Hi Everybody’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 three four or five who knows nine months Which is kind of the case, right? It has now stopped working. So how do I know though? I know enough from watching the show that sometimes the style becomes where the market becomes unamenable With with how I’m trading when 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 these So what I like to think about is charting your equity curve for this Because if you chart your equity curve You shouldn’t 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 five to one style stuff 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? 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 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, 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 a 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 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 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, cuz 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 gonna rip the way it did, you know so so I attribute that to luck in many ways like 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 Yeah, of course I had that copper trade after President Trump made the You know when you put the tariffs on the market was down 25 percent 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 gonna be You know 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, 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 one two three, which was the prevailing spreadsheet of the day. It was later bought by IBM and Put into a think it was like they had a program called 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 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, but 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 It’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 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 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 things if you see that you’re up 15% one of the things when you’re newer they might look at and say 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 and by mid mid decade and like Continental Grain 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 gonna start to not necessarily micromanage But they’re gonna dig a little deeper and kind of see like, okay Where are the losses coming from? We know we’re gonna lose money. But are they bullheaded? because They believe like I believe Another thing that I think Paul said in the First market wizards book and that 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 with your personality I think ultimately what shows up on paper is is a 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 so when I look at that and say I Don’t look at a 15% drawdown as necessarily being a bad thing.
It’s it’s how did the person get there? 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 your 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 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 could 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 offer limit down five six days in a row. I Was tightening the belt on my depends bladder control But When they when it lifted it came roaring back. I ended up offsetting the trade Down one and a half percent.
So it’s survivable and 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 go. It’s gonna be part of life Anyway, when you look at your own equity curve, you can kind of look at it like a chart and say hmm Is this 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 got to 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 gonna talk about that this week When you become and maybe tomorrow 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 their 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 so 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 want to move and change the rules on you so the only thing that you can do is Hold fast to and have that 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 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 got to take a timeout.
So you got to change your strategy Right or change the vehicle, right? See if you’re into stock index futures look at some 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 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 ideology and and you know, they’re very quick to point out If I’m if I’m going out on a limb, but the one thing That I am accountable to myself for is I was a 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 it when you’re at 10% You need like 11 11 percent return to kind of get back to that previous high watermark. So you want to minimize Putting all that pressure on yourself once you get down past like 15 to 20 percent 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 gonna always not work But it means for what you’re doing right now You can’t if you’re gonna 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? Right because typically you’re not gonna change other people’s opinions despite how strongly it might feel You’re certainly not gonna change how the market feels So this is a clever way to you would be become your own coach and Then say okay when I’m in a drawdown, I know I got to cut my risk I can also cut my frequency if I’ve done, you know, ten trades and only two of them are winners Even though I’m taking paper cut losses now.
I might say okay. Well, I got to 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 answer the question. When can I press when can I scale up right? Because you’ll have the data to make that decision Um Anyway, it’s good to be back.
I want to run too long I like to keep these things usually under you know, ten 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 a comment and I will make sure to you know, answer all your questions.
I’m in 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 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 You know process my feelings around that and Love myself in there. Um, 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 because 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 Well, I syndicated through lips and I’m sure you can get it in Spotify and Apple podcasts among others And then with the YouTube stuff here that has a video part there’s got to be fourteen fifteen hundred episodes of content 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. So I don’t like to repeat myself.
I Repeat myself when I’m distressed. I repeat myself when I’m distressed 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 It’s not like it’s unhealthy. I just needed a break for a whole bunch of reasons and You know, I’m back now.
I feel good. I’m not done, 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 gonna do my best but there’s a lot going on behind the scenes and I think we’re at a good time to 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 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 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, I’ll see you tomorrow
