How frustration saves you from despondency and leads to profits

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• 0:00Speaker 00

  What's up everybody, hope you're doing well. My name's Michael Martin, appreciate you being here. I've been doing some shorts, so if you click on the tab, you can see the shorts there. Today I want to talk about an email that I got and a couple of comments I got about

• 0:15Speaker 00

  how to develop the discipline that you need, you know, in order to honor your stops. Now, we're in a market where it's a little choppy, right? Some of the names that you're in, they're getting banged around, I get it.

• 0:29Speaker 00

  But don't sleep on this. The key to getting great results as a trader is sticking to your discipline. As frustrating as it might be to kind of get knocked out of all the trades that you're getting your hopes set on, you open up yourself to lose a lot of money. And that's the worst place to be. It's one thing to get knocked around and whipped out of trade for like paper cuts, right? But it's a whole other thing to lose 10% of your account on a trade because you didn't honor a stop or you had a protective stop in, but it was getting kind of close, then you lowered the sell stop. And nothing good comes from that. I know it's aggravating and frustrating to get knocked out of a trade.

• 1:11Speaker 00

  I know it's even worse to get knocked out and watch a thing rebound, but you know, we're in that kind of market. It's also December where you might see, you know, I'm not a conspiracy theorist, but you might see window dressing style trades where institutions are pushing size around either up or down depending on, you know, their positions. Keep in mind too, that sometimes they might be short a certain name, but they might be long another name like a pairs trade. So it's not necessarily, uh, there being short isn't necessarily a dig on your stock per se.

• 1:46Speaker 00

  But you'd really, your job is to protect your capital, right? And I've learned from all these guys, all these market wizard types, a couple who mentored me, some I'm in business with. And at the end of the day, they all say the same thing, like, the goal for traders to develop a system with which, you know, he or she is compatible, right? And two, Even if you're hell bent for election as a speculator, your number one job is to play superior defense.

• 2:15Speaker 00

  That's what makes you a pro compared to the amateur, you know, crowd who are just kind of, I don't want to say they're throwing darts, but they don't typically have a plan. They're trading memes, they're trading hype, they're trading probably what they see in the media. You're a little different, you know, you're using some type of a screen. You probably have a very deliberate, an intentional position size. And you have to understand, look at it this way. Say you have 100 trades. And of those 100 trades, you have 60 to 70 of them that are tiny little paper cuts. And then the rest, say 30 to 40, are ones that make you money. Anywhere from like a quarter point to, who knows, 20% on your account.

• 2:59Speaker 00

  100% of those trades are great trades. Even the paper cuts. There will be times when you get knocked out. There will be times when you put in protective stops and the markets run away from you and it's nothing that you have to worry about. You start making money right away. I don't know that we're in that kind of environment right now. But I do know that, and I've seen this happen before, people, you get aggravated. And once they get aggravated, they start to try to tell the market how things are gonna go.

• 3:29Speaker 00

  Well, trust me when I tell you, you're gonna lose that fight. And it's gonna put you in an even worse kind of situation mentally. And if you lose your money, you've lost your capital or some of it. It could be destabilizing, right? And now you're trading with scared money, right? And you've lost your confidence, if you had any. So, someone asked on YouTube, you know, how do I develop that type of discipline? Well, imagine losing 10 to 25% of your account because you didn't feel like putting in your stop, you know?

• 4:02Speaker 00

  Statistics play a big role in this.

• 4:08Speaker 00

  Just because you haven't gotten smashed over the head with a big sizable loss because you either didn't put a stop in or you didn't honor it and/or you renegotiated it, you could be doing what we call resulting. In other words, you say, "Well, how bad could it be? I haven't put in stops and never gotten dinged, if you will, on my account." But at the end of the day, so therefore I can say that that process is bona fide. That's like saying you could take all your money and put it into, you know, one particular name. And I, you know, I believe in concentrated positions, but not 100%. You know, you put all your money in Nvidia or Bitcoin, you might make some money, but

• 4:53Speaker 00

  just because the outcome of that was favorable does not mean by any stretch of the imagination that that was, you know, a valid strategy to start with. And so imagine losing, like I said, a five to, I don't know what's sizable for you, but whatever would really put you on tilt, you can avoid that financial smashing and emotional smashing by starting to put in your stops. And if you're aggravated about getting stopped, then trade smaller. If volatilities have increased, then trade smaller and then make a wider stop. But I think it's a very risky proposition to be in the market and to not put a trade on and then honor it with a protective stop.

• 5:36Speaker 00

  You know, there's things that we have to do as traders to preserve our mental capital. And I think trading, putting protective stops in is one of them because when you get smashed and you end up losing more money than you know you should have, you start to say things like, "I shouldn't be here. I have no business being here. This shouldn't have happened to me." And you're right, but the thing is, is that it's your responsibility to own where you put that stop for whatever amount of inventory, right? There's no one but yourself to have to, I don't want to say blame, but you don't want to put yourself in a spot where you say, "Man, I should have known better." And this is one of those situations where I think you can avoid that.

• 6:19Speaker 00

  I always honored my stops because I probably didn't have as much money as you did when I started.

• 6:26Speaker 00

  One of the shorts that I'm doing, you know, I was starting, I started with,

• 6:31Speaker 00

  you know, well, it was 5K back in the day. It's about 13,000 in today's dollars. You know, there wasn't a lot of breathing room, but one thing that I knew was like, I knew that I wanted to get out of blue collar despair.

• 6:44Speaker 00

  And stop living in the Raymond Carver short story that I was living in and go and be in white collar once and for all. And so I said, my goodness, if there are rules to follow, which I didn't really know all the rules. I knew, I knew about finance. I knew cash had time value and this and that. But trust me when I tell you it was super aggravating for me because you're not paying any commissions practically. You're probably paying zero commission. I put stops in knowing that getting knocked out of trades, I was still paying, you know, not full boat. I get some bit of a discount working through my firm, but you know, getting knocked out of trades was a double whammy for me because again, the round turn was 1%. It cost me 1% of my account to trade.

• 7:30Speaker 00

  So I had to learn how to trade super small, honor my stops and then build into my winners and let my winners run. So that was probably environmental, right? Just like we are products of our environment. Where I learned to trade, anyone who kind of learned how to trade in any time in the eighties, that was the environment. The commissions were a factor that had to be considered. Nowadays you can trade like a banshee and it barely hits your P and L. But you know, for me, not to get in it, round turn commission was about 1%. In commodities, it was a little bit more. So I had to kind of add to my account every month. That was just the way it was, you know, I, I didn't like it. But those were the rules.

• 8:14Speaker 00

  And it's like, if you don't like the rules, then you don't have to play. But to try to say like, well, I'm going to play by my own rules and disregard proper tenants of, of risk management. You know, you're kind of playing, you're, you know, you're playing with fire on some level. I mean, you gotta be careful. I don't want to see anyone get hit. I don't want to see anyone get hurt. I know it's aggravating to.

• 8:39Speaker 00

  You know, to get knocked out, to get whipsawed. But trust me when I tell you like, if you put a stop in and you were risking say 2% of your capital, then you go ahead and you get knocked out. It bounces back up 1% the next day, but then it does nothing but sell off for the rest of the year. You're gonna be able to look back and think and say, man, thank God. And look at any of those names, right? Look at where, look at where you got out. You know, say you put in a stop at like, you bought something at, you know, 20, you tried to stop it at 19, and you did, it went back to 20. So now you're aggravated, but you're smart enough not to chase. And then over, you know, the next several weeks coming into, you know, New Year's Eve,

• 9:20Speaker 00

  you see the thing trading down to like 12, 13 bucks. So you get to pat yourself on the back in those circumstances. And trust me, I, I do that all the time and say, thank God for my stops. Thank God for my stops. Thank God that I don't have the stupid ego to think that I know more than the market. Thank God I don't have the kind of ego who sends, who wants to stand there and take in the teeth as, you know, the market sells off because I have strong conviction about a trade. You know, and you can see the setups, right? You can see the, the, the holders and the maxies. You know, I don't wish this on anybody, but you have to be objective. You can't fall in love with the story. You know, there's a high probability that any particular name that you're in could see a 50% drawdown.

• 10:04Speaker 00

  You have to remember at 180 bucks, Nvidia is a $5 billion company or something like that. So that means if it gets cut in half to 90, it's still a $2.5 trillion company. Oh, but Mike, it's trading at 25, 28 times next year's earnings. So what? I don't care. What does that mean? That there's a buoy? All I can tell you is, you know, watch, look what's happening to Bitcoin. It's the same type of a deal. You have to be objective. You can love the story all you want, but you have to love your own capital more. Because only you are gonna care about your account the most, more than anyone else in the world. So I wouldn't be careless with your risk management.

• 10:49Speaker 00

  That's where, you know, even if you don't wanna go pro, you kinda have to do the things that pros do if you wanna get their type of results. And you don't wanna be kinda right there, kinda clicking and just about to get stuff and then take a destabilizing loss. It'll set you back a long time. It might take you a couple of months to get over it and get it out of your head. You know, I can't say that I've been there. I've had worse things happen, like limit moves, for example, where I was in and the market jumped my stop. I couldn't do anything about it and I was in it. You know, I was, you know, I wrote about it too, cuz it happens, right? It's happened, I've had limit moves against me three times in thirty-six, thirty-seven years.

• 11:30Speaker 00

  Not enough to scare you out of the market, and I don't trade large enough at the beginning to have enough on so that it could really hurt me. But it's naive of you to think that those types of things aren't gonna happen. And there will be a name, I don't know if it's Nvidia, but look at some of them. Look at GBTC, look at ETH, right? ETH, ETH. ETH, look at Riot, look at RGTI, look at EOS Energy, another short squeeze. They've all had significant pullbacks, and if you weren't protecting your capital, you could've gotten smashed. I mean, they're down fifty percent. You can't afford, you know, investors can't afford those types of drawdowns. How do you avoid them? And all the mental crap that goes with it?

• 12:14Speaker 00

  You have to honor your stops. You could always get back in at lower prices, you could always get back in at higher prices. Sometimes you're gonna get shaken out. It's the way it goes. It can be aggravating, but I would rather be aggravated and lose my money and buy these little whipsaws than to not stop out and then be despondent because I'm down a big number on a position when I had every opportunity to get out and preserve my capital. Remember, you might be thinking you want a 1X, 2X, 10X your account. I'm with you, man. I'm here to help you. But you don't want a .5X your account. And the way you do that and insure against it is to know what your position sizing is and to honor your protective stops.

• 12:59Speaker 00

  The life you save may be your own, you know? So be careful. Don't be so cavalier just because you haven't seen a big smashing happen against you. Markets can move fast. They can oftentimes move a lot faster than you can bang out on your hockeys or do whatever it is that you need to do to enter, you know, your order to offset the risk. And I want to help you preserve your capital because it's hard enough to get in the first place. Trust me, I know that. Anyway, check out the shorts. And if you haven't gotten a copy of the audiobook version of the Inner Voice of Trading, my book, there's a link in the description. Please like and subscribe and let me know what you'd like to hear on the show. Thanks for being here. I'll see you next time.