Everybody, it’s Michael Martin. Thanks for being here. So question came in about, you know, buying pullbacks.
And this is, this is, you know, I kind of have a love hate relationship with this, because although I’m not necessarily a momentum trader, you, you, after diversification, I think we all need momentum in order to kick in, in order to make money. And that’s true of investors too. So like when people say, Oh, you’re a momentum trader.
I think everybody’s a momentum trader on some level when you think about it. And I’m not trying to be a smart ass, but that’s just how my mind works. When I think about people parroting or saying shit that they heard other people say, it’ll put a lot of thought into what they’re, they’re saying.
And so, so when I think about, generally speaking, my, my take on this is, is as follows, and I’ll tell you why. To me, lower prices mean lower market cap. It does not by any stretch of the imagination mean greater value.
Now, if you talk to good friends of mine who are CFAs, they look at me and they say, you’re a frigging idiot. Of course it means low, better value because you can get it for a cheaper price. And I say, well, my genius CFA friend, you’re having a trust issue.
I’m not falling blindly in love with these things, right? These aren’t the Farrah Fawcett poster that we all had hanging up on our wall in 1978 or whatever it was, because you don’t know what the earnings is. And you don’t know that the pullback is really the insiders or people who are in the know, which may, you know, I’m not saying that what they’re doing is legal or illegal, but to me, there’s always, you know, I follow what Paul, Paul Tudor Jones said, price moves first and the fundamentals follow. I can’t trust, right.
And I see other bloggers, you know, using my lines and not giving me credit for it. Um, you know, price to me is the only thing that’s going to tell you the truth, right? At the end of the day. Now you don’t have to believe it, but prices don’t go down for any other reason.
Then longs aren’t buying anymore, right? People start taking profits, right? Or they’re just managing risk. They could be trimming their position, right? But ultimately when you sell stock, it’s not a bullish thing, I guess is what I’m getting at. Doesn’t mean you’re bearish, but if I had thousand shares of, you know, Philip Morris or something, and it ran up and I sold it, it doesn’t necessarily mean that I’m bearish.
It just means that there’s probably no more asymmetry for the type of payoff that I was looking for, you know, speaking about yesterday’s lesson and I hit my mark. And if I’m, if the changes to two to one or one to one, then I lose my trading edge, right? Now the odds aren’t, I need to turn after that such large move, I need to go from an high expected value move and very asymmetric move to now an accuracy model, right? Cause what happens after you’ve hit your five to one? Is it still five to one from that point? And that would speak to Tuesday’s lesson about having a plan for what happens at every price point. So at the end of the day, if you think of it the way that I do, just from a risk management standpoint, say I’m completely wrong, that lower market, lower share prices do mean greater value.
Okay, well then you need to operationally define that if you want to get pro results. So what does that mean? If it pulls back to the 20 period EMA, right? Or if it holds or bounces off of an anchored VWAP from a high volume or the highest price, near term price, well, how do you define that then, right? Cause that’s really what this game is about. It’s like, and I’ve said this too, if you don’t define your risk, it’s going to define you.
And that’s not a good thing. So what is the pullback? What’s the retracement? And do you buy on the reaction off of that anchored VWAP? Do you buy off the reaction of the 20 day EMA? Do you buy off the reaction off the nine period EMA if you’re an intraday trader? So define what that means then and lock that in as your definition. Cause it only matters to you.
Generally speaking, like I said, I don’t think lower prices necessarily mean better value because I don’t know, right again, go back to QQQ of March of 2000, when it went down from 120 to 100, sure it’s 20 points, but what is that? 18% or something like that. So, okay, is that a decent pullback? And then what happens if you buy the pullback and again, go to Tuesday’s lesson, where’s your protective stop at that point? When do you know that you’re wrong, right? In other words, if I buy a 20 at $19.99, I’m technically wrong a penny. Now, could I have bad time? Could I be in a little early? I mean, only time is going to tell, but these are the types of things that you need to really cogitate on and have answers to because preparedness to me is everything, right? Preparedness is everything.
You have to be prepared for every potential situation and having to figure things out on the fly in my humble experience. Yeah. If you’re in the new market wizards book, it doesn’t matter, but for everybody else, you need to know what you’re going to do ahead of time until you can build up your chops, right? What do you use to solo over a 2-5-1 jazz chord progression? What do you use over 1-4-5 blues, right? And who do you, do you listen to Clapton or Stevie Ray Vaughan or, you know, or someone like Mike Stern, who’s all over the place.
So, these are the types of questions that I always ponder for myself and I put forth to you so that you can be more prepared because to me, the more prepared you are for these scenarios, when you try to have to figure things out on the fly, I think you’re going to get the worst of it. Why? Well, and this isn’t forever, but at the beginning, your instincts aren’t there yet. You don’t have enough punches to the face.
I’m, if anything, I’m lucky that I’ve had millions and millions of observations of watching the market and seeing, okay, the convergence and divergence between fundamentals and technicals, right? I’ve heard every spook story from Y2K to who knows what and what’s going to happen in the market and then how everything has played out, right? So, you learn to trade the crowd. You have to have a plan at first, then you can make some adjustments, but you can’t not do it and not be prepared. Don’t worry about being wrong.
It’s okay to be wrong. You just can’t stay wrong. So, you can make adjustments.
That’s part of it. That’s part of the evolution. If you look back, like I said, to what I was doing in the late 80s, early 90s, fantastically different than today.
For one, I use options a lot more. Back then, I couldn’t do it. They were too expensive.
I didn’t understand them and I didn’t have the time to learn them because I still had my Clark Kent day job. So, have all these answers and build it out. You will go so far.
You’ll be so far ahead of everybody else who aren’t as prepared. And to me, the preparedness part is so much of it, right? If they say that 75% to 90% of the trading is the emotional and the psychological, when you have this level of preparedness, you can answer all those questions. That’s the tactical aspect.
Then what you can do is draw a line down the page and next to it say, here’s how I’m going to feel if the market does this. And so, by having a plan, you don’t let your feelings hijack you at exactly the wrong time that will not screw you out of money but lead you to perform not as well as you could have. Then once you’re in cash, you can go back and do a postmortem and review things and say, okay, how can I do this better next time? In a calm state without beating the daylights out of yourself, you see? This is how you learn to grow and you can kind of become your own coach.
Anyway, if you haven’t already gotten a copy of the audio book version of my book, The Inner Voice Trading, click the link at TraderMindset.com. You can get it for free. Thanks for being here and I’ll see you tomorrow.
