Your Relationship With Risk: Nickels In, Quarters Out
Hope you’re doing well. There are a lot of emails and requests to record videos, and I’m going to try to get to as many as I can. There’s a lot of overlap, so I’ll give you a shout out via email or on the YouTube channel — there are too many to list individually.
I want to talk about relationship status again.
Risk Management Is Everywhere
When we manage risk, we do it in every area of our lives. We do it with our employment. We do it with our spouse or loved one. We do it with our kids. We do it with our friends.
The best relationships are ones based on reciprocity — some give and take.
Think about the question I get a lot: Mike, how do you deal with losses? You really can’t tell when I’m making or losing money because I’m generally placated either way. I don’t get emotional about it.
Right now I’m in a 2.1% drawdown. I don’t care. It doesn’t bother me. Trading losses and drawdowns don’t affect me emotionally the way they did when I was starting out.
Why? For one, I have a lot of experience now. I know I’m one trade away from making it back. The way I look at things, I’m looking for five-to-one payoffs. If I don’t see that, I don’t put the trade on. It’s a go/no-go rule for me.
I don’t need to be right. I don’t care about that. I’m looking for setups where the payoff is absurd compared to what I’m risking. As I say to my trading pod and my closer friends, including Victor: I’m risking a dime to make ten bucks. That’s how I look at it.
That’s not new. I didn’t invent it. I invented it for me, in my way. But there are people — probably better traders than me — who have mastered that approach.
Some Days You Give, Some Days You Get
Back to the relationship part.
You have to remember that some days are giving days. You don’t feel like you’re getting attention. You’re not getting the love you need. And there are other days where you’re spoiled rotten — you have the best friendships, the best partner, everything is clicking.
That’s the ebb and flow. Every day isn’t going to be gimme, gimme, gimme. That’s not a healthy way to look at it — unless you’re a narcissist, in which case, keep being you. But people catch on to that after a while.
I’ve jettisoned people from my life who operate that way. There are people who start sending me emails and treating me like we’re friends — and I know what’s coming next. They want free coaching. I don’t do that. I don’t have the time for it, and there has to be an exchange of value. If you value my time and my insight, I’m doing what I can here.
I had a window of time off, but I have to take care of myself because no one else is going to do it. Then I can come back when the timing’s right.
There’s a huge library available. There are about 1,500 episodes between the audio-only ones and the video ones on Spotify and Apple Podcasts, going back to 2017. Some earlier. I had podcast episodes as far back as 2005, when I was doing more book review work.
Losing Money Says Nothing About Who You Are
I want you to think: when you put on a trade, you have a relationship with the market. Some days you give. Some days you get. That’s how you learn to let the water roll off your back and not internalize the losses.
Look at me. Losing money says nothing about who you are as a person. It also says nothing about how good or bad you are as a trader.
What gives you insight is your equity curve.
You can make a lot of money, then give back — systematic attrition of capital — then boom, it ramps up again. You learn about yourself if you study your own behavior.
That’s what I had to do. I didn’t have a choice. There was no one else to help me. There were books and a handful of people, but most of the traders I knew back then were execution people — they weren’t managing their own money. There were some floor traders in Coffee, Sugar, Cocoa, Comex, and Nimex I got to know who were running their own books, but not many.
Nickels In, Quarters Out
Here’s what one of those floor traders told me: on the days I have to give, I’m giving nickels away. Nickel, nickel, nickel, nickel, nickel. On the days I win, I’m taking quarters to 50-cent pieces.
That’s how it has to work. Asymmetry.
This is how you learn to cope with what might be a 50 to 70% frequency of losses. The 70% of the time you’re wrong, you’re giving away pennies and nickels. But the 30% of the time you’re right, you’re taking dimes to quarters to 50-cent pieces. Those wins will probably be less frequent — but if you’re adding to your winners, you’re waiting for those opportune times when the market lets out a little gas and then the move resumes to the upside.
Think about giving away nickels to make quarters. Do the math. You have to be in it, and you can’t internalize it.
How Often to Review
I review, probably quarterly. Some people look every day. I think that’s too much — on any given day, it’s difficult to know what’s going on. At most, weekly.
I believe in postmortems, but some people have gone off the deep end with it. They spend four hours doing analysis and postmortems. The easiest thing to do is just chart your equity curve.
If you’re having bigger swings, maybe you have to cut your position size. If you’re having bigger swings, maybe you have to get out of the semis and switch to something else.
Also remember: lower prices don’t mean better value. They just mean lower market cap. In the case of Micron, they had really good earnings, so you can let that go — but good fences make good neighbors.
Cutting Out the Negative
Related note: I tend to cut away people who are negative. I have neighbors who come at me in the morning saying, “I hate this guy, I hate this politician, I hate Gavin Newsom, I hate that.” I’m thinking: why are you coming to me first thing in the morning and the first thing out of your mouth is how much you dislike another person? Why would you think I’d care about that? And why would you want to bond over dislike for another human being?
That’s zero emotional intelligence and tone deaf on how to deal with people. I have to move that out of my space. I don’t want the negative feelings of my trading to infiltrate the trades I’m putting on going forward.
So look at your equity curve. Do postmortems, but keep them simple: did I do the best I could with what I knew at the time? Don’t start overthinking things. Don’t bring in Monty Hall problems and start renegotiating everything based on how you feel about being smart or how you feel about losing money.
I have my thesis. I go with it. I know where my stop is. If the stop gets hit, I can always get back in — but I don’t want to renegotiate mid-trade.
The Emotional and Financial Payoffs
Know that you’re going to have to give away nickels to get the quarters you want. You have to stay with the risk and take it home overnight.
That’s another thing that came out of the Market Wizards books: they all understood that the money is the risk and reward. There’s emotional risk and financial risk. Part of the emotional risk is: how do you feel about taking risk home overnight? Because that’s how you get paid.
So go to school on yourself. Think of yourself as being in a relationship with risk and the market. Some days you have to give. Some days you have to get. On the days you give, make sure you have a set, determined level. Then that’s it.
You can take it further and set daily loss limits — weekly, monthly. A lot of day trading and prop firms have those. It’s a good idea to have some of them in mind.
Thanks for being here. Get your copy of The Inner Voice of Trading audiobook at TraderMindset.com.
