Everybody, what is cracking ma? Good to see you. You look good today. Good question came in in the comments about when I was talking about equity curve and having that help you be a bit of a governor to know when to start backing off, trading less frequently and especially cutting position sizes versus your equity ramping up, nice slope to the curve, perhaps even going parabolic, giving you an indication that might make sense to trade things a little bit larger because it seems as if, at least through the evidence that the market is amenable to your trading style.
The markets have seasons, commodities have seasonality, but there’s different days and weeks and months and time periods where we want to go through our trading and evaluate when we lose, is it us or is it the market? Did we do something that was off kilter or not exactly in model, if you will? I’m not going to rehash that, but the question came in as like, should you just use closed trades or open mark to the market equity? I think that’s a great question. Thank you because I can’t see the names. Sometimes it’s like a jumble of alphanumeric stuff from someone leaving a comment and they don’t type their name.
Thank you for leaving the comment. I wish I knew who you were and I would shout you out and give you props, but thank you for the comment and the question. I would use your account balance.
Why is that? Because I thought about this even before I answered it in YouTube. When you see your open trade equity and then you plot it that way over time, you get to see the effect of having risk overnight and over the weekend. That data can give you a lot of information that can help you make better decisions.
For example, you might notice that you’re worried stiff about taking risk home overnight, but when you look at your equity curve, you can see that there’s a payoff to it. That’s objective. You might have very, very strong feelings and I’ve been there.
Look at the grain markets. I’m taking risk home and I know it’s weather driven, but you got to stay with the trend and the stuff’s all over the place. You can just put your stops in and where the market’s going to go, where it’s going to go at the end of the day.
I can’t get upset because I know over time I’ve done the right thing and I’m just going to continue to do the right things and the trades are going to go where they’re going to go. I don’t want to steer them and I don’t want to look at any one particular day and say, okay, you made $0.07 here, you made $0.16 here and then you made another $0.07 and then you gave back five and then got stopped. I don’t look at that as failure because I can’t predict on any given day where things are going to go.
I know if you’re studying commodities, you have to look at term structure because there’s things in term structure that you’re not going to see on the chart. Stocks are more secular. There’s sectors, then there’s industries, then there’s the tickers.
With futures, there’s like a seasonality, especially to the physical stuff. There’s crop years and so you can see there’s history in there that doesn’t necessarily change on a dime, the billions and billions of dollars that go into the production and consumption of commodities and commodity products, meaning like bean meal and bean oil from beans or would be like a product or like ultra low sulfur diesel fuel and gasoline or products from crude oil, so is jet fuel A. You get the picture. You can see those relationships and what they were and how they’ve acted historically and then when do they get out of sync.
If you’re studying natural gas, you can study, there’s really five months that matter in natural gas and then you can see consumption, how is the heat affecting things, the temperature liquid natural gas, this and that. You can build models that way. Going back to your equity curve though, you can see like if you take partial profits, that’s going to show up in the shape of your curve.
If you leave profits open and don’t decrease your position sizing until it gets to specific spots, then your curve is going to have a different shape. You get to see like the shape really is a function of the market which you can’t control and your behavior which you hopefully can control. That will lead your curve, your equity curve to have a certain shape and then you get to determine do you like the shape of it? Is it moving up? Is it sloping up fast enough? Because then you could use it and I’m not saying it’s regression analysis, but if you want to grow your account to a certain level, you can project like when it’s going to get there because you can see the equity growing over time and if you’re running out of space, you can do it then by how did you do every week and then condense it and say, okay, I want to get to 300K by a certain type of time.
I am not on that trajectory. What do I have to do to change my behavior? Do I have to trade larger? Do I have to use margin which I don’t know that I would do just starting out? Do I have to let my winners run longer? Or do I need to increase the number of positions that I have in my account? So that’s why this is very, very valuable is because it helps you. It doesn’t help you predict, but it gives you an idea like are you targeting the very goals that you set up for yourself? Then at the end of the curve, draw an arrow on it and see like which way is it pointing because that’s an indicator of how things are going and that to me was a diagnostic that I used.
Again, I was using what was then called Lotus 1-2-3 which was the prevailing spreadsheet of the day to keep track of things because I’m like the people that work with me were never going to come over and help me out with this stuff. They were all working on tips and selling stuff to make commissions. They were not really concerned with being either proprietary traders or like portfolio managers.
I know they kind of thought of themselves as portfolio managers, but they were really just asset allocators making their commissions and their fees. As an aside, I think that industry is going to come under an enormous amount of pressure. Why? Well, right now we have the advent of AI.
We’ve already seen commissions have basically gone to zero. So what’s left? If you have – well, that’s an aside. I won’t get into that now.
But I think that the RIA industry is going to be – there’s going to be a lot of changes there as well. So that’s what I could do. You could probably keep track of everything if you wanted to get super about it because Excel and Google Sheets can do this.
If you looked at your accounts, you could say, okay, there’s three parts to it and kind of come up with those barometer looking things and kind of create your own bars and say, okay, this was the composition of my account as my account balance so that you can see the bar where you can be like, okay, I’m 60% cash, that’ll be blue. The yellow part will be the closed equity of gains. Then the next color that you can pick, make it red or green, this is the open trade equity.
Then watch that as you plot your equity curve and then see what is the composition of each particular day or month, if you will, and keep track of all of it. What is at risk? What is cash and what has been booked? This type of data to me could be very, very valuable. We kind of use that in the coaching to help people make better decisions and to let their winners run for as long as possible so that this way they oftentimes will find that they can hit their goals sooner.
It’s hard to take open trade equity, big open trade equity home overnight, because it can make you anxious. The anxiety has nothing to do with finance. As long as your trading rules are set and you know what you’re doing, so you don’t want to let your emotional constitution psych you out of a winning trade because you’re scared about giving back too much of your open trade equity overnight.
This is why goal setting really matters. Is your behavior aligned? The fancy word is praxis, putting your beliefs into your behavior and then acting accordingly. Nowhere in the model does it say, okay, I’m going to buy on a 55-day breakout with a full 1% risk unit and then adjust my stop after one ATR up.
Then if it gets to three ATRs, I’m going to shit my pants and puke out the position because I’m scared. It’s not a trading rule, but that’s how if you read the studies like I do, that’s what people do. What’s the Dow Bar study on mutual funds? The average hold is like 4.3 years.
I thought these things were built for 20 plus years to be held. Anyway, I don’t get off target. These are my thoughts, though.
I think that information can really help you make better decisions, which is really the whole point of it, is you get to go to school on yourself and say, okay, here’s the sum total of all my decisions through this period of time. Now I can see like, okay, now I have six months, 12 months, 18 months, whatever it might be. I have enough data to see I know what I’m doing.
I know I can make money, but I’m not making enough when I’m making for me to hit my goals. You don’t want to fall into that kind of, you’re kind of stoned about it where you’re making money, but you’re not kind of making the traction that you need to make in order to hit your goals. I think you’re entitled to hit your goals.
You’re entitled to financial abundance. It’s not greed at all. That’s something different.
You deserve it. If you put the work in, you absolutely deserve the results. Thank you for watching.
I appreciate everyone’s comments and questions. You go to Trader Mindset. You can see there’s a lot of resources there.
You can get yourself a copy of my book, the audio book version at TraderMindset.com. I’ll see you tomorrow.
