Rebuild Your Trading Confidence

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• 0:00Speaker 00

  Hey everybody, it's Michael Martin. Thanks for being here. Hey, so I just had a great trip to New York. I was there for 10 days. You wouldn't know it because I have everything programmed to be released, so you wouldn't know it from one day to the other. But it was great. I got to see some friends, did a lot of work. Saw a Rush concert on the first at Madison Square Garden. It was ridiculous. I had seen them a long time ago, in 1982. First Rush show was there. Rory Gallagher opened. Then I saw them again at Radio City. They were still kind of on this Signals Moving Pictures Tour. I think Marillion opened for them there.

• 0:39Speaker 00

  Boy, the opening acts really get razed a lot. Rory Gallagher blew the joint off the Garden. That was Thursday, December 2nd, 1982. Went to a Yankee game, stopped by and saw my friends at SMB, hung out and talked with Jeff for a while, who's a great guy. Caught up with Steve, who I've known a little longer. I'll have those guys on the show soon.

• 1:01Speaker 00

  Great people.

• 1:03Speaker 00

  You know, enjoyed the city. It was hot and muggy, very, very humid, as humid as I've ever felt it there.

• 1:11Speaker 00

  Went to a ballgame.

• 1:14Speaker 00

  Celebrated a friend's 60th birthday. So I hope your summer's going well. While I was gone, I get a lot of feedback, emails, things on Twitter, comments on the YouTube channel. And I'd like to kind of keep that conversation going. So if you have a subject that you'd like me to talk about, either drop it in the comments, or you can reach out via email and I'll do my best to get on top of it here. So one thing that comes up is, how do you deal with hesitation? And, you know, how do I rebuild my confidence? So I want to put those two together because I think they're related. When I think about hesitancy in my own life, really because these are thematics right across a lot of things,

• 1:58Speaker 00

  it really comes from having a lack of confidence. And that can come from any number of things. When you're earlier on and you're starting out, you might not have your complete trading process honed. You might be super great at entries, but you might not be great at the trade management part. Like, what do you do once you're in the risk? Your mind might go aflutter and have 1,000 ideas. Do I have a scalping exit? Do I use a swing trading exit? Do I sell half at 1 ATR and raise the stop to break even and take the runner home with me? Or do I sell the runner on a close on a two-minute bar below the 9 AEMA? Like, you have all these different rules. You gotta pick one.

• 2:42Speaker 00

  You know, you gotta pick one and say, like, what kind of trader are you? And I think in many ways, we're defined by our holding periods, right? Not just by asset class, but when you ask people, you know, what do they do? They're like, "I'm a scalper." It doesn't even matter the asset class. That just tells me that they're very short holding periods, minutes, sometimes seconds if they see the type of rip they're looking for. So you need to determine, you know, what type of trader you are, and then what is it you're looking for your money to do for you, right? Because if you're a scalper, it's a lot of work, a lot of screen time. If you're a position trader, you don't have to put that much time in front of the screen. It's a very different lifestyle choice. You get to choose that. You know, you're actually in control.

• 3:29Speaker 00

  For the more experienced folks that I tend to, you know, talk to at the bigger hedge funds, who are clients, when they lose their confidence, it's usually that there's some kind of rut, they're in a bit of a trading funk. There might be something going on in their life that's an overhang that kind of feeds into their trading. They might be in a bit of a losing streak, and that psychs them out a little bit because, you know, their jobs are on the line. If you're paying rent on a desk and you keep paying your rent, you probably won't lose your spot. But at some of these bigger places, you know, if you're down,

• 4:05Speaker 00

  you know, at 3%, you're like, "Man, I don't have that much room left before they're going to give me a talking to." And I'm a pro, right? Some of the places, it's like 5% you put on warning, and if you draw down another 2.5% to get to like 7.5%, you know, they say goodbye. And if you're used to making a lot of money, you know, you gotta talk to your spouse, you got kids, you got all these things to be concerned with, right? Hopefully, you've saved your money.

• 4:34Speaker 00

  But I tend to go back to a time when I did very well. And I review... In those days, you used to get PDF confirmations. I didn't really execute on the screen. I'd call my orders to a trading desk, a CTA desk, and then they would deal with the floors. I wouldn't... Sometimes I'd call the floor if I was looking for like, "Where's the depth of market? What's really happening? What are the locals doing?" Because you can glean some information there. Now is a different day and age in that there's not a lot of floor trading, right? So you call the CTA desk, and then what they would do is, at the end of the day, I'd do my checkout and say, "What happened with these ticket numbers?" I used to write them on buck slips like this and call them in.

• 5:18Speaker 00

  They were usually good for the day. If nothing happened, I would just call to make sure and say, "Okay, what happened to ticket 119? What happened to 127? What went on with, you know, 132? Nothing done. Okay, perfectly. Here's the positions that you should see in the account, right?" And every once in a while, maybe once every two months, they'd be like, "What about this S&P trade?" And I'm like, "Oh, that's not mine." And they'd be, "Okay." So what ended up happening is someone did an S&P trade, and they'd find it in my account because someone fat-fingered it when they were typing in the account number. So you clean that up. Why? Because you don't want your clients getting confirmations for trades that aren't actually yours, right? Especially if they're losing money. It makes you look like an idiot. So we call that the checkout.

• 6:01Speaker 00

  Then what you would do is you'd end up getting a PDF emailed to you of any of the day's business. So I had a few of those in, like, from 20 years ago because I never really delete the emails. So I was able to pick some of those up and recreate some things. I get monthly statements and this and that. And then I kind of teach off. It happened to be a good window of time. And I'd just go back and I think, "What was it that I was doing well there? Was it the market, or was it me? Was it a combination of both?" And it got me thinking about a lot of topics that I'm going to talk about this week, especially a follow-up to Friday's episode, which everyone seemed to like. That did very, very well.

• 6:45Speaker 00

  Oh, it didn't... I mean, does well, relatively speaking, but it was the one from Friday called "Remove Pressure with Asymmetry." And I had the iPad out and I was showing you the math on how if you don't have at least prima facie, like, not prima facie, but ex ante, right? A potential for like 3, 4, 5 to 1 payoff, that it could be a go-no-go type of rule that you insist on having for your trading, right? And you could tie that up with maybe calling that your A trade, right? Now, when I say 5 to 1, I'm not meaning that it is any one particular trade

• 7:28Speaker 00

  that you can get access to or that it's guaranteed. It's just that can you see it on the chart? Is there overhang or resistance before you can get to 4 or 5? For example, right? So these are the types of things. If you have clear blue sky, of course, multi-year highs, all-time highs, you put yourself in a good spot where that's not going to be there. And I tend to review my trades and I replay it. You know, we don't have replay the way you have it now, where a lot of traders use that as a very important tool, right? But we look at that from the standpoint of,

• 8:09Speaker 00

  "Okay, how can I go to school on myself and revisit like those trades?" And it wasn't like I wasn't taking losses. I was betting big. You know, I was risking a lot of money in those days. But the markets were ripe and I was sizing up accordingly. Why? Well, because the market was very amenable to my trading style, so I could up my size because it turned out that the system was working 2X times, meaning where my accuracy was normally 30, 40%, it was now 60, 70%. So... And the payoffs were much larger, so I scaled up my bet sizing as well.

• 8:52Speaker 00

  And that's kind of how you grow your account asymmetrically, not just by looking for, you know, 4 to 5 to 1. So I'm going to talk about that probably again on Friday. Trading comes down to process, though. And so if you lose your confidence or you never really got it, it's probably tied to the lack of process or a part of the process that you're unsure about, and that gives you insecurity. That insecurity is going to show up in your P&L, right? It's hard to get around it. It's, you know, trading is one of those things where you need absolute integrity with your emotions and your psychology because whatever you're thinking or feeling, it's going to come through your actions and show up on your P&L.

• 9:36Speaker 00

  So I tend to go back and review history and/or if I can't see it, I try to keep things super simple. And say, "Okay, am I forcing trades?" right? Because sometimes the market turns and you don't know it. You don't know it until after the fact. So you have to take, keep a rolling track of like your last 3, 4, 5 trades and see, "Okay, these didn't work out. Why not? Why didn't they work out? Was it... Did I handle it badly? Did I misread something?"

• 10:06Speaker 00

  And then I tend to...

• 10:11Speaker 00

  You know, scale down, trade a little smaller, and then get back in the groove, right? Because to me, getting the confidence or the self-assuredness means a lot. It means a lot in life, too, right? I've said it a million times. If you take a person with average intelligence or average ability, but you infuse them with a lot of confidence and keep encouraging them that they can achieve their goals, they tend to do it. Now, their part in it is that they have to actually believe it, too, right? They can't just be walking around blind without a cane, thinking that they could achieve anything. They actually have to do the work. The fancy word for that is called practice. No, praxis, P-R-A-X-I-S. Big fancy word.

• 10:52Speaker 00

  And it basically means where you marry your belief with your behavior. And that's where traders can really learn a lot to rebuild their confidence, is are they taking the actions that are consistent with their goals? When we do the coaching here, the first thing we talk about is our goals. Forget charts and all that other nonsense. And it's not nonsense. It's important. And risk management, all that stuff plays a part. But you need to know ahead of time what the hell it is that you want out of the process of trading. Do you want to be validated as a human being? That's a deep one. Do you want to be able to say like, I'm a consistently profitable trader? So the more honest you are, from an emotional intelligence standpoint, with what it is that you're trying to do,

• 11:36Speaker 00

  I think you're going to get closer and closer to understanding, you know, how to get your confidence back. The hesitancy part comes from not having the confidence in the particular setup. So for that, I would paper trade it. I have a humble belief, could be wrong, that most people don't spend enough time on simulator. Because it's too easy to lose money in good markets, right? And when the market gets super toppy and super volatile and you don't have training for that type of market environment, you might be able to make money with one or two little tweaks, but it's something I think you should practice with, you know, a pseudo account first.

• 12:19Speaker 00

  And just learn to understand how the whips, you know, how does the wicking part, you know, happen? And how does that knock you potentially out of otherwise good trades? And this way, you would learn to scale down and trade smaller. It's always easy to scale up. That's, anybody can do that. It's not necessarily wise. And I do think you need a lot of experience to kind of know when to scale up. We'll talk about that this week as well. Most people try to double or triple their position sizes, which is nothing I would approve if I was the desk manager. You know, it's not, um, it's not advisable to grow that quickly. You want to try to do it systematically.

• 13:01Speaker 00

  So I would isolate the part where you're dealing with the hesitation and figure out like, what is it about this part of what I'm doing that is giving me the duress or the moment of pause? You know, and how can I work through it? One is, you could reach out to me and I'll help you with it. A lot of times, the simplest response, like Occam's razor, is to simplify. Right? Once you're in the trade, you can't think of five different exits. You really have to say like, here's my protective stop. That's the first exit. You know, you do the opening range play, the first bar after the pre-market high, and then you find the next breakout.

• 13:43Speaker 00

  Then you're going to position size it based on that near-term low, which could be 1% or 2% away. So you have to think like that. Okay, so now you're in the trade. But do you size, do you put your optimal size on all at once? Or do you scale, right? Because those are two different mindsets. And you have to find, usually through a lot of practice, you know. So sometimes people are really like, well, I'm only going to put half on. I'll put my stop in below the low of that first bar. Then when it starts to rip, I'll catch the next breakout. But for other people who are putting on their optimal size at the beginning, when it hits that same spot, like an ATR away, that's when they're lightening their load.

• 14:26Speaker 00

  That's where they're cutting their position in half, raising their protective stop to maybe a close below the 9EMA as the runner position. So even in scalping, you could have two different styles that are drastically different, that could be, you know, selling half of the initial position on the optimal piece when the other type of scalper is actually looking to add there. So you have to figure out what's best for you, right? So, and I've vacillated between both, you know, depending on the market conditions, just for that purpose. A, I want to always keep my drawdowns low. I don't want to find myself in a drawdown over 10% at any given day, especially these days. When I was younger, I was taking 10% risk units 20 years ago.

• 15:11Speaker 00

  And I have the confirmations to prove it. I was also making many multiples of that on my winners, so the math worked. But I also had 15-plus years of experience. I was a pro. I had client assets under management. I, you know, I had finished two and a half years in the Incline Village Trading Tribe. And I had, you know, good mentors that I had access to if I needed them. So I had every reason to succeed at that point, the way I succeeded, you know. And that's why I'm kind of paying it forward by doing videos like these, to kind of give back where, you know, you can't necessarily come to my house or hang out or do this and that,

• 15:56Speaker 00

  because I just don't have the facility to host those kinds of meetings right now. But I was talking with another person, I'm not going to mention his name, who was going through a struggle and lost a bunch of money, tens of thousands of dollars in a particular period of time. I don't remember if it was a week or a month. But it was a percentage that, it wasn't big, but it also wasn't small. It kind of shook their confidence. And so what I said was, take a week off. You can't come back to the market with this mindset, because I spoke with him after the close on Friday, a couple of weeks ago. And I said, take time off. Because you bring that energy to your process. You can't win when you're feeling that way. If you look at any top athlete,

• 16:42Speaker 00

  they're not cowering, feeling like I've just come from a bad beat and smashed. That's what happens with poker players, right? They have pocket aces. Some jackass out of position pushes all in with 2-3 offsuit, pre-flop, and they flop a full house. Now, sometimes when you're short stacked, you kind of have to do that. Sometimes you're forced to do that. Otherwise, it's not a great play. But you get your aces cracked. And, you know, you might have had a strong hand, you know. You might have even had three of a kind. You might have thought you had a lot of the people beat based on their betting and how they bet. You get a feel for people. And you still lose. You might have done everything right, you're still going to lose. That's the way it works.

• 17:27Speaker 00

  So I said, look, you don't seem like you're in a good spot. You got to take some time off from the market. Re-collect yourself. And, you know, start to write some things out. What went wrong? Besides, losing money isn't what's going wrong. That's usually affiliated to the process, right? So go back to the process and see like, where did you have opportunity to remove your positions? You know, before the losses got out of hand? Or they got to a spot where they're affecting you? I don't know that, I might have misspoken there. I don't know that they got out of hand. I just know that the losses affected this person in a certain way.

• 18:11Speaker 00

  And I know what that feels like, because I've been there. I've felt any of the feelings that you're feeling or any of the psychological things that you're going through or that you are going to go through, I have absolutely have already felt them. And I've had to make sure that I've kept my behavior in line in such a way that I didn't sabotage myself and sink my own ship by revenge, excuse me, revenge trading or wanting to win it all back in one trade or having some kind of ego like, who the hell does the market think it is to take such a big loss from me? I come from the standpoint that we live in a paradigm of personal responsibility, and everything that happens in my account is my fault.

• 18:56Speaker 00

  If I make a lot of money, I take credit for it. I also am humble enough to know sometimes the market is ripe for the picking. Doesn't happen a lot, but it does happen. And when it does happen like that, that's when you have to be your biggest. That comes from having confidence and knowing who the hell you are as a trader. Losing money doesn't say shit about who you are as a person, right? And losing a large amount of money percentage-wise just means you need tighter risk controls. That's all fixable stuff, right? So I always go back and say, look at the process, because the process predicts where you end up. You don't like big drawdowns, then you have to cut your position size. Trade smaller, add to your winners.

• 19:40Speaker 00

  Right? Or make an adjustment. Don't have too many correlated positions. Look what happened to this kid with situational awareness. Really funny name for a guy who didn't seem to have any, right? Didn't know how to read the market. How they raised all this money in the first place from such large investors is beyond me with no experience. But anyway, fooling their money or soon parted. So don't be afraid, if you're at wits' end, to take a week off. Because kind of trading through it isn't necessarily the best strategy, especially if you're just starting out. You're not going to miss anything.

• 20:24Speaker 00

  The market will be there when you come back. The sun will also rise again. It's sometimes the best thing that you can do is put some distance and just observe. Or if you feel emotionally you can't take that, which to me is a sign of weakness. If you can't take a week off, something's wrong, right? Because that's beyond persistence. That's self-flagellation. It's ego. I would go back to the simulator and say, okay, what about, what am I doing here on paper that's not working? But do it with real-time data. I think going back to the sim is always a good move. It's always a good move. You know, you have to remember,

• 21:08Speaker 00

  look at Jim Ballard, look at David Ledbetter, look at Mark Harmon. These were all golf coaches who coached the best people. Actually, throw in Jim McClain. I actually caddied for Jim McClain when I was younger. They might not have won any major tournaments. They might not have the verified fucking track record that everyone's got to brag about. Guys like me, you know, you have coaches that can help you in many, many ways. And, you know, if Tiger Woods, when at his peak, had three coaches at the same time for various parts of his game, find a way to coach yourself through that process or find somebody to help you get back on the right track.

• 21:52Speaker 00

  Because sometimes you can't see the fire when you're standing on top of it, right? You know there's smoke, but you don't know where it's coming from. Most of the time, I find that it's the human that's the problem, not necessarily the market. They're overtrading or they're trading too big. And with the advent of technology and everyone telling you how much opportunity there is, it's hard not to churn your own account, right? When I started out, if you churned someone's account, you'd get thrown out the business. You'd lose your license. You could also get censured and fined. Nowadays, with the technology being what it is and commissions being low to no, nothing,

• 22:35Speaker 00

  you can effectively churn your own account and not see the impact of it. But that doesn't necessarily mean it's good for you, despite it being available. Anyway, we'll talk more about this as it evolves. Because confidence is a huge part of life. Any type of endeavor you want to get into, you have to do it confidently and you have to believe. I always believed like I was going to make it as a trader. I didn't know how the hell I was going to make it. But I knew I was going to make it, and that part was not debatable. And you have to start like, I'm going to, I think, I have that gene like, how hard could it be? I can figure it out. It might not be the same way. Someone's going to do it, but I'm definitely going to figure out the way I can do it for me.

• 23:19Speaker 00

  So anyway, thanks for being here. I'll see you tomorrow.