Trader Mindset

When directional momentum stalls after you've established your position, here's what to do.

All trades have a beginning, a middle, and an end. Most traders focus too much IMHO on the entry (beginning) and the exit (the end). Mismanage the "middle" and it can mean all the difference between a winning trade and losing one.

Revert to more simplicity when you get in a rut.

Great traders focus on their behavior all the time. Consistency Perseverance Persistance Determination When you're starting out you won't have the luxury of having these feelings if you blow up two months into your trading career. Keep your frequency of trading to a minimum until you learn to trade one style and own it. Limit yourself to initiating two trades a day, else you might find yourself chasing everything that's up $2 / share because you feel you're missing out on many trades.

Most traders fail to reach their true optimum ability and optimal performance because they have no sense of imagination and the don't challenge themselves.

The biggest problem with being a chart-reader only trader, is that finding names for your watchlist is terribly inefficient.

Don't plan to get tasks done, else you'll be stuck in blue collar despair. Make goals that include increasing assets under management, revenue, net income, and consistent behavior around following your rules. That's how you'll grow your business and your wealth.

When I set personal goals alongside my business goals, I tend to hit both. When that happens, life is good! Already hit your goals? Set new ones that are realistic and attainable. Don't forget to set your "FU" or stretch goals also. You might not hit them, but you get your subconscious mind thinking about them even when your conscious mind is working on the attainable ones. You just never know...

You need two variations of your marketing message: one for individuals and high-net-worth families, and another for institutional investors and allocators. These two segments speak different languages and their concerns are very different. For example, if you launch into your pitch loaded with industry jargon to a HNW family, they won't understand a thing you're saying, whereas the allocator will. If you waver too much, you'll inadvertently end up trying to be everything to everybody. That tactic doesn't work. Learn to speak to your audience and be mindful of the subtle variations that will make you a success speaking to both segments.

Write out a short list for some of the things that you're grateful for. This is your Gratitude List and it can help you feel a little bit better about things when you think nothing is going right. You can try this just when you think you're gas tank is empty and you don't know where your next source of motivation might come from. Do everything you can to remain persistent and determined.

If you have no trading edge, where you execute your business doesn't matter.

Putting space between yourself and the market can be refreshing. You don't have to do this only when you're losing.

You can learn trading faster intellectually rather than emotionally. That's why it's easy to understand, but hard to do. Your emotions can get the best of you, stop you cold in your tracks, kill your confidence, and keep you at the level of a very knowledgable spectator.

Just like professional athletes and competitors prepare mentally for a match, so can you. In fact, you have to. You can't just wing it. Intentions equal results. Put it in your mind that you are going to achieve your goals then go and do it.

Here's a great example of how to combine your passion for one area of your life that can potentially benefit your business.

Michael Martin discusses how you can get potential clients to come to you.

People do business with people they like - so be likable. If you're a fly fishing nut and know all the best spots to fish, you can find like-minded people to cohort with by joining a group or association that is passionate about fly fishing. Or even better, you can start a weekenders fly fishing getaway for which you are the guide. Successful businessmen like to fish and be outdoors, so it's a good group to affiliate with. They have the success, the business acumen, and the capital to risk to either back your company or become clients.

Setting personal goals in parallel with you trading goals can have a 1+1=3 type of payoff. For one, achieving personal goals can give you a boost of confidence and raise your self-esteem. I generally believe that it's impossible to do anything well if you lack confidence. Trading is a game of failure and learning to succeed in the face of low accuracy and high expected values can help you develop the mental stamina necessary to survive periods of time where you have no evidence of any trading skill. Two, having personal goals keeps your brain in a mode of "figure-out-ability" that is critical for trading success. Your trading tactics and methodology is going to come from much trial and error. When your brain is conditioned to figure things out, you're in a natural state of "curiosity leads to revelation leads to eventual solution." When I have had to come to the trading whiteboard "cold" so to speak, it took me much longer (days and weeks) to get my brain in gear to figure out a solution. Lastly, you'll meet new people along the way when you have similar interests. People tend to like and become friends with other people who share experiences. Maybe some of these people would be interested in learning about your trading process and hiring you to manage the money?

Position sizing has the most impact on your P&L, so make sure you get it right. In strongly trending markets, you can throw a dart to pick your entry and make a ton of cash. The position size is the part of your trading algo where the sword cuts both ways. It's also the part of your trading that goes to the core of any self-doubt you might have about your ability. Trade to big and bad news and bad luck can hurt you badly and destabilize you for weeks or months. Trade to small and never get anywhere for all your efforts (it's possible to trade too small and not have enough risk to meet your financial goals). In this episode, Michael Martin discusses several things to consider as you carve out your methodology for position sizing.

Some options trades require you to complete the structure in two steps. Whereas you don't want to "leg" into intra-commodity spreads, you might consider that a strategy for your butterfly or condor trades. Instead of putting on a long butterfly all at once, many traders we've worked with are buying call spreads, for example, and then after the market moves selling the call spread above it to complete the butterfly. This doesn't work 100% of the time, and sometimes you just offset the vertical spread. However, sometimes is does work and you can take advantage of the flexible nature of options to carve out your Reward to risk profiles.

Michael Martin discusses how it's appropriate for some traders to focus on one market or sector for professional purposes.

Both winning and losing streaks are "user-defined" so make sure you understand what your trading results are telling you. Here's one way to know.

You are powerless over the markets, regardless if you have 30 years of experience or only 30 days. Focus on your process, because you can't control the outcome. I believe you need to have positive intention about your trading as "intentions equal results." Your intention is closely related to your attitude and your attitude affects your judgment, judgment affects your behavior, and behavior predicts where you end up in life. You can't work backwards from losing money in one month and determine that you are not a good trader. You may have had bad luck or the markets might not be amenable to your trading rules. You may come to understand that your process needs tweaking to better suit the markets or your emotional makeup. That's what backtesting is for. If your results from trading in one month are "in model" then all you can do is study the variance between what orders your system generated and what orders you entered. The same can be said about winning months and good trading.

In this episode, Michael Martin has a frank discussion about what you need and what you don't need at the beginning of your career. In one sense, your job is to survive. That means going slowly and playing superior defense. Many traders keep a full-time job to make sure they can pay their bills before going solo.

Michael Martin discusses the "triumvirate" that every trader needs to succeed long-term trading the markets.

In this episode, a reader asks Michael Martin about some of the markets he's trading.

Most allocators know that you are powerless over the markets. But if you tell them the markets you trade, they'll have a good idea of where your performance should come from.

Be mindful of all your trading activity and non-activity. Growing too slowly can be problematic, but so can growing too quickly.

You don't have to double your position to have added to a winning trade. Try adding 20% to see how it feels. For best results, you'll have to backtest in a simulator to determine the best location and position size for adding to your winners. If you believe, like I do, that most markets don't trend and that trends persist, this might be a good tactic for you to look at.

The hardest part of investing (and trading) is knowing when to take profits. In my trading, I'm using systematic exits. Harder, is when I have a long-term buy and hold in my investment portfolio and I have to let go of a name that I've had for ages. See the corresponding video on Disney.

You can create some interesting spreads between weekly and monthly option expirations. Some traders buy the longer dated options and sell nearer expirations to pay for them. Get the MartinKronicle Android App - it's free.

There are traders whose sole responsibility is to create alpha in only one sector or in one commodity group. Sometimes, it might be in just one contract such as natural gas, for example. Since most markets are not trending, focusing on one sector can be a challenge if there is no direction or trend. Unless you've been trained... These particular traders have learned to make money in natural gas regardless of the market environment. That ability did not show up overnight and it took a great deal of trial and error in order to understand the shifts between market environments. You can get there also, but you have to be willing to run more than one system. The key to understanding the context of "diversify" here, is that the trader deploys several systems depending on the market environment. Get the MartinKronicle App for Android When markets are trending, they're long or short. When volatile and choppy, they have vol crush trades on. When consolidating, they have credit vertical spreads. And when seasonal, they can create calendar spreads in futures. These aren't day traders either. You can study the relationships between an underlying security and all the related instruments to find your trading edge. Admittedly, some of them have access to the cash commodity markets too, so that gives them many more combinations of relationships to study.

I don't believe there is anything that can be called "advanced trading." Most of the time that I see that expression, it's in marketing literature. The best trading rules that make your money are easy to understand and simple to execute. Words like "advanced" are there to feed your ego. My take is that if a trader has a strong sense of self, then finding the right trading methodology is easy (or easier). Trading is largely psychological and emotional and the best traders acknowledge who they are and what they can handle, and act accordingly. I've said before "if you don't know who you are, then what you know doesn't matter" when it comes to trading. Get the MartinKronicle app for Android. We'll be adding much bonus content that we can't include in a podcast or blog post. Apple iOS version coming soon!

There were times when I invited huge vol to my portfolio. It would run up 20% and then dive-bomb to -20%...that's intraweek! The portfolio comprised of outright directional trades including long/short futures, debit option trades, and long stocks. What I found over time though, was that all this ebb and flow created an equity curve that looked like a heart monitor. I had to find a way to create positive slope to the curve. That's how we keep score. Get the new MartinKronicle app for Android Moreover, it wasn't about the instruments that I was trading nor the combination of them, but HOW I was trading them. Once I determined that my up days and weeks were from a small semblance of skill and not luck, I had to learn to keep the profits that the market was "giving" me. Backtesting, I found the optimal points where I had to cut my losses and, more difficult than that, where to take profits without unwinding profitable trades too soon - to me, the hardest trade there is to make. In this episode, I remember how I had to make tough decisions around blue-chip names when you're taught that selling them is a sacrilege. (Watch the attached video to see what I mean.) Our first order of business once we add risk, is to keep losses small. Once I did that in concert with learning tactical ways to take profits, my equity curve took off. And that's not having to change my orientation to trading, the instruments I traded, nor the timeframes within which I traded. Those two seemingly small adjustments led to huge gains and I didn't have to do that much to turn this situation around.

Frustrated about your trading? Maybe you're fine right where you are and you just have to accept "what is" and take life on life's terms. I see this a lot in traders who always want to be somewhere else when they are doing fine right where they are. If this sounds like someone you know, listen in...

In this episode, Michael Martin discusses the evolution of your trading rules and system design.

Although it takes a bit of time and effort, building a systematized set of trading rules is worth it in the long run. Instead of reading charts to come up with trading ideas subjectively, each evening you'll run your trading rules to generate orders which you'll enter the following morning. In this episode, Michael Martin recounts how he developed his original model and how it evolved into what he's doing today in trading and teaching building models and systems.

Start with long-dated Call options and turn them into a Bull Call spread by selling the upper strike when the underlying reverses down. Cover that leg when the vol crashes. You can create other structures too, such as condors or butterflies all based upon a core holding of long dated calls.

If you put every dollar you have to work, you don't give yourself any room when Murphy's Law kicks in. If you keep some dry powder, you'll be able to able to withstand some shocks to the system, as well as have capital to deploy when something falls into your lap.

Michael Martin interviews options trader and portfolio manager Hari Krishnan on the current environment and how traders can position themselves with options to capture greater profits. Krishnan is the author of The 2nd Leg Down: Strategies for Profiting after a Market Sell-Off.

Crypto investing is missing some key components that an investor's are used to in trading equities, options, and futures. In this episode, Michael Martin discusses what's missing and why you should measure 8 times and cut once in the crypto space.

With the likelihood of the fed tightening, investors who rely on certain instruments for income are in a tough spot. They can use options to transfer the risk and hold their current positions.

Key inflection points can happen with the fundamentals as well as the technicals.

I've seen too many traders try to trade something on a hunch because they thought earnings were going to be a blowout. It's much more complicated than that. There's the EPS, top-line growth, expenses, one-time charges, and forward-looking statements that get reported. I've seen companies beat by $0.02 per share, but the forward-looking statements are bearish or cautious and the stock sells off. Trading on hunches is a gamble: you don't know the probabilities nor the expected values. If you can't model it, you can't trade it.

If you believe the adage that "good trading is boring," then system trading is boring to the nth degree. There are days, sometimes weeks, that I don't generate an ORDER, never mind a trade. Then there are times when there are so many orders, you have to write them all out first in a general ledger and number the tickets. On the flip side, system trading is also very peaceful because I'm able to scan thousands of instruments in less than a minute and not worry that I'm missing out of an opportunity. That is a mental advantage if nothing else.

Focus on your process and stay out of the results - you're powerless over them. All you can do is control the "controlables" - that is, your behavior.

Seasonal commodity spreads can be very a reliable type of trade for your portfolio. While commodities are surely not for everyone, commodity spreads are considered "hedged" because the trader is simultaneously long and short the same commodity but in different expiration months. A great source of information on spreads is at Moore Research Center. You can find them on the internet at www.mrci.com.