Day Trading Authority Podcast Episode 2 Part 3

Mark Soberman: Right.

Michael Martin: Right. So when you get done your listeners and your students have to be patient. So the question I write in the book and something that we can talk about today is, what do you feel like when you have to be patient. What does it like for you? You know, teach me and tell me what it's like when you have to be patient because patience is not a feeling. Patience is really a state of mind, it's a place of being, maybe sitting still, sitting on your hands. I know someone listening right now would find that that it would be absolutely heretical if I said, “Log out of your trading system today and turn the screen off. Don’t watch the markets in real time.” They’d be like, “Well, that's not what traders do.” And I'd say, “Well, that's what your definition of trading is is that you see yourself in front of a screen all day watching the markets.” That to me is entertainment. It's not trading, but if it works for you, great. Who am I to say? I say take out your journal and right down, if you can, if you're man enough to write down what your feeling when you have to surrender. Does that really mean quitting or does it mean regroup and come back tomorrow with a clear head so that you can go out?

[Inaudible] Jones used to have records and records of data whereby he would keep track of his daily equity run, something we can get into later for those of the listeners who are looking to get allocations. And he would have rules and say, “Well” -- he never wanted to have a month where he was down more than 10%. So when he was down 8% or whatever, he’d be cutting his positions and getting done, as you would say, and being in cash. Now, even if he had a week to go in the month, he would take the rest of the month off because on his track record he never wanted to have a, you know, 10% of a 1,000+ basis point down month on his P&L. He used to do it for weeks too. He didn’t want to have like the 2% day. And then the other rules for the weeks, I have to look up the numbers but I know he had them. And that's how you have very, very rigorous risk management. Now, at the end of day, the allocators are going to want to see how you perform under pressure when you were down, how long the draw down was and what your daily vol is. So you do yourself a big favor by actually taking time out and putting some distance between yourself and then feeling whatever those feelings are because if you think you're going to bully your way through it, you're not going to rationalize your way through a draw down, you know, that's suicide. And that's my two sense of it.

Mark Soberman: Sure. Well, it's interesting because we have a strategy that we call Keltner Bells, it’s all about swing trading ForEx and we all know that ForEx is basically open 24 hours a day and, you know. Any of us who have tried to trade ForEx, you know, for 24 hours know that that’s, you know, that's when we know we’re good, obviously, quickly. So teach something called Snap Shot Trading which is basically taking a snap shot of the market two times in 24 hours and only the rest just sort of just sort of do what it needs to do. And drives people absolutely crazy who have, you know, the strategy from us because they can’t stand to be on the sidelines, they can’t stand to potentially miss a trade at 2:00 in morning or 2:00 in the afternoon. And I think it’s a lot to do with, you mentioned a lot about like just sort of natural human nature and, you know, how smart people, they just, you know, they hate being wrong. We’re all thought a certain in, you know, in school when you trade, you really have to just realize that, you know, being wrong is going to be something that’s going to happen on a regular, you are going to miss a good trade, you know, all the time by being patient like you say, you know, waiting for those odds to really be stock enough in your favor. I mean, you know, how do we kind of get around. I guess the way that we’re coated as human beings, to actually be able to, you know, adapt to a strategy that’s telling us to do the exact opposite of what’s comfortable for us.

Michael Martin: Well, that’s the get in part, right? I mean Jason Zweig wrote in Your Money and Your Brain and Jonah Lehrer probably wrote one of the best books I’ve ever read in my life, How We Decide, talk about the prefrontal cortex and how as human beings over millions of years we have been conditioned to respond to opportunity, whether it’s at the casino, whether it’s with a loved one, significant other, whether it’s trading. And that’s the get in part. And I think a lot has been written about, you know, missing opportunities in trading, it’s not that big of a deal. Yeah, sure, if gold is going to go from 400 to 3,000, there’s probably a couple of spots that you get along. So any one trade is really incidental to your career.

Two, if your so inclined and unless, of course, you like beating your head against the wall and thinking that you actually have skills that you don’t currently have but for some reason you should be aware at 2:00 in the morning if there’s a big move in the a currency, you probably have expectations of yourself that far exceed what anyone else would expect from you. Two, you can program something to look for those types of opportunities where you don’t even have to be there with an algorithm or some type of high frequency trading solution so that this way you don’t actually miss the trade. You don’t have to be awake for it either. So you can look at in journal, again, what does it feel like when you feel like you missed an opportunity and what does that really mean to you? What could you have done differently? You know, because the goal is to have balance and harmony, not just between yourself and your trading but in the rest of your life. If you kind of pull the Jack Nicholson, you have all have work and no play, make Jack a bellboy and, you know, you’re in a scene from the Shinning.

And so you have to have balance in your life so that everything works for you, not just your trading mechanism but, you know, what you’re looking to get out of it emotionally, right? Trading has to be both emotionally rewarding as well as financially rewarding. And whatever feeling you keep feeling from your trading is part of your system. So if you feel frustrated because you’re missing opportunities all the time, well, that’s really your system. And so if you keep doing it, I don’t really see anything wrong with that system. It’s a system to deliver you frustration. It’s working perfectly. Don’t change it. But if you what to give yourself a break and trade during normal hours, then, you know, focus on, you know, the 9:30 to 4:00 bracket or whatever time frame you’re going to delineate for yourself and say, “Okay. Here are the hours I’m going to trade. If it’s going to happen, it has to happen within these hours and then I’m going to turn off the machine.” You know, there’s a point where you have to turn if off and go do something else, go read, go for a hike, go out, go the gym, go surfing, whatever it is that you do, go do it. Because everyone in the book has something, everybody in the book that I spoke with has a way to get away from the market. They do not obsess. Obsession is not a good thing.

Mark Soberman: Right. I think you have – well, I know there’s a chapter, I think you called it Surrender. And I think one of the quotes you have, the famous quote from the great trader Yoda was train yourself to let go of everything you fear to loss. And you talked a little bit about, you know, how people try to avoid failure at all cost. And, you know, obviously we’re talking about, you know, minimizing the time in the markets but, you know, even if you’re able to do that you’re still going to have, you know, failure on a regular basis. I mean, you know, we’re talking about embracing those feelings but, you know, how does somebody kind of – I don’t know -- kind of get through that if they’re hitting like a losing streak or having a number of losers inn the row. They’re doing everything right, they’re following their but they’re still failing. You know, what can somebody do kind of keep is safe?

Michael Martin: Right. So imagine yourself sitting in a chair and now separate your body and go stand 10 feet away, look back at yourself sitting in the chair. You know, what is so bad about trying something and losing like who you’re trying to impress, your dad, your girlfriend, your boyfriend? I don’t know who’s listening but what makes them so important to you and what makes them so invaluable? And when you talk to most folks, you find out that they have a couple of real doozies in their life where they completely not only drop the ball, they were ignorant to the opportunities. They made fantastic errors and judgment. And even if you don’t believe any of that, you can read anything from the [00:35:34] human beings are definitely addicted to opportunity but we’re also fantastically horrible, you know, channeling a little Phil Tetlock here of making prediction. We’re horrible at knowing both the frequency and the magnitude of any particular type of event. And so why people put that kind of pressure on themselves that they have to be both on mission but have perfect timing in everything is really an exercise in self hatred. I don’t know what else to call it but I give myself a bit of a break. I know I’m prepared. I try my hardest. When I fail I say, “Okay. What can I learn from this both, again, emotionally?” Financially, I don’t care anymore because I know what my losses are before I start. And, you know, if you’re a professional trader, losses are part of the business, you know.

My system is not exactly accurate which means it’s based on mathematical expectation. And to tell you a personal story, I joined – I launched my own CTA concurrent with joining the – being invited to join Incline Village Trading Tribe which at that time was about four or five guys including Ed. So two months into it in my account where I tend to do my more aggressive trading, I was down 25%. Two months into it, Ed Seykota sitting immediately to my left in his living in Incline Village. And I’m saying to myself and to Ed like, “Wow! This whole trading tribe were academic work. And now it's so -- well, Eddie, what the hell is going on? I’m here. I’m flying from Los Angeles. I take 24 hours to like leave LA get to Incline, you know, and then leave the next morning because it’s too late to leave. And yet I find myself down 25%. I get into beans, I get knocked out, I get into the beans, I get knocked, I get into the beans, I get knocked.” And it didn’t feel so well and it was also – it wasn’t necessarily humiliating but, you know, Ed is a guy who can look at you and tell you a lot more about yourself without even you, you know, uttering a single word. You might mark the same thing. It’s very insight for people.

So I’ve been there, you know, I lived through the frustration. I’ve had the self doubts but you have keep taking that next step whether it's a big step or small step, you have to take the step and say, “Okay. This is how it goes.” Everybody has fantastic draw downs. Bill Dunn had three years 15% in a row and he runs money for, you know, gigantic people who have nine figure accounts with them. Why people feel that they shouldn’t have to go through that as traders is not really realistic and it’s probably some idealized version of what a trader should of what Bruce Kovner, you know, should be or Phil Lipschutz for those of you who look up to him in the currency trading space. You know, everyone goes through this emotional hazing and they – no one is exempt at any time of their career. So the quote from Yoda is like, “What is it that you’re holding on to? Is it that you want to be viewed by your peers as a market wizard or that you’re infallible in the markets or that you’re the Zen master?” Like I don’t know what that is but I would just trade to have fun, have fun, make money, have a great quality of life, go enjoy, you know, the people that you love in your life and the things that you love to do, that’s what trading does for you. Anything else is really a different type of system. It’s not really trading system, it’s an emotional delivery system.

Mark Soberman: All right. And we’re back. I hope everybody got some good stuff out of that interview with Michael Martin. I know you probably want to listen to the entire interview because he just had so much good stuff to share with us. And if you’d like to do that, all you got to do is go to the trading tips blog. Again, that was netpicks.com/trading-tips. What you want to do is you want to sort of scroll down there and you’ll see there’s a host called Free Webinar Recording; The Inner Voice of Trading. And it actually was dated November 11, 2011. So many -- if you dig down a little if you’re listening to this recording later, a podcast later, but it’s definitely there that you can actually listen to the whole thing right online or download the MP3.

So with that, Brian, I think what we’re going to do is go to our listener questions. What we asked you guys to do is to send us questions. And you could do that with email address podcast@netpicks.com. If you got some questions that you'd like Brian or myself or both of us to answer, by all means, please, send us an email. We'd love to hear from you, get your feedback, is there anything that we’re not covering that we should. We definitely want to hear from you and we’ll make sure to work that in to future podcast. But we did get some really good questions. I got a little list here. So I might do is, Brian, if you don’t mind, just kind of put us both on the spot, let's just pick a couple of this that we should go ahead and try to answer. Sound good to you?

Brian Short: Let's do it.

Mark Soberman: Well, you have no choice. This is what we’re doing. So here we go. Question here is: How much time should I commit to trading? And that's from Allan B. So it's a very general question. I'm going to speak from the perspective of a day trader. You know, obviously there's different types and style of traders. But from a day trader,

Stay tuned for parts 2-4 of The Day Trading Authority Podcast Episode 2: Understanding Your Losses!

If you cannot wait, or if you would like to listen to the actual podcast, please visit: http://thedaytradingauthoritypodcast.com