Hey, everybody. It’s Michael Martin. Thanks for being here.
So I got a great question about, you know, when you’re starting out, should you just focus on trading one instrument? And I want to talk to you about that today. I think it’s an interesting idea. There are pros and cons, just like everything in life, to the decisions that we make.
I know a woman named Linda Bradford Raschke used to suggest looking at a market and then following it in five or 10 minute intervals and really learning the nuances, right? And generally speaking, I would agree with that. She said that a long time ago, over 20 something years ago. Now electronic trading has really evolved quite a bit since then and how you can use alerts and how much easier to come up with custom scripts and pine coding and this and that.
You can upload your own scripts and hotkeys have become more prevalent. So the world has evolved in a way that the individual is much more empowered, even if they didn’t have to. You know, when I started the business, if you wanted to learn how to code, you had to go to the bookstore and get, you know, C++ or you had to go learn it yourself, Python or this and that.
There weren’t people online that you could connect with. So you kind of had to do, it’s like what George Carlin said, you know, if you’re a discus thrower and you practice yourself, you know, alone, you got to go get it yourself. So trading was such, it was harder in a different way in that the resources available just weren’t there.
You really had to do everything yourself. So that shaped the decision making process. You’re like, okay, I want to trade.
Do I want to spend six months to learn how to code something? Do I just want to trade, right? Because traders trade at the end of the day. So I think let’s talk about some of the pros and cons of just focusing on one instrument. And since we’re on the topic, I’m going to guess that most of the folks out there who do focus on one particular thing are usually doing it around stock index futures.
That seems to be the most popular thing. They, you know, the margins are low. There’s minis and there are micros.
And even before this whole 25,000 PDT rule got shit canned, most of the folks who were coming into day trading who had small cash or lower margin balances were going to the minis or the micros, or they were trading penny stocks, or they traded options. But from the emails that I get, I can kind of infer that the majority of them were either trading some combination of either SPY, QQQ, IWN, or like I said, ES, MNQ is two points. The mini Dow, I think, is two points.
Then there are micro contracts as well. There’s a mini gold. There’s a mini crude.
There’s a mini silver, right? And so let’s talk about where you might have blind spots, because you probably know the benefits of focusing on one market. You certainly will learn the granularity of how that market works. How does it work opening, say, if you’re dealing with futures, how does it open Sunday night? And what do the foreign markets do? And how do the local people, the local Americans deal with what happens overseas, right? What happens in the pre-market Monday before the actual opening bell for stocks at, say, 6.30 Pacific, 9.30 Eastern, and 8.30 Central time? 7.30 Mountain.
Don’t want to leave out my friends in the Mountain time zone. Because those instruments all can have different nuances in the aftermarket, in the pre-market, the post-market. Then what happens when they trade outcry? What’s the normal volatility for the one minute, the three minute, the five minute, the 10 minute, the 65 minute? Because then you’ll have to choose your time frame that you’re going to probably trade these things, because I know you’re not talking about buying and holding, right? So you have to figure that out.
Also to consider, are you going to be long only? And that can be kind of cool. But if you’re looking for where we are right now, which is August 10th, the markets look like they’re rolling over and you’re long only, you’re going to have to buy bounces, which is different than buying breakouts to the upside. It’s a different dynamic.
It’s a different market. It’s a different feel. And those moves are, they may be pronounced, albeit for intraday or daily moves, there might be mean reversions while something is in a downtrend, right? So you trade it being oversold and then how do you measure that oversoldness? What’s the measurement that you use? So it has to be more scientific than I think it can’t go down anymore, because you could always lose 100% of what you put up, right? So it has to be something a little more scientific than I just think it’s oversold here.
What is the metric, right? Because you need to systematize those rules, even if you’re a discretionary chart reader. So that provides to, I’ve seen a lot of people lose a lot of money and fail at trading because they had the wrong tool. They showed up for a hammer job and they had a ball, you know, they had a flathead screwdriver and everything’s useful in the right context.
So my experience is unless if you’re trading, you know, the actual SPY QQQ, you’re going to probably be long only. Futures, it gives you the option, no pun intended, to be long short, but short selling is also a different skill. The rules that you would use to buy something long, you can’t take the inverse of those necessarily and trade them short.
Back in the 80s when the markets were less crowded and less sophisticated, you could just buy 20-day highs and sell 20-day lows. And to some degree you can do that, but the results are not that great. The returns are choppy.
Your equity curve is going to look like, you know, a heartbeat and it’s hard to grow your money that way. A lot of false moves. There’s no follow through.
So that becomes problematic. You need something that’s a little more sophisticated than, you know, the trend following rules from the 70s and 80s. So with this one instrument, what I would suggest is, yes, study one market this way and so you can learn the nuances and develop a base for yourself.
Two, you can now take that model of what you’ve learned and then go learn another market, another index or how to apply it to a stock or apply it to corn, right, or sugar. Apply it to something else and now you have something to compare and contrast it to, right? So then the second thing would be like, why are you only playing the market from one side? Now granted, short selling is super risky, much riskier than buying something long, at least on paper, right, theoretically, because there’s no upper boundary as to how high something could go if you sell it short, but you could also buy put options, right? So I think for the folks that I know who focus on trading, say, just natural gas, they’ve been doing it for 20, 30 years, they can’t tell you where the S&P is because it’s not, they don’t care, it’s how they make their money. So what they’ve learned in the futures markets are, you know, term structure, where do the spreads move, how to, you know, play one contract against the other, you know, in the grains market they would call it old crop, new crop spreads, right, how to spread it against another commodity, right, so we have an inter-commodity spread, that could be like buying wheat and selling corn short against it, a relative value kind of trade.
They also know how to use the options markets and that’s, and why do I say all this? It’s because if you’re going to look at one instrument and your financial well-being is going to be tied to the performance of your trading that particular market, think about what I just said about like stock index futures, if you’re long only and the market’s rolling over in a downtrend, are you comfortable sitting on your hands, right, because if you want to get professional trading results, the manager’s not going to care what environment we’re in. You’re going to have to find a way to make money regardless of what the regime is, right, so then how do you do that, right, you have to be a kind of a trader, if the instrument isn’t going to cooperate, right, it doesn’t have the courtesy to just go up, you’re going to have to learn to trade both sides of the market if you just have one instrument because things don’t just typically creep up, right, look at the folks who are holders of Bitcoin, you know, they have to eat a lot of crow, personally I don’t think it’s the store of value, like a bond is a store of value, you can’t tell me something that has a 50% drawdown is a store of value, right, I don’t give a shit what Michael Saylor says about anything, never mind Bitcoin, so if you want to make money and that’s your goal, right, not to become an expert in trading ES or NQs or anything, your goal is to make money by managing risk, right, so reword your goal and that will help you understand like your skills might end up being lacking and or you might not develop the very skills that you need to make money because you’re coming to it saying, I want to be the world’s best long only trader of QQQ, perfect, but what happens when technology, you know, isn’t in favor and or the components in that index are dragging it down, do you start an index deletion strategy, can you learn to trade the market with puts or bear put spreads or can you sell credit call spreads above the market so that your expertise in that one particular market will hold fast across all market regimes and you can make money, that’s going to require you to develop several trading strategies on top of that one particular market, so to me that could be good or bad depending on how you’re built, like when I started, I could not handle foreign exchange because it was 24-7 and it was also very difficult to get the interbank rates because we weren’t really an interbank dealer, at least where I was working, so I didn’t want that type of stress, I had enough stress in my life, I was trying to build my business, I had to have my Clark Kent job where I was getting clients and opening new accounts and doing this and that, which was much harder because there was no internet, so I had to do it mano a mano, so I had to use my time judiciously, same thing with options, I found them far too complicated, at the time I didn’t have the time to study the Greeks and implied volatility and then learn about the charts, I found it overwhelming, there was just too much to learn and the resources just weren’t there, there were one or two books about options but it was much harder to find somebody who was trading the options markets back then, remember day trading wasn’t a thing back then, it might seem very foreign to you like I don’t understand why didn’t you just scalp using zero DTEs, I had seven licenses, I don’t even know what DTE means back in the late 80s, early 90s, it wasn’t an expression, now it’s like your dead grandmother could tell you just trade for DTE calls towards the end of the week if there’s a breakout, that market has like I said evolved quite a bit, the resources just weren’t there, so if you choose one instrument you might find yourself needing to find multiple strategies for making money depending on what regime that we’re in, whereas if you studied one particular entry system for long only and you can apply that to any number of instruments no matter what sector is in strength, meaning you could look at Mansfield relative strength, look at the sector then find the industry inside the sector then find the names inside the sector and you might be able to just trade one set of rules across any number of securities rather than trying to become a specialist in one stock or one instrument that might require you to be long only and then have to sit out for who knows what, days or weeks, maybe more if the market isn’t amenable to your particular flavor of being long only. So those are my thoughts, I appreciate you being here, if you’re new to the channel please like and subscribe and you can go to TraderMindset.com and get your free copy of the inner voice trading audio book, thanks for being here folks, I’ll see you tomorrow.
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