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Transcript 0:01 Speaker 00 Hey everybody, it's Michael Martin. Thanks for being here. So the question came in, you know, what type of trader should I become, given the environment that we're in? It's a very whippy kind of sawtooth market, up and down and up and down. It's a make it and take it kind of market. So it's very good for day trading, right? Especially with costs being almost zero.
0:22 Speaker 00 And then it's like, well, what should I do it with stocks? Or should I do it with options? Or should I do, say, ES versus SPY? Or, you know, NQ versus QQQ? And those are harder for me to answer because I don't know your financial wherewithal and your level of emotional intelligence to seeing whipsaws in your account balance, right? Because those provoke you to, you know, sometimes take action when you otherwise don't have any, you know, training. But I think if you want to be like a man or woman trader for all seasons, the people who that I've looked up to and that also in my peer group,
1:04 Speaker 00 who are doing very well, in the younger group or the newer traders who have less experience, the ones who are excelling and doing very, very well, and who have done well, typically have a plan for every potential outcome that they can foresee for a position that they're thinking of putting on. And when I say thinking of putting on, it goes back to the art of war, that, you know, victorious warriors first win, then seek battle. So what do I mean by that? So say I have a stock, I'm going to buy it at 20 because its shares would be the best way to do it because implied volatility is like 185, right? So yes, you can create spreads and other things that you can use to take,
1:49 Speaker 00 you know, take advantage of the high IV. But let's keep it with a stock, right? So first thing you would know is, what is your R, right? What's your risk unit? How much capital are you willing to put up, right? If you follow Bill O'Neill, he says, you know, four, five, six names in your portfolio. So let's say you're looking at 100K. So you're thinking somewhere, you know, 20K is what you're looking at. Uh, maybe 15 to 25K, depending on your tolerance for risk. So it's not, you're not optimizing for contracts or shares, right? You're thinking allocation. In my experience, backtesting for the optimal number of contracts and/or shares is a fool's errand.
2:35 Speaker 00 You might find some different data, but look into that. So you're thinking percent allocation. This is how you're going to manage your risk percentage wise. Like, how much of that are you willing to risk? Right? So you put up 20K and you only want to really risk 1% of your portfolio. So that's 5%, right, of the 20.
2:56 Speaker 00 So you have to say to yourself, okay, so where's my entries? Where are my entries? Where are my exits? What, what do I calculate the position size if I know, right? So if I have 20K, I'll be looking at a thousand shares. You know, maybe risking a dollar or 50 cents. That kind of makes it tight. So then you say to yourself, okay, well, maybe that's too, that's too strong. I'm going to start with half of that. I'll start with 10 and then I'll add afterwards. That's also a way of doing it. But the, the traders that I've known over, over decades had answers to not just the quantity, right, the allocation of capital. They calculate the quantity. They know where their protective stop is. They know where the entry price is.
3:41 Speaker 00 Then they know also like, okay, let's see what happens. Let's get into the foreshadowing aspect of trade management, which is what you do once you're in the trade. So they envision, okay, what are the potential outcomes? If I have a stop at $19 and the market opens at 17, what am I going to do?
4:03 Speaker 00 Okay, if the market stays and I have my optimum position after two, three, four, five days, whatever that might be for you, and it stays around 20 plus or minus 10 cents, what am I going to do there? Indicating maybe using a time stop. If I get super lucky and the market shoots up and goes parabolic and we're anywhere from, say, 24 to 30 in a day or two, what are you going to do then?
4:36 Speaker 00 Right now, this can vary between stocks or options, right? Because obviously, options have a definitive end date. So you have to be a little bit more proactive. But you know, what happens if I'm in the thing then and it starts to tick away? But it stops and it starts to create a base inside of a stage two uptrend? For example, when do I add? Do I add to things when it pulls back or trades and the moving average kind of catches up? Right? Because that's a type of mean reversion. You know, it doesn't mean you're going to lose money. Sometimes it does, right? Stock could trade up and come back to a moving average and then resume. What are you going to do under that circumstance?
5:19 Speaker 00 Know that ahead of time so that this way you don't have to get nuts while you see unfolding. So if it goes super parabolic, what do you do? Do you sell piece? Do you sell all of it? Then do you wait for the moving average to catch up? And are you going to be okay emotionally if the thing continues to rip in your face? Right?
5:41 Speaker 00 Without you being in it is what I'm saying. So then you have to consider, okay, well, once it starts moving up, when and what and how do I move my protective stop up? Because I can't buy a stock at 20, have it go to 25 and still have my original stop at 19. That doesn't make any sense whatsoever. So now you're having visions of this thing going to 30, 40 bucks and you don't want to get knocked out, so you leave your stop at 19.
6:11 Speaker 00 You know, that's one way to do it. It's not advisable. Obviously, you should figure that out and talk to your financial advisor. I don't know. But at the end of the day, you know, you need to know what's going to happen at that point. And then by doing this, and there's a million other instances, right? Like, so then it rallies up, it's trading sideways, it's creating a base in a stage two uptrend. Where's your protective stop? Are you going to always trail it with a $1 stop? Right? What's the ATR? And then if there's structure, can you switch between an ATR or a percent-based stop? In many ways, those can be, those can be equal, depending on how you set things up. Or can you use structure? In other words, is there support right there? Right?
6:56 Speaker 00 Or are you going to use a close below a shorter term? Right? Using daily charts? Are you going to use the 10 or 20-day simpler exponential moving average? And use a close below one of those lines as your definitive exit? Then do you have rules for stalking? Do you follow your exes on social media to kind of see what they're up to? Right? That, to me, is kind of a self, you know, mutilation kind of situation. But, you know, I typically take the tickers off the screen for the most part when I was younger to avoid that look back or having a sense of regret. So I had to, I had to process my feelings like, okay, I caught the bulk of the move.
7:41 Speaker 00 Market tops get super whippy and volatile. And so, yes, it might be able to go up, but, you know, what, at what, where's the asymmetry at that point? You see? So when you answer all these types of questions, you can, you can think about the two outcomes to every trade that we've talked about here on the show. There's an emotional and psychological, and then there's a financial. So if you work through all those scenarios... Because this is what I did when I was younger. Like I said, I always had a strong inner voice. So I said, you know, this is my responsibility. I can't like, let's wait and see and see how it goes. That's a failure to make decisions and be decisive.
8:24 Speaker 00 The best people that I know, whether they're the newer guys,
8:29 Speaker 00 you know, or, you know, newer guys, meaning they have less than 10 years of experience, who are doing very well. Do you like, you know, more the legendary guys that everybody would know? They all had a plan for like, okay, here, if this is what happens in the market, here's what I'm gonna do. There's no negotiating that.
8:52 Speaker 00 And I might get it wrong once in a while, but I can't stop like Bambi in the headlights and not have an idea of what I'm gonna do and how I'm gonna execute. I need to have that all worked out. Right? Because the markets can move fast. You may or may not be using leverage. I mean, my take on that, just as an aside, is like, if you're having trouble making money with the cash that you have, using leverage is probably a bad idea. Right? So definitely use paper trades and that to kind of get your skill set down. Certainly get to know how to use the damn technology that you're trying to execute with. Right? Because the last thing you want to do is lose money because you don't know how to enter a sell order. Right? That's something that's amateur land.
9:36 Speaker 00 So you have to know that in advance. But I would work out all these scenarios and say, okay, if I get in, here are all the possibilities. It could gap up and get taken over. Right? Say there's a takeover thing and there might be a proxy contest. Do you just sell the whole thing? And if they say, we're gonna offer 40 bucks a share and it trades to 35, are you gonna try to hold on for the last five? Are you gonna buy it at 20 and sell it at 35? Right? What are you gonna do?
10:05 Speaker 00 And again, I've seen a lot of people lose a lot of money. And also, an enormous amount of opportunity cost by not having answers to that. In fact, I see it with almost every financial advisor and a client. They say, give me all your particular KYC, know your client stuff. You know, your age and number of dependents, your tax bracket. What do you make? What's your net worth? What's your liquid net worth? You know, blah, blah, blah. And we'll come up with an allocation model. And then they put the money to work. The advisor starts to earn their fee. But like I said, I think yesterday, that's just risk reduction. Where's the risk management part? That's noticeably absent in almost every conversation. Why?
10:49 Speaker 00 Well, because the advisor has to say, look, this is my best guess. As opposed to saying, which would have a lot of integrity. We might have to buy 20 different names to end up with 10. You know what I'm saying? Because we're going to get into some, we're going to get knocked out. Then we'll reallocate that money to the next best idea. While the winners are just going to work out right away. But those are uncomfortable conversations. So it's like, well, I don't want to think of the negative stuff. So let's just put the money to work. We'll let it go. And we'll see how it goes. And again, I talked about this, I think, a week or so ago, where I'm like, don't fall in love with the ideology. That's not going to save you money. How you feel about Bitcoin, right? How you feel about AI?
11:30 Speaker 00 Go back and look at the QQQ on a monthly chart and scroll all the way back to March of 1999 and look at that. Because that's kind of what we're seeing right now. Everyone's throwing money at AI. We don't know how anyone's going to make money with it. It seems super exciting. That's what happened from 95 to 2000, when people were so excited about the internet. It was so new. Everyone wanted to be a part of it. And risk management went out the window. We're like, well, we're diversified. Well, go look up, you know, Style Creep.
12:05 Speaker 00 So I would, I would have a plan for every possible outcome so that even if you're a discretionary chart reader, your decision-making process be very, very regimented. And even if you didn't get out at the top tick, it's all a learning experience so that next time you can refine those rules. But saying, "I don't want to do it now because I don't want to have to deal with the feelings of being wrong or the discomfort," it's not going to go away. These are decisions that you're going to need to make, or if you do thousands of trades, all of these scenarios are going to come up guaranteed 100% of the time, not necessarily for every stock. But if you trade enough times, you're going to be in a takeover candidate just by good luck.
12:48 Speaker 00 Two, you're going to have something that goes parabolic for who knows what reason. Three, you're going to have something that you're taking home overnight, even a modest amount of risk, and it's going to open below where your stop was. Just part of how it goes. If you trade futures, it's happened to me. I've had things long where I was all for limit down for several days in a row. It's happened three times in my career, less than, less than once a decade. But you have to have a plan for that. So this is how you can prepare before you start even taking classes and all that other kind of crap, is just to have an answer for those questions because then, you know, your behavior predicts where you end up. Right? So anyway, thanks for being here. Keep the questions and comments coming.
13:32 Speaker 00 I appreciate everybody, and I'll see you tomorrow.
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