for them, and it's really not. Like, sitting on your hands is an emotional situation that traders from all generations had to have contended with. Sure, there were different concerns about commissions and slippage and spoofing and high-frequency trading. Every generation's going to have its issues to have to contend with. But the feeling of sitting on your hands when you're in a winning trade is pretty much a universal feeling that many, many traders across generations, you know, have to contend with. They all have to deal with it, or they had to deal with it at one point.

• 7:16Speaker 00

  And it's not to be cavalier, and it's certainly not to be reckless, because we're not talking about saying, "Throw caution to the wind." What we are saying is, what I am saying is, when it comes down to the market behavior, you're in conversation with the market, and you're going to have a response. That response is going to be to adjust your protective stop, right? So that you can maximize your upside. See, my goal is to get you out of the 2 to 1 thinking, so that you at least embrace the possibility for something that's a lot more asymmetric, like 3, 4, even 5 to 1. You can't predict 5 to 1s. And no one can predict the frequency or the magnitude of how many of them will show up.

• 7:59Speaker 00

  When the markets are ripping, there's a lot more 5 to 1s. When you're looking inside of a sector, there's a lot more 5 to 1s. So, we have to get out of the thing like, "Well, Michael, the 5 to 1s are so scarce, I'm just going to take the 2 to 1s anyway." That, to me, is bad math. You don't know the math. Because it's still, it's not predictive. Obviously, for something to go to 5 to 1, yeah, I get it, it has to have been 2 to 1. But what you want to start to study, if you want to get into the math, would be conditional probabilities or Bayes' theorem, for example, and say, okay, every time something gets to 2 to 1, right? Or if I know in my trading that, say, 25% of the time, when I put on a trade, I'm going to see a 2 to 1 payoff.

• 8:44Speaker 00

  It might be more, I'm just making up a number for you. So then you say, okay, given the known probability of the frequency with which I see a 2 to 1, what is the likelihood, then, of 3, 4, 5 to 1? And when you start to look at those things, now you can start to model your behavior, because now you kind of know within reason, from a probabilistic standpoint, the kind of conversations you're going to have with the market, and then what you need to do from a behavioral standpoint, and either taking some profits off the table, or worst-case, keeping the, not worst-case, or a second scenario where you keep the entire position on, and you just continue to raise your protective stop each successive day in trading. Anyway, appreciate you all here.

• 9:27Speaker 00

  Check out the cohort if you want to join, and I'll see you. Have a great weekend, I'll see you Monday.