How to find your optimal trading strategy

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• 0:00Speaker 00

  What's up, party people? So, a question came in and said, "Mike, could you give a description of like, uh, your A+, your A, your B, your C, your D trade?" And I was like, overwhelmed. I don't have all that. I don't, and I think, I don't think you should either. I mean, if you're starting out and you're, you know, lacking in success that you wanna have, you know, trying to trade five different setups and then having, what, three, four, five names for each one? Really puts, puts a challenge to you that's extraordinary. What I would do instead is focus on one or two things, like you might not trade every day, and I certainly don't trade every day.

• 0:44Speaker 00

  I don't wanna, right, first and foremost, the, I have a lot going on. I don't have eight hours to sit in front of a screen all day. And even when I do trade, I typically put on a starter piece, kind of like an appetizer, bring the bread and the water, kind of a thing at the restaurant, and then I'll gradually add. I'm not concerned about getting something on and then taking the risk off at the end of the day. That's not, that's not what I do. I'd rather have the market do, you know, the heavy, the heavy lifting. And I'd reinvest my, uh, my unrealized gains into my protective stop, usually after I add. So, so think of that as like, the one thing that I do. And I'm fine if it takes several days in order to find, um, a candidate.

• 1:29Speaker 00

  I don't know, nor, nor do I really care how, how you find your success. But what I would do is, I would, I would, just like, when I remember I went to, when I started on Wall Street, there were four asset classes. I had to cut two of them, just to get my feet underneath me, and I had to stick with, you know, stocks. And the reason I looked at commodities is because I had been physically trained in commodities, but also because of the leverage. You know, because they were, they were low, low-priced, uh, commodities, coffee, sugar, cocoa, cotton. Low vol, low price and low vol meant low margin, right? The exchanges, in that case, it was Coffee, Sugar, Cocoa Exchange, down by the World Trade Center, um, they set the margins.

• 2:09Speaker 00

  Then your clearing member, your FCM, can either make those margins, those initial, you know, um, margins, not the maintenance margin call, but the initial margin call, they set those, and they could, they could keep them at the same level that the exchanges set them. Or, if they wanna kind of discourage the trading, they can actually make them more stringent, up to like a hundred percent of notional value, which is kind of a message to the marketplace, saying, "We really don't want you trading this stuff at our firm." And, I can remember, they did that. I, I was at a, a small place called Smith Barney Harris Up Ham, there was like, twenty-eight-hundred people, at the time, at the company, and the margin that they set for the platinum contract was a hundred percent of notional value,

• 2:53Speaker 00

  which is saying, "We don't want your business." Because in that case, they take leverage out of it a hundred percent, right? It's like a stock that doesn't have, that's not marginable. So, instead of having three, three, you know, trading setups, you know, each one with three, four, five names, I would say, "Okay, which one feels the best? Which one do I get the best? And let me get this one down." Because you might be going to bed thinking, "Well, if I don't have all those, somehow I'm missing out." And I don't see the world that way. I see it as, you're working by yourself at home, you're not at a proprietary trading firm, you're not at a desk, you're working remotely, maybe for a few hours a day, because you probably have a full-time job.

• 3:36Speaker 00

  So, keep it simple, right? Find the one type of setup or strategy that really resonates with you. Hopefully, you can trade it for enough risk to make some money at it, and then keep as much of the risk that you can possibly withstand, with respect to what we were talking about yesterday, in terms of enjoying the suck, and doing things that you don't wanna do. Right? If you read, you know, the most recent Market Wizards book, you know, there was a couple of remarkable things in that. A lot of them tried to fade small caps, then they ran into capacity issues. So, they had to change, and they still succeeded there.

• 4:14Speaker 00

  So, that's why I say, like, you can learn how to do this, you just have to have the will to do it. You also remember, I've said, if you take an average person, I worked with a guy, I don't wanna mention his name, when I first started, and he helped me a lot. He went to high school, and then he wasn't able to go to college. Um, he was, he was a stand-up guy, an amazing guy. And he had to help earn money for the family. And so, he became a, um, a paper salesman. And, he was from a very tough neighborhood in Brooklyn. And where he wasn't academically smart, he was insanely street smart.

• 4:58Speaker 00

  And he knew how the world worked. And he was a great kind of upstairs trader, right? And the thing is, is that, once he started buying positions that started making money, because in those days, we were trading for commissions, right? We weren't allowed to take a piece of the profits. So, every time someone would buy something, we'd get paid. Every time they'd sell a position or short a position, we'd get paid. So, there's an old saying in that business, in that you're only as good as your last trade, just like in Hollywood, you're only as good as your last film in many ways. But here's a guy who was full of confidence, because he knew who he was, and he knew what he could execute, and he had a monster business that everybody in the branch admired. And he helped me out quite a bit.

• 5:41Speaker 00

  So, that's why I'm like, I was humbled so much by, by my, getting this job, because I thought that I came out and that my education was gonna matter, and it didn't. And I got schooled. Man, I got schooled up and down Third Avenue, right? And that's just the way that it works. So, I would take the time to just isolate one thing that you really resonates with you, and learn everything you come, you can, become the master of that. Because there's no reason that you can't become it. If it's cup and handles, boom. If it's an opening range type of trade, where you're looking at the pre-market and this and that, knock it out of the park, right? So, learn that one thing and master it. Once you got, why do I say that?

• 6:26Speaker 00

  Because for all the opportunity that you think you're missing, the opportunity cost to your confidence is immeasurable. It is ginormous. Because if you can take, like I said, a person of average intelligence, and infuse them with an enormous dose of confidence, that person's gonna become unstoppable. And even at that point, you're very well on the way to starting to hit your goals. It doesn't even matter if you have a B or a C or a D setup at that point. You dig me? So, get, so get to winning as soon as possible, because the winning part is infectious. Just like me, it took me, I never came back to foreign exchanges, I just don't want the, the busy twenty-four-seven kind of a deal. I did eventually take an awfully long time how to learn options.

• 7:06Speaker 00

  And they became handy, because, you know, whereas, when it like, the advent of electronic trading, became more and more of a thing, you know, you could execute futures contracts, buying and selling them, outside of what we would call outcry sessions. Stocks really don't have it that, in the same regard. Like, right now, it's eight o'clock in the evening, on a particular night, where I'm recording these, for, for the week that you're watching it, because I have to time-block my days. But the futures markets are open now. Stocks aren't. There's a window of time in the pre-market, and there's a window of time in the post-market, but it's nothing compared to futures.

• 7:51Speaker 00

  So, then you have to say, "Okay, if I'm gonna take a sizable position home in stocks, do I wanna do it with this limited risk? With like, say, a long put or a long call? Or, like, a long call, a long bull call spread, or a long bear put spread, right? Where it's a net debit balance, and I know what my max loss is? Because this allows me, as a tool now, to better manage my risk, in a way that I can sleep at night, and not worry about getting blasted. Uh, two, just as an aside, I typically don't make big bets in front of, um, you know, big bets in terms of earnings, ahead of time. I'd much rather wait for the number to come out, and then even pay a higher price in the aftermarket,

• 8:34Speaker 00

  and go home with a piece of risk, and see how to trade it the next day, right? That's much, much more, um, along the lines of how I'd prefer to do things. You might feel differently. But this kind of keeps things simple, and, you know, listen, my hat's off to you, if you're trying to find out four different types of strategies, all with different risk units, because of the level of success that you have, or the expected value for that particular type of setup. But, if you're like, two years into the business, trying to figure it out, and you're still not consistently winning, my, my answer to that is to simplify. Go back to where you've had some success, and then become the master of that one strategy.

• 9:16Speaker 00

  Because, look, you get another thirty years of this stuff, you can figure all that stuff later. You don't have to be a hero today. So, I, trust me when I tell you, I was humbled, I was schooled, on a, on a so many fronts, when I started to learn my trading career. It's not to say that you're not successful, it's to say that if you took a step back, to take two steps forward, right? That's kind of what I'm getting at here. Figure that part out, and you might accelerate yourself, and see yourself getting to profitability that much sooner, or consistent profitability, right? Because it takes a, a lot of time to figure out, if you're on to something. You can't look at five trades and say, "Eureka, I figured it out."

• 9:56Speaker 00

  Or, you know, "I only won, uh, my gains, I only won on two of the five trades." Like, then, at least you have something to work with, because then you're like, "Okay, if two, if I win forty percent of the time, what's my bet size? What's the expected value of that trade, right? If I did that one trade over and over and over again, I might be able to find something." And then, because then the scaling part, to me, for most of you, for the foreseeable future, will be much easier. It's not until you get into the, you know, over the ten-thousand-share kind of order, where, you know, you might have liquidity constraints. You see what I'm saying? So, at any rate, that's the message of the day. Please like and subscribe, and share this with your friends.

• 10:39Speaker 00

  And if you haven't gotten a copy of the audiobook version of The Inner Voice of Trading, you can go to Trader Mindset and get that copy. And, um, check out some of these videos on this playlist, you might like those too.