The impact of large winners on your trading results

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• 0:00Speaker 00

  Hey everybody, it's Michael Martin. So, let's talk about, you know, power law and winning streaks. I know, I know many of you might be trading one particular ticker, long or short, on any given day, that's what you do. There's great opportunity cost in that, obviously, because if you think about it, you know, it is possible for markets to trend, but most of the time, they're not. So, if you're trying to kind of dumb it down to, you know, one-minute bars, or 30-second bars, whatever it might be, you're turning trading into a working, a working-class job. And I don't want to, I want to think, I want you to think like a business owner, not a business manager. And so what happens is, if you limit your scope, because most of the time, you can

• 0:45Speaker 00

  use the same entry criteria, position sizing, across any number of instruments. And if it's the same dollar of risk, what do you care? You see? So, when I see people saying like, "I just trade the MNQ," or "I just trade the ES," to me, that's a fear-based strategy, because there's so much other opportunity out there, and opportunity cost is a real, is a real cost to your performance. Now, maybe that's appropriate for your budget, maybe it's appropriate for, you know, what you think is your style of trading, but how are you gonna know? Two, the indices have high correlation, and when markets get stressed, those correlations grow. So, that all becomes one big trade. So, you know, you can normally do the study, go to Claude and see, okay, if you're looking

• 1:30Speaker 00

  at DIA, SPY, QQQ, IWN, you know, look at that, maybe you're short TLT, you know, against it, I don't know. But I want you to think about expanding your horizons. The reason why, and I got again, this comes from our, you know, our deep dives that we do at Portfolio Accelerator, is that when you, when you think about where your returns come from, there might only be three or four names in your portfolio that make you almost all of your money, net-net of what your losers are, or, and by losers, I mean, things that kind of move, but don't move enough, so they're kind of used to offset the, the smaller losses that you're consistently taking across all of your trading. Right?

• 2:15Speaker 00

  You look at the distribution of the bell curve, right? You, you want to kind of skew that as much as you can to the right, and take larger gains. So, that means, you know, buying things, hanging on to your winners longer, reinvesting some of your gains into a protective stop, and for some of you, maybe even adding to your winners. This way, you're letting the market do the majority of the work. And you could always position size it to a point where it's appropriate, rather than saying, "I need to trade this particular size during the day, and if I can't do that, then I can't trade it." Whereas if you took something that was maybe a tenth or a quarter of position of that size, you'd be able to withstand the risk, which is not necessarily scary, and not, nor is it reckless, of, you know, taking it home overnight.

• 2:58Speaker 00

  And we, we, we looked at a bunch of studies, I don't have them handy, about how people did, and looked at, you know, where their gains came from, and it was largely found that it came down to this power law, where you have, you know, a significant part, maybe 80% of your gains are gonna come from a handful of names that work over the course of the year. And the more you can let that money work for you, the better off you're gonna be financially, if your goal is to actually make money, if your goal is to sit there in front of the screen all day and grind, that's a different type of a goal. So, you know, I'm not calling your girlfriend ugly, I'm just saying, take a look at, at

• 3:39Speaker 00

  expanding your horizons out there, because there are names that have been moving, that, you know, you can have a position on, it doesn't require a lot of work, and it doesn't mean for a second that you're any less of a trader, because you're less active. You see what I'm saying? And I get a lot of questions from people who are frustrated, and the reason is, is that, when I, when they tell me what they're doing, is they're trying to find, like, the shortest timeframe possible to trade, where there's the, the greatest amount of randomness. They're struggling, they're not making any money, they're putting the work in, thinking that this is a deterministic endeavor, and it's not, it's about expected values and probabilistic outcomes. So, to me, the best way that you can work on that, and to help yourself, is to trade

• 4:22Speaker 00

  extremely small, and get used to holding your winners as, for as long as you possibly can, because the money that you can make on that, it even surprises me sometimes, right? So, I'm not saying, you know, necessarily turn your world upside down, but there comes a point where, if you're not making the money that you have set for yourself in your goals, right? Because you need to set a goal around this, and it should scare you, but you're not getting those results, then it's time, you know, you have to save fish or cut bait, it's time to pivot and to try something different. You can bang your head against the wall, if you like doing that. For me, myself, I always knew, like, I had come out of a working-class environment, where

• 5:07Speaker 00

  I was exchanging my time for money, so the last thing I wanted to do was to get into a blue, a white-collar job, and exchange my time for money, working hard. Sure, it's written in the Constitution that it's an American way to work hard, and no one can take it, take it away from you. Hard days work, and a fair day's pay, right? Get it? But with trading, you have a way to go parabolic with that, in your life. So, you know, be mindful of the blue-collar things that you're bringing to the trading career. Long hours don't, doesn't necessarily equate to bigger gains. It isn't, you need to have a relative understanding of how things work, and a relative level of intelligence, but the main thing is, you have to learn how to execute.

• 5:49Speaker 00

  You know, what is it that you're trying to do that should all point to your goal? You're trying to grow your capital, couple hundred percent a year, that's gonna require you that you take some risk, and it either means taking larger risks during the day, which could mean larger drawdowns when those moves fail, or smaller positions and hold them over longer periods of time, so that you let the moves play out. So, it's not, it's not a dig against anybody, because I know millions of people who scalp and do very well, and I know people who, obviously, invest, which is the longest form, the longest hold. So, think about how you can improve your trading by holding on to your winners longer. Right? Very few people are gonna sell at the top.

• 6:34Speaker 00

  You can certainly see reversals in play, but the idea is that, sometimes, if you just sit on your hands, and you let your winners go, and I can't tell you how many times that came up, when I talked to the guys who were in, say, the first two Market Wizards books, and I think it was even quoted, they were quoted somehow by saying, you know, "The best trades were the ones where I didn't pick up the phone," because in those days, you called your trader or your broker to execute, there wasn't, you know, there wasn't an internet, so you couldn't do it with hotkeys or your mouse. And that, most of them would say, like, "Sometimes the best trades were the ones where I didn't pick up the phone to call in a sell order, I just let the winner ran, and that made all the difference." So, if you're struggling on the short-term side of things, consider trading smaller

• 7:19Speaker 00

  and extending your holding period for as long as you possibly can. Now, we talked about this, I think, a week or two ago, as well, when someone said something like, you know, "I was, I was up 1% and then I gave back half the gains." And I'm like, "Well, that's half a percent." Like, you can't fall to pieces about that. Don't, you know, we're gonna probably talk about this, you know, tomorrow or Friday, but ultimately, don't get comfortable taking small gains, because then it becomes a habit, and habits are harder to break. Yes, you want to be profitable, but you also want to optimize that to make the most amount of money that you possibly can for the risk that you're willing to take, again, without having to reinvent yourself every day. Right?

• 8:00Speaker 00

  Now, if you're at a prop desk, and you have access to four to 10 times leverage, and you're being trained, that's a different game. Most of the folks who are watching this are do-it-yourselfers, and they're doing it at home, with some type of capital, some of them might even be trading these funded accounts, which, I have to fully admit, looking you all in the eye, like, "I couldn't, I could never pass any of those funding challenges. My, my style of doing things would not overlay well with the rules that they put on there." So, don't beat yourself up if you're having trouble with it as well. It seems like a very unnatural, it seems like it's a very unnatural way to say, like, "You can be profitable, but you have to be profitable this way."

• 8:41Speaker 00

  Whereas if you're running money, part of the discovery process is those happy accidents that kind of fall into place, where you find yourself in the right place at the right time, and sometimes it's serendipitous, but you learn, and you're like, "Oh, okay, I'm gonna try this again, maybe not as big, but now, this and that." But if you have to, you can't have one trade represent X% of your overall gains, you have to have a certain number of trades, because we want consistency. Brother, that's not consistency, that's fucking bullshit, is what that is, because if you're a trader who can make money, and I give you a 20-trade limit, or I say, "Well, I don't care how you make your money, but as long as you put on 25 trades a day, then you're

• 9:24Speaker 00

  in my, you're in my company," that's bullshit. So, I don't even, people say, "Well, with your skill, you could lever this up and, and trade how many times you're leveraged by opening up these accounts." And I'm like, "Well, I don't want the, no one's gonna overlay those types of rules on me," which is kind of like, I like doing my own thing, and/or having full discretion. I don't want to have to talk to people and get their approval, I know what I'm doing. So, be mindful of that, just because you're paying 40 to 100 bucks a month, you know, look, maybe that's better for you to lose play money, and learn your craft at the same

• 10:03Speaker 00

  time, but I find it very difficult to, to, and they're like, "Well, look at the success, look at all this money that we've paid out." Well, sure, if you play lottery, someone's gonna win there too, but the odds are, in order for those companies to make money, it's because the majority of the people are failing, because where are they getting the payouts from? They're not piggybacking your trades, they're not actually taking risk in the market, they're relying on other people's failure. How do they guarantee that? Well, they put 45 different rules on top of the model, you know? It's like in roulette, they say, "Hey, winner pays 35 to 1," but, you know, you have negative five, five and a quarter cent, about 5.26 cents for every dollar that you bet, every

• 10:46Speaker 00

  time that you bet, in roulette, if you have a 38-spot, you know, wheel. So, that, to me, is a game of negative expected value, to do these funding accounts, because the rules, you know, once you learn how to trade, you're the asset, not the funding account. So, you would never want anyone to dictate to you what your trading rules have to be in order for you to get paid. Then, if you get paid, do you get paid out all at once, and why do they average it out over three or four months? And if I make 100K in month one, and you're only gonna pay me 25K, what happens to the other 75? I still want that money, regardless of how I do in month two, three, or four. Right?

• 11:30Speaker 00

  So, now that, what are they gonna do, net it out? So, it's kind of slippery, but at any rate, we're getting off the subject here, the, the main thing is to think, like, think in terms of baskets, think in terms of the fact that you might not need that many trades to make a lot of money, and realize that some of those bigger winners might not be anything that you're looking at, so it's time to kind of expand your horizons. Just food for thought, if you're struggling, sometimes, this is the kind of pivot that can really turn things around. The good news is that you're trying hard, you're working hard, you're willing to put the work in. In my experience, the universe typically rewards those types of people, but it might require you to get a little bit uncomfortable, and make some different decisions going forward.

• 12:15Speaker 00

  You like this video? There's more, check out the box here, and check out the link below for the upcoming cohort. I'll see you tomorrow.