Is it you or the market?

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• 0:00Speaker 00

  Everybody, it's Michael Martin. Thanks for being here. So, lots to catch up on, about 15,000 emails. I'm gonna declare inbox bankruptcy. Anyway, been away for a while, took some time to myself. A lot of emails to catch up on, so without much hesitation, let's get right to it. One of the most requested videos I've been getting is, "Mike, how do I know if it's me or the market?" You know? A lot of you are just starting out and you can't tell if what had worked for you for the past 3, 4, 5, who knows, 9 months, which is kind of the case, right? Has now stopped working, so how do I know, though? I know enough from watching the show that sometimes the style becomes, or the market becomes unamenable

• 0:47Speaker 00

  with how I'm trading. When should I give up on it, right? Versus, when should I just sit tight, trade smaller? It's a tricky question, right? But it's one that I get all the time, because it's the one that shakes your confidence the most, right? It's like for those, the blind who once could see the bell tolls for this. So, what I like to think about is charting your equity curve for this. Because if you chart your equity curve, you should, you know, you should be able to see it like you would see a stock chart. You know, is your equity going higher? What does it look like? Are you breaking out? You know, are you having sharp downturns? That kind of stuff. Most of the time, you know, we advocate betting smaller and looking for asymmetric payoffs. You know, 5 to 1 style stuff.

• 1:30Speaker 00

  Because, for all the work that you're gonna do, you know, you might as well get paid. You know, I'm a working-class kid, right? So when I go to work, at least I have it built in my mind that, you know, I have to get paid for, you know, the risk that I'm taking. And when I look at, you know, the markets, as we're sitting here today, it looks like a lot of them are rolling over. So when I can see that after like millions of observations,

• 1:59Speaker 00

  I know that it's not an environment for buying calls, right? It might be selling call spreads above the market, for example, or buying puts, or, you know, buying net debit put spreads, for example. But I don't want to fight the tape, and the quickest way I can tell... That's objective is if every day you just, you know, make a chart on whatever spreadsheet you're using, just mark down your equity. It's not good or bad, it is what it is. And then create a chart of it and you'll be able to see the slope. You know, what does it look like? You know, and then go back and use that as a tool to say, what did I do here to trade particularly well? And this can help you differentiate skill and luck

• 2:44Speaker 00

  over a longer period of time anyway. Now, look, I'll tell you, I'll be the first one to look you in the eye and say, there have been plenty of times where I was just lucky. I was in the right place at the right time and there's nothing wrong with it. What's harder to handle in those moments or to, you know, if you're playing detective, is to say like, okay, I was lucky for sure. But what about my instincts, you know, played a role in that? Right? Because I'm not new, right? I'm not new, but I still have luck. You know, I had those Exxon, I had a bunch of Exxon calls in early January. And I had no idea it thing was going to rip the way it did. You know, so, so I attribute that to luck in many ways.

• 3:28Speaker 00

  Like the, the trade paid off, but you know, with options to me, it's more like, a lot of times it's luck in many ways. The key is to not bet so much that you put your, you know, too much of your capital at risk, you know? I don't, I'm not looking for, I'm looking for asymmetric payoffs, but I'm not looking to make those crazy grand slams.

• 3:53Speaker 00

  Yeah, of course, I had that copper trade. Um, after President Trump made the, um, you know, when he put the tariffs on, the market was down 25%, it's like a 10 standard deviation move. So I did put on a very large bullish trade with options and I ended up losing. But it was one of those ones where if it paid off, I would have doubled my account. You know, if I do that 20 times, I'll be up a thousand percent. In that case, I lost, I lost, yeah. And that's the way it goes. You take your beatings when you have to, but at least I knew what the, what the, the loss was going to be at the end of the day I put the trade on. So that to me is like, you don't have to sign up for a service and start paying them a bunch of money. I think all those statistics are kind of cool,

• 4:36Speaker 00

  but it's not anything that you can't do on your own. Now, when I grew up, there wasn't an internet. And there wasn't mobile technology, so there was no app to solve any of my problems. So what I had to do was come up with my own solutions, just, you know, figuring it out off the top of my head, like, okay, what would a normal person do here? Or what would a person who I think is normal do here? And I was always one for kind of keeping databases and notebooks and tracking things. So it was very natural for me to use what was then called Lotus 123, which was the prevailing spreadsheet of the day. It was later bought by IBM and put into a, I think it was like, they had a program called

• 5:21Speaker 00

  Notes, but nonetheless, they've now discontinued the thing. It was very good, slash file save. And I would keep track of like my trades and kind of estimate, okay, how much could this move to the upside? What was the downside? And then look at that ratio and say, okay, for the money that I'm putting up, can it move three, four, five to one for the risk that I'm willing to take in my account? Because I always thought like a poker player or, or, you know, how can I, I don't know what I don't know. And even as I'm older now, I still don't know what I don't know. I try to be hyper aware. That's kind of part of my overall makeup and who I am as a person.

• 6:01Speaker 00

  But, um, charting the equity curve really starts to tell me when things get out of sync. Now, it's important to understand that losing money is part of the deal. It doesn't say anything about who you are as a person, doesn't say anything about your intelligence. What it does say is like, okay, how much you're losing, how frequently you're losing. When you shape your equity curve, you can say, okay, it looks like my equity is turning down. Now's the time where I have to change my bet size or change my frequency. So you can get to become your own best trading coach. You don't need anybody.

• 6:38Speaker 00

  Right? So by putting up your equity curve, it'll show like what is your equity doing over time? You could build a simple chart like that inside, you know, Google Sheets or Excel, whatever it is you're using. And, you know, take a look at that and say, okay, now it seems like my equity goes here. This way you can set up some rules for yourself. That's what I used to do. I borrowed from Paul Tudor Jones, who would have rules for like daily losses, weekly losses, monthly losses and this and that. And when I was coming out and when I was an emerging CTA, what I used to do is kind of play poker a little bit with my track record. And what do I mean by that? Well,

• 7:19Speaker 00

  there's a difference in the eyes of allocators between being up 15% and being down 15%. They look at that person differently, like in terms of monthly returns. So a couple of things. If you see that you're up 15%, one of the things when you're newer, they might look at and say,

• 7:39Speaker 00

  how are they positioned? Meaning, what's their risk unit? You have to remember in those days, we were coming out of 2% risk units. Hello. The decade before, they were trading at commodities corporation, they'd put their whole account in one idea. So that was a 100% risk unit with futures. Now it's a different world back then because it was a cottage industry and there were like four people trading. It was like commodities corporation, Keith Campbell, John Henry, by mid decade and like continental grain.

• 8:11Speaker 00

  So at the end of the day, when you see 15% down, this is what gives them a little intestinal discomfort. Because then they're like, okay, how did this happen? Did the person, the trader not have protective stops in? Are there successive trades? Like this is when they're going to start to, not necessarily micromanage, but they're going to dig a little deeper and kind of see like, okay, where are the losses coming from? We know we're going to lose money, but are they bullheaded? Because...

• 8:41Speaker 00

  They believe, like I believe, another thing that I think Paul said in the first Market Wizards book is that price moves first and the fundamentals follow. So your risk management system is really who you are as a trader. And I think that's in many ways congruent with your personality. I think ultimately what shows up on paper is a mathematical reflection of who you are as a person and what you feel emotionally and psychologically about making and losing money. Because the numbers are what they are. They're not good or bad, they just are what they are. A is A, right? So when I look at that and say, I don't look at a 15% drawdown as necessarily being a bad thing. It's how did the person get there?

• 9:24Speaker 00

  Is it five trades that all lost 3%? Because those are big risk units, each, right? Were you in a trade that opened sharply against you and you couldn't get out? You know, as they say, the first loss is the best loss. When you're in a situation like that, if the market opens below where you would have had your protective stop and there was no market then, so it opened well below where you, that's happened to me. Right? I've been in Mad Cow. I've had limit moves against me. They're not fun. But it's the position, and I wrote about that too. There's a Mad Cow example in the Inner Voice of Trading. And it sucks, and there's nothing you can do about it. But what saves you is your position sizing. In that trade, I was long futures and Mad Cow hit the tape and it was limit against,

• 10:09Speaker 00

  offer limit down five, six days in a row. I was tightening the belt on my Depends bladder control. But when it lifted, it came roaring back. I ended up offsetting the trade down 1.5%. So it's survivable. And just as an aside, that type of thing has happened to me probably fewer than, well, I'm coming up on 37, 38 years. That's happened to me three times where a market jumped above or below where I would have had a protective stop. I'm sure that they were all longs. I'll have to try to remember all of them. So it's like less than once a decade, right? It's the way it goes. It's going to be part of life.

• 10:51Speaker 00

  Anyway, when you look at your own equity curve, you can kind of look at it like a chart and say, hmm, is this bullish or bearish? And if the equity is turning down and if the slope of the line is clearly getting negative, that's when you can say to yourself, I don't know right now if it's me or if it's the market. I know that I'm following all my rules, right? I'm not taking flyers. I'm not acting out of FOMO. Right? I'm not holding on to Micron, even though it blasted a huge number. It's down 23% or so off of that number. Right? So you gotta be careful. You can't fall in love. You can't be down 50% in Bitcoin. Like, that shows to me that you're invested. We're

• 11:31Speaker 00

  gonna talk about that this week. Um, when you become, maybe tomorrow, uh, when you become invested in an ideology, right? You can't let all your risk management go out the window, despite what you might believe, right? And this happens when people are highly polarized about politics and this and that, or they're holders and this and that. At the end of the day, you have to be really objective. You have to think of everything that you own or are short in your portfolio, are people that you're dating or you're sleeping with who are ultimately gonna cheat on you. And I hate to say it that way, but the markets are kind of built to betray you and they're gonna move the way they wanna move and change the rules on you. So the only thing that you can do is hold fast to and have that

• 12:14Speaker 00

  type of tenacity and hold fast to your protective stops, no matter what you think or feel. Because those are the only things that are gonna help you protect your capital. And no one's gonna care about your money more than you. Right? So if your slope of your equity curve is turning down, you have some choices to make. If you're following your rules, maybe you create a band and say, okay, if I'm down 5%, I'm gonna start to cut my position sizes in half.

• 12:42Speaker 00

  Or if I can see that the losses that have come, like I might be trading SPX options, right? Because they're cash settled, right? I won't get assigned. But I've been losing because I keep trying to play the market long and it looks like it wants to roll over. I gotta take a time out. So you gotta change your strategy. Right? Or change the vehicle, right? See, if you're into stock index futures, look at some, uh, or stock indices, look at, you know, something that's not showing signs of rolling over. And as of, you know, today, it would look like maybe the Russell 2K, for example. I'm not giving trading advice, but...

• 13:17Speaker 00

  This way you can make objective decisions, which are hard enough to do, especially if you're trading by yourself. You know, I have, you know, I'm in a pod myself. And so I also get access to some of the best people who've ever done it to kind of hear me out when I'm going through my audiology. And, and you know, they're very quick to point out

• 13:37Speaker 00

  if I'm, if I'm going out on a limb. But the one thing that I am accountable to myself for is I always have very strict risk management. Like I know what the max loss is on every trade, still to this day. I don't like waking up to big surprises where I could lose a lot. I'm more than happy to deal with the upside uncertainty rather than the downside uncertainty. So in those moments, if you know your trading rules and you've been following them religiously, you need to cut your position sizing because you want to minimize the drawdown. What you don't lose, right? You don't have to earn back, right? And when you're at 10%, you need like 11%, 11% return to kind of get back to that previous high water mark. So you want to minimize putting all that pressure on yourself.

• 14:22Speaker 00

  Once you get down past like 15 to 20%, that's when you got to start to take some time out, you know, time off and go have a park bench day, like Peter would say in Central Park, and, and put some time because whatever it is that you're working on isn't, isn't working. It's not getting results. Now, it doesn't mean that it's not going to always not work, but it means for what you're doing right now, you can't, if you're going to try to take the market head on, like you would debate somebody about your favorite theme or your favorite politician that you can't stand, there's an oxymoron. Your favorite politician to not like well. And believe me, there's enough of them on both sides of the aisle. You know, how do you get paid with that, right? How do you get paid by being invested in that outcome?

• 15:07Speaker 00

  Right? Because typically you're not going to change other people's opinions despite how strongly it might feel. You're certainly not going to change how the market feels.

• 15:16Speaker 00

  So this is a clever way to you become your own coach. And then say, okay, when I'm in a drawdown, I know I gotta cut my risk. I can also cut my frequency if I've done, you know, 10 trades and only two of them are winners. Even though I'm taking paper cut losses, now I might say, okay, well, I gotta cut that down. And what day of the week am I losing a lot? You know, the retail investors tend to be awfully busy in the morning where institutions historically are working towards the end of the day. And so maybe, you know, change that up a little bit. See how you feel. And then keep track of it. And then this way, when you start making money, you'll also be answer the question, when can I press? When can I scale up, right? Cause you'll have the data to make that decision.

• 16:00Speaker 00

  Um, anyway, it's good to be back. I don't want to run too long. I like to keep these things usually under, you know, 10 minutes or so. But it's good to see you all. Thank you all for your support. Thanks for all your emails and stuff. I'll have episodes this entire week. Please like or comment and I will make sure to, you know, answer all your questions. I mean, backlogged on emails. I had a lot going on. I'm working on a few things. I've been storyboarding, you know, three different book ideas.

• 16:31Speaker 00

  I've been mourning the death of two people who are very, very close to me. So I needed to take some time off and, um, you know, process my feelings around that. And love myself in there. And I'm busy, I'm busy with other projects. I'm also very creative. I like, you know, I do, I paint, I write, I do all kinds of things on that side of it. And so, you know, I also got a little burnt out in that. I think I, and I've said this before, there, I said, there would become a day when you might not see me again. Cause I'm just out of ideas. I've answered all the, all the potential questions that I could possibly answer. I think I've said everything that possibly could be said. I know between what you can get on the audio only side, which is, is, um, well, I syndicated through Libsyn.

• 17:14Speaker 00

  I'm sure you can get it on Spotify and Apple Podcasts among others.

• 17:20Speaker 00

  And then with the YouTube stuff here that has a video part, there's gotta be 14, 1500 episodes of content, uh, if I'm not mistaken. So after a while, I don't know what else to possibly say about certain things that I haven't already said. So I needed a break that way too, cause I didn't want, I don't like to repeat myself. I repeat myself when under stress. I repeat myself when under stress. The, the idea being, you know, I'm here to help the community as best I can, but I can't put myself in a spot where what I'm doing is, it's not like it's unhealthy. I just needed a break for a whole bunch of reasons. And, uh, you know, I'm back now. I feel good. I'm not done.

• 18:02Speaker 00

  You know, grief is like that pain in the ass neighbor who shows up all the time, wants to talk about the market. So I'm going to do my best, but there's a lot going on behind the scenes. And I think we're at a good time to, to, um, you know, talk about what's going on. There's a lot of risk in the marketplace. Both indices are kind of overbought. They're at high, you know, they're at very high multiples. And so you have to be careful. You can't, you can't bull your way through things, right? You, you can't, just like, you know, in life, through relationships and grief and mourning or whatever, you have to stop and take a pause and really take care of yourself. Anyway, I love you all. I appreciate you being here. If you have, if you're new to the show, I give away the audiobook version of my book,

• 18:47Speaker 00

  The Inner Voice of Trading, which you can get for free at tradermindset.com. It's very prominent on the site. Thanks for all your support and I'll see you tomorrow.