Trader Mindset

You have to always manage risk with the odds in your favor. Even if you lose, if you're sticking to your rules, it could be a good trade that just had a bad outcome. Keep putting on trades with high expected values and over hundreds of trades you'll come out ahead. How you recover from a drawdown is more important that the duration or magnitude of the drawdown. Everyone has drawdowns. Therefore, focus on your rules and play superior defense and allocations such as Peter will respect your process. If you bail on your rules, like amateurs do, you relegate yourself back to amateurville. How you behave around drawdowns will show allocators how you will behave when you lose their money.

Michael Martin answers the question "How would you trade X commodity or stock?" Also, he discusses how he trades laggards.

Energy analyst Brynne Kelly discusses term structure in crude oil and natural gas, as well as what happens when markets invert.

We all run two systems: our trading rules and our emotional rules. I think making money over the long term is about being a master of both systems. In the short run, your trading rules can benefit from luck. Our habits or paradigms really tell us what we are feeling on a deep level and steer our behavior, and our behavior predicts where we end up in life. I think this is why you can know some really smart people but they can't trade. Two, it can be tied to why some can make money but can't keep it. It's absolutely why anyone can learn to trade, but few can actually do it. They aren't built the right way emotionally for the profession. Bull markets reward even the worst systems with net long exposure, but when the markets turn is really where the money is made so to speak. How does your trading serve you in that regard, because sometimes people trade for more than the money. They think they want the lifestyle because they see the outward expression of the results without fully understanding what it takes to get there. If you're not getting results that you'd like, you're likely going to have to change your behavior, perhaps more than your thought process. If you believe that humans are pleasure seekers, you might believe that we do what feels good. Therefore, changing might not feel good until it becomes ingrained and habitual. In order to develop new habits, you have to subscribe to massive repetition and consistency. What are you willing to NOT do to improve your trading results? Sometimes it's removing a factor or parameter that helps you get the outcomes that you want more consistently in a probabilistic endeavor such as trading. Here are some good questions to ask yourself: Can you stop daytrading or short term trading to make room for longer-term winning trades? Do you feel like you're in greater control by trading more frequently? If that's your belief system, and you're not making money, would you say that your need for the feeling of control is greater than your need to become a successful trader? That is true for many an aspiring trader because they haven't felt the feelings around what being a successful trader is, so they have no after-the-fact or "a posteriori" knowledge. Are you willing to let go of those feelings around control to evolve into something more than you are now? This is what I mean when I speak about 'surrender' - I'm not talking about giving up, but pivoting. What does it feel like to make decisions with uncertain outcomes based upon short-term random data? The more you can live with the uncertainty, the more money you'll make. Think in terms of increasing the odds or probabilities.

Sometimes the best trades are the ones that you don't enter. I know this might sound cute, but entering orders around big announcements can be a big gamble. Consider how you feel around trading the EIA, API, NOPA Crush numbers, quarterly earning announcements, and the FOMC announcements. Are you keeping orders on the book or do you lift them? Is part of the payoff the excitement around the trade ? Lift the orders around these moments of uncertainly. If you're trading options, that's a different story. I don't think it's a good idea to make your bones trying to trade announcements as a strategy. Allocators won't know how you can model this in a way that has high expected values, and in today's world, low daily volatility. Cancel existing orders around the releasing of key data points. I'm not saying to offset existing positions.

Advisors to HNW clients are in the business of gathering assets and wrapping them up in a "fee for service" asset management program built around an asset allocation model. I know they like to call themselves "money managers" but they don't know their asses from a hole in the ground about portfolio management. Their sole focus is to get in front of money in motion. That's why they have as many as 5 securities licenses, in addition to the health and life insurance licenses. You can bet that if their clients are considering an alternative investment or managed futures, that the Financial Advisor will have a product in-house to allocate their client funds into (and get the fees too). This isn't altruism. Your best leads - the Glengarry leads - will be the people you already know who deal with commodities as part of their business. They understand the cyclical nature of commodities, they have superior fundamental knowledge of the business, and they understand basis risk. These are the perfect candidates for you to market your services to. The less you have to explain to someone about how commodities work, the easier it will be to get your message across. If you run a long/short equity fund, these are good candidates for you too as they inherently understand the nature of shorting / short selling.

You typically need to register when you are going to be marketing a great deal and holding yourself out to the general public. You can hold off from registration and take advantage of what are called "de minimus" exemptions and avoid paying the fees and doing all the paperwork until you have a certain number of clients over any 12-month period of time. On the RIA side, you can register by state or with the SEC. There are asset levels that would mandate your registering with the SEC regardless of the number of clients. One thing I'd like to stress is that most potential clients are not going to understand anything about registration. Two, being registered will not make raising assets any easier. Clients are not going to show up just because you are registered. I think many new traders go and register because it will give them a sense of security or clout. IMHO, it doesn't do that. All it does do is create busy work for you so that you can avoid the rejection you get from having to ask people for money. I'd save the registration fees in that regard, find some clients, and then go register using some of the management fees you've earned. If you have a trading grubstake, and enough money to pay your expenses at the beginning of your career, spend the time and money raising assets. Everything else is a distraction from what will get you to where you want to be. Getting assets to manage is the key to your success and growth. Focus on that process. Your track record will come over time. If you want to grow your business, double your asset base. For example, if you're running $1,000,000 right now and you want to grow, go get 4 new clients at $250,000 each. That's the fastest way to double your asset base and increase your fees. If you achieve 12% RoR, it will take you more than 6 years via internal growth because your fees would come out of the account. You can get 4 new clients in a few months or less. Save your money and don't buy shit you don't need like computer monitors, a fancy office, or registration fees. You can't buy your way into success - you have to trade up to it and gather net new assets.

Make sure you allocate funds to your marketing budget first. Don't skimp on the quality of your handouts. I'd create a nice 4-pager that folds over, in color, and have a bio about yourself, a summary of your trading style, and how what you do fits in with other managers. Unless you have 12 months of return data, I'd keep the performance in the Disclosure Document. Else, you'll be needing to update the color handout and color printing can get expensive quickly. You can write up the summary, get the headshot, and then have someone at upwork.com design and put together the 4-pager for you for a few hundred dollars. Get a high quality head shot with a professional photographer. Do not, under any circumstances, use a cropped photo from a wedding or formal in which you were wearing a tuxedo. You can get a pro photographer to take a few dozen shots of your for a few hundred dollars. This is money well-spent. You don't need to have all the social media channels on your firm's website. If you goal is to make professional connections, I'd use LinkedIn and leave it at that. That's the platform where people expect to get solicited and make business connections. If you have Facebook, Twitter, Stocktwits, Snapchat, Instagram, and Google+, you'll need fresh content for all of those channels at least weekly. It looks bad if you sign up for Instagram, post one thing, and then abandon the channel. I would be very judicious in posting personal things. That includes pictures of you and your frat brothers, political opinions, or thoughts about President Trump or Secretary Clinton, for example. Unless you don't care about polarizing your audience, do what you think is best, but I'd avoid such themes in my sharing. You might offend a potential client and in the beginning, you can't afford to turn people off when you're trying to turn them onto what you can do for them. Add this all up and you have the start of a professional appearance. You'll find though, that you still have to do outbound marketing in order to raise money. Setting up a website and a few social media channels is a good way to engage people, but you still have to ask for the money.

You need sales training to raise money. If you're afraid of rejection, you have to hire someone to do this for you. Money will not walk in the front door because you are licensed, have an office, or even a decent track record. You need to ask for the business, ie, ask for the money. Clients will not decide unless you ask them. In the beginning, you might not be able to hire anyone because of lack of revenue. That means, you'll have to learn to raise assets yourself. You can rehearse and practice your "pitch" by recording it into your smartphone. Then listen back to it and hear your own voice. Are you exhibiting confidence? Where does your voice change, crack, get louder, emphasize certain points of a sentence? This is revealing information because as you know, any type of verbal communication is a combination of what you say and how you're saying it. What do you sound like to yourself? That's exactly how you will sound to potential clients. Record yourself reading your disclosure document. Record yourself explaining your trading process and risk management. Then record yourself pitching a friend or colleague and have them ask you questions about what you're saying. See if they can poke holes in your presentation. By doing this, and getting a little uncomfortable now, you'll be much better presenting when it counts. I promise you there are guys running money who can't spell "disclosure document" but they are good salesmen. If you think that isn't fair, you might be right, but at least you know now that you have to find a way to sell and raise assets.

What do you do when you have all your capital committed, but you get a NEW trade signal before you get stopped for a loss or take a winner to free up some buyer power? This can happen when you have a smaller account. It can also happen if you have a larger account, but have a maximum amount of the account that you commit to margin. If you have a smaller account, my recommendation is to sell the biggest loser to free up the cash / buying power. This is done before your protective sell stop is hit. In my experience, trades that have made me money did so from the 'get go' so that's why I puke out the biggest loser at that time. I believe that you'll be better served by taking the new trade that has momentum behind it. If you have a larger account with a "target margin percentage" based upon the total assets under management, you can set a circuit breaker to make a rule around this occurrence. For example, you might have a rule that allows you to commit as much as 15% of your capital to margin in your futures trading account. That means $150,000 for every $1,000,000 under management. Do you allow it to go to $200,000 intraday? Do you offset the biggest losers or oldest positions that do not have unrealized gains in order to free up the margin? Look at your backtest and see how many of those losing trades came back to be winners. In my experience, only a small percentage will (at least based upon how I trade). Many of these new trade signals will be for additional risk units to existing winning trades in your portfolio if you have this as part of your system, that's why this rule is important. It's not uncommon for me to have initiated 4-5 trades (in different names), only to have 1-2 knocked out for losses, 1-2 be flat, and 1-2 show modest gains. Once in a while, one position will run like the wind. [Sometimes, I get knocked out for losses across the board - fun times...] If I get a signal to add to the winner, the margin has to come from somewhere if I have not gotten stopped or taken a gain from a system generated order.

When you trade with a system, you'll find that a few times a year the markets just stall right when you have a few positions on. Once this happens, it's important to remember that you have to play superior defense and protect your capital. Professional traders sometimes use what are referred to as "time stops" to offset risk. Here's how to do it... If after you get long, for example, and the market stalls and there is no real movement in your position up or down over the next 2-3 days, offset the trade and go to cash. That might mean a range of $0.20 up or down from your entry or 1/4 point if you trade commodities. You can define what you feel your definition of the market being "flat" is. The best trades make you money right away. From looking at my own backtests, I found that upwards of 70% of these trades that "stalled" eventually lost money. I pre-empted that from happening by offsetting them before they could get stopped for the max loss that I was willing to take on the trade. So, I wasn't technically making money, but I was "losing less." Either way, I had more equity in my account that had I not utilized this strategy.

Backtesting is valuable for system design, as well as getting emotionally prepared for what's possible. It shows you what your gains and losses would have been had you followed your rules over the previous time period that you're testing. There are more things to measure besides gains, losses, and drawdowns. For all the trades that you make, you'll have commissions and fees that you can calculate given what of your trades get filled. There is no cost for entering stop orders. If your backtest generated $60k for last year, but you didn't consider the effect of commissions and fees, you might be surprised to find that you also generated $40k in commissions. Therefore, your net trading profits are $20k - a big difference than $60k. Worse, you don't typically get filled at the price you entered in your order. Stop orders become market orders once elected. That means "you get in line" for the next fill based upon "Priority, precedence, and parity." The difference in the price that you entered in your order and the fill price is called "slippage" or "skid" and it comes as a cost to trading. You can add a number to your simulator to represent the slippage in your trading simulations that will represent the impact it will have on your trading and your P&L. This will give you a truer sense of what you're endeavoring to do as a trader. Therefore, I'm concluding that when you overtrade, you're getting the worst of it: you're losing money, paying higher commissions, and losing money from slippage. When try to overtrade your way out of a drawdown because you feel more frequent trading means more opportunity to win, you make a bad situation worse.

The duration of your drawdown is "how long" it takes you to get back to the previous high. It's one thing to be down 10%, but how long will it take you to recover? If your losses are "in model" there's no reason to panic. You can get this information from backtesting your rules in a simulator. If you are trying to read charts, you're out of luck because your activity is based upon guesswork. While you're enduring a drawdown, your instincts might lead you to begin trading more frequently. Greater frequency of trades doest not equal greater opportunity. Most trades are suboptimal so I think you'll do better in any case by trading less. Your instincts might also lead you to "investigate" a new trading methodology to "overlay" on your existing rules, such as option selling because it brings in "revenue." You can lose your a** selling options. Behave consistently as you would when you're up 20%. All you do is follow your rules. Take it one day at a time. Meditate on how you feel when you have to be patient. You might feel anxious, depressed, angry, and frustrated to name a few. I don't believe your can overtrade your way out of a drawdown. You may also consider trading a larger position on something that you are "sure of" because "...if it only goes up 10%, I'll be back to even." "To every thing there is a season, and a time to every purpose under the heaven" - King James Bible Your trading rules might be "out of season" with the market. If you're a commodity trader, you know those markets are cyclical - so no surprise there. If you're an equity trader, sectors rotate so your winners will ebb and flow in secular markets. You will go much further as a trader if you understand that losing money and drawdowns are not a reflection of your ability to create alpha as a trader. But how you handle losses and drawdowns emotionally and behaviorally will provide you and others insight on your managing larger sums of money. Investors and allocators need to know you can be trusted.

If you want to be a professional trader, losses are part of the business. How you deal with losses, collectively called drawdowns, differentiate the amateurs from professional behavior. If you're down 20%, you need to do 25% to get back to even. This is important because you don't participate in the upside, ie, absolute performance, until you actually make the client money. Your sharing in the profits are called Incentive Fees or Profit Allocations and they are benchmarked against the initial account balance, aka, the "high water mark." Your ability is going to be measured by performance or alpha, but also how little you lose. Risk adjusted returns therefore are your goal. If you can garner market-like returns but with only a fraction of the drawdown, you'll be able to differentiate yourself from the competition. [Remember, the riches go to the salespeople. You need to learn how to ask people for money. It won't typically show up just because you have great risk adjusted returns. You need marketing and sales to 'show and tell' your performance.] Shorter time frame trading does NOT give you more control over your losses or drawdowns. It just means that you're likely to "die by 1,000 cuts" instead of taking a position and hold the risk over night and over the weekend. Those are good risks to take. Selling or offsetting your trades because it's the end of the day is known as "bad risk" - full of giant opportunity cost. In effect, you're leaving money on the table by not taking trades home. In order to minimize the impact on your P&L and also on your emotional constitution, you can take a haircut on your equity when you're in a drawdown. If you get to 80% of a previous high water mark, you can trade based upon 60% of your remaining equity, and effectively trade 48% of your original capital. This helps you trade smaller when your system is not aligned with what the market is doing. Your bet sizes will be based upon a smaller capital base. Set a max drawdown limit for the day, week, and month to keep your losses in order. Examples can be "never lose more than 1.00% of your overall equity in one day," or "stop trading at -9.50% for the month" thereby avoiding a double-digit down month. This infers that if you're at -9.50% on the 20th of the month, you stop trading until the start of the next calendar month. This may seem counter-emotional to you when I've told you to stick to your system, but you can benefit greatly as a professional trader/PM if you can say that "you've never had a down month of 10% or more." This rule is a circuit breaker in your system. Talk to prospective clients about how they deal with losses. If you show them that you have a superior methodology for dealing with losses than the other managers they're dealing with, there is an opportunity for you to capture those assets under management.

Gains look like gains only to the extent that you keep your losses small. Most traders lose and quit the business in frustration because they are underfunded, focused on short-term time frames, and trade to large for their capital space. You can gear your target RoR for a high number, like 100%, but you'll also have to endure a drawdown of 40-60%. I'd focus on consistency in your approach and your discipline. That is what you bring to the table that amateurs cannot. If the average person could act consistently around managing risk, there'd be no need for portfolio managers. Risk-adjusted returns are the key to getting an allocation. Sure you can get big returns, but at what risk to the operation? Anyone can roll the dice and hit it big once or twice, but that's not how to build a business. Those type of results appear from random luck, not a bankable process that can be repeated like a robust trading system that can be deployed across many markets. This podcast episode was inspired by a great email that I got about one particular trader's performance and a few of his discussions with "prop trading desk managers" (read: brokerage). There aren't many prop trading firms out there. Most are brokerage masquerading as prop trading. True prop trading is a firm that will give you funds to manage WITHOUT your needing to deposit your own funds because you are talented. If you want to trade your own capital, wait 6-12 months and see if you've developed a sense of trust with the firm. Making a deposit to an account makes you a brokerage firm client, not a prop trader.

We make predictions all the time, so why not in your trading? Professional traders will backtest and then add new elements or parameters to their existing system(s). Markets will evolve also, so you need to keep pace with evolving market environments. That means experimentation with something new. You can also test your hunches within the discretionary percentage of your trading. For example, some traders are 90% systematic and 10% discretionary. Test your predictions and hunches in the 10% discretionary allocation. Just make sure to follow you risk controls, ie, max risk per trade and correlation studies before you put on the trade. I think prediction gets a bad rap because anyone who doesn't have a system is effectively guessing at the market. That typically doesn't work out that well for too long until your rules get systematized. For one, you need to have rigid risk management techniques in place. It's likely that you will blow up if you put a large percentage of your capital on any one idea based upon a prediction or hunch. Risk 0.50% instead of 50%. Your feelings aren't facts and it's better to gauge your reasoning with proper risk management. There will always be new ideas to trade, but if you roll the dice on one name based upon a prediction, with no training, you're likely to get the worst of it.

Many of our students set goals based upon what they want the end result to be. Hard to have ownership of going from point A to point B if you don't know how to get there. Typical goals could be delineated accordingly: "I want to gain 15 lbs of muscle," "I want to lose 10 lbs of gut fat" or "I want to earn $X or X% this year." Instead, focus on what you have to do to get those results. For example, replace "I want to gain 15 lbs of muscle," say "I am going to the gym at 5 am M-T-Th-F each week before I get to the office." Then you can break down what exercises you'll do each day to breakup the workout so you don't go nuts, but also so you'll have much more ownership about the process. You can envision going to the gym and the exercises you'll be doing more than what you'll look like having lost the weight or adding 15 lbs of muscle. Professional traders focus on process, not results, so this type of thinking is in line with best practices. We find that when our clients or students focus on the the process of what they're endeavoring, they get better results, perform more consistently, and enjoy the process of achieving their goals. You can also make the small adjustments that you might need to make after several weeks, like adding an additional day of rest or adding cardio.

Frustration is the antithesis of confidence and euphoria. It can cripple you and distract you from your sense of persistence and determination. Unlike other teachers, I don't put a negative connotation on euphoria - as long as you don't abandon your trading rules, have at it. You can avoid frustration in the first place by "not" having expectations of the outcomes of anything (or any trades). This is not the same thing as Expected Value, but an emotional expectation about the result of something you're endeavoring - such as trading. One sure-fire way to decrease frustration in your trading is to make sure that you're protective stop is not placed inside the 20-day ATR of the instrument that you're trading. For example, say you're trading an instrument that has a 20-day ATR of 15 points. If you're long and the current market value is 535 and you've placed your stop at 530 because you have set 5 points as your max loss point, you are more than likely to get stopped given that you're stop is well within the ATR. Many times, traders with smaller accounts do just this because they don't want bigger losses. This is respectable and totally understandable. In our coaching and teaching, we've found that traders disregard the daily vol of the instrument their trading as if it was going to change because the trader put a trade on. We can't change the nature of things. The instrument that you're trading isn't going to change how it behaves just because you're in the trade. In the above example, you can trade a smaller position and give your smaller position a greater latitude by placing your protective stop at 520 (535-15). You can test this strategy. You might find that you are not getting knocked out of as many such trades and, if you are trading in strong trends, take the risk home overnight and let the market forces, time, and leverage work for you.

Bitcoin Bandits Although most people speaking about Bitcoin or crypto currencies can't tell you what the significance of blockchain technology is, I've read stories about people quitting their jobs to become bitcoin traders because of what they perceive as the opportunity of a lifetime. I remember the hubris during the dot.com boom very well. Regular Joes who had 9-5 type jobs were quitting their jobs and becoming day traders or SOES Bandits. Most eventually blew up. Some committed suicide or "went postal." They'd quit their jobs to become day traders and they used their 401k rollovers from the jobs they'd just quit to grubstake their trading account. You can read a good piece about SOES and the environment at Themis Trading. If you are considering this, please think twice - it's hard enough to get a good job that you like in the first place. You can be a trader by night and "keep your day job" so to speak. Trading is difficult even in the best of times and when the markets turn for the worse - and they will turn - traders who have not had years of experience across various market cycles and no training to boot, will be left holding the bag. Instead, learn to place your orders either the night before or the morning of the trading day. You can be sent alerts if your orders are filled at which point you can enter your protective stops. Although I don't do it myself, you can do much of this from a smartphone. I'd recommend doing this for a year before you make a big leap employment-wise. Many newer traders have a hard time paying their bills because they are trying to pay for their expenses from their trading profits. When the profits dry up as they do for every trader at various times during the year and career, traders can become reckless and take unsound risks because their actual performance is not what they had forecasted. Hard to make money when you're trading with scared money. It's best that you keep your funds segregated: keep money for your bills in a savings/checking account and your trading corpus in your trading account.

Stoicism can help you develop your overall philosophy and way of life around trading. However, you can't philosophize your way into emotional intelligence. Trading is experiential and that is the only way you'll be able to learn how to conjugate your trading rules with your tolerance for risk and your level of respect for the markets. A good site where you can learn a great deal about stoicism is Daily Stoic.

Randomness is omnipresent. It's everywhere in your life and in your trading. On any given trade, it's hard to determine if I had good or bad luck, if I have any skill, or if I'm in the right place at the right time. But once you have monthly returns from over several years of trading you can begin to run statistical analysis to get a better idea if you are good or lucky. If nothing else, the concept of randomness keeps me grounded or sober, in that "I am powerless over the markets." A great place to learn about the role of randomness in your life and trading is Nassim Taleb's Fooled by Randomness. I recently listened to the audiobook version after having read the hardcover book 6 times. I found that I (think I) heard things for the first time. Monte Carlo simulations show you how starting dates can alter your performance. If your first trade was on September 1 and that path led you to a 20% drawdown, you might find that someone trading the same system but starting two months later was up 25% by EOY, while you finished at breakeven. FYI - if you are working on a trading system, make sure that you include data from companies that went out of business, were taken over or merged, or instruments that were delisted, else you have only a list of survivors. For example, if your system would have had you long Enron, you'd like to know how that trade affected your P&L, as well as that of CMGI or any of the other dot.com stocks that blew up circa '99 and '00. If you would have traded Pork Bellies back in the day, you should run that data through your simulator also although the contract has been delisted from the CME in mid 2011 because of lack of interest and trading volume. Doing this will at least simulate the "worst case scenario" in your backtesting.

Please considering leaving even a 2-sentence review. It would help spread the word about the show. You can eliminate the risks you can't see by removing names from your "watch list" or data that you've raked - the step before you run the data through your simulator. Carbon Monoxide of Trading Pro traders focus on "not losing" rather how much they can make. Of course we need to make money, but by preserving your capital and focusing on defense, you put yourself in a position to appreciate your money emotionally and financially. Two invisible risks that you should be concerned with are below: Correlation risk Volume and Liquidity You can reduce correlation risk by NOT having all the metals in your data source. You can "rule out" correlation risk by saying "if long gold, don't take trades in silver," for example. Or, you can set a max risk per group, ie, social media companies, metals, softs, interest rates, so that one group or name will not become unwieldy. When the markets turn, they will turn for the whole group. If you have large positions of highly correlated assets, you might be in a spot risk-wise to give back more than you want to...and that's having placed definitive protective stop orders in the market to get filled - it's worse if you use mental stops. Volume is what you saw traded yesterday. Liquidity is what you need to offset your position when you need to do so. Big difference. The invisible risk here is that thin markets move sharply. You don't want to be in a position to take larger losses when the market turns on you because everyone is on the same side of the market. That's the case with Bitcoin right now. When you're looking to sell, who will be there to buy? You can rake your data to include only names that have a set criteria of trading volume so that you avoid problems before they arise. Commodity markets like oats, lumber, and cocoa can be problematic in that regard. Cocoa is not necessarily thin, but it does not have a daily trading limit so your loss potential can be much greater than you'd imagined when building your system.

"Mental stops" are not really stops, per se, but thoughts. It's a price where you are losing money, but aren't emotionally ready to take the loss, so you don't take it. Maybe you're not willing to take the loss because you've done a lot of work to research the trade and you feel it's not fair that you didn't get paid. Well get used to it. Neither the market nor anyone cares about what you put into your trading. Long term success comes down to your consistent behavior: putting in the orders and taking small consistent losses. Mental stops are an emotional place where you want to re-evaluate the situation to figure out what to do. That's the point where your lack of conviction in your process is starting to work against you. I think that's especially true for chart readers and discretionary traders. System traders put in their stops, get stopped, and wait for the next order to be generated by the system. The reality is that you've lost money. End of story. You have lost the money regardless whether you've "locked it in." Don't let the accounting language dissuade you from trading the way that will impact your trading positively. Yes, taking consistent small losses actually impacts your trading positively. Amateur move. Put your stops in and take solace in the fact that you'll be automatically get taken out of the trade before I lose any MORE money. Being able to take small consistent losses is the hallmark of a pro trader. Losing money does not mean you suck or that you are a loser at trading. The stop price is the point at which you are willing to transfer the risk to someone else. If you want to be a pro, losing money is part of the business.

Challenge your own way of thinking and let other traders help you uncover your blind spots. We all have them. I'm looking for people who think differently than I do so I can learn. I don't have a monopoly on ideas and I can be a bonehead at any given time. I rely on systematized trading rules and by gaining new insight from other people (who are mostly much more intelligent that I am) I am better off because I can oftentimes reduce the wisdom into a trading rule to enhance what I already have. I couldn't do that on my own - not without a great deal of random luck or perhaps a big loss that helped reshape my thinking. Below is a partial list - there are more coming. Brian Lund Jared Dillian Todd Harrison Mark Yusko Moore Research Brynne Kelly ETF Global Chicago Sean McGlaughlin David Aferiat - Trade Ideas Tadas Viskanta - Abnormal Returns Steve Sears - Barron's Striking Price Options Insider Sal Arnuk Joe Saluzzi

It's impossible to imagine the value of the blockchain and crypto currencies, so I'm a long-term investor at this point. I think the value is in my process, not the instrument that I'm trading. Two, I'm not going to let any one security put my trading process in jeopardy. I've talked before about what I look at and how I rake the data to include instruments within my trading system. I'm not going to change those rules for any instrument. I have not traded bitcoin futures and I won't be in the near term. There is not enough data and I don't know who has basis risk. It seems like the market is dominated by speculators and not hedgers, and they are heavily biased long. When the market is lop-sided and fickle, it makes for a poor trading environment. That's why I'm invested and not trading at this point. It's too easy to lose money when I'm trading well... The best that will happen is that I'll add it to my system and trade it among all the other instruments that are in there. It's not getting any special treatment, nor am I going to try to develop a dedicated system to trade bitcoin. Use cold storage for your crypto currency investments - that means offline. You can use a USB drive and drop that into a safe deposit box. You can also use what's called a "hardware wallet" such as those below instead of an online wallet and exchange such as Coinbase or another online digital wallet that can be hacked. KeepKey Ledger Nano S Trezor Lastly, keep your mouth quiet about owning bitcoin or any other valuable cryptocurrency and how your store them. No one needs to know your personal business. Don't brag or bring attention to yourself (about bitcoin, art, or collectibles) so you don't tip off anyone to come and rob you.

Goals need to be realistic and attainable. You also need to consider the growth in competing areas of trading. If you're making money, how do you know it's not random luck or a bull market? I'd love it if everyone could turn $10k into $1,000,000 but the majority who try will lose all their marbles. Those that do will be lucky having been "in the right place at the right time." Think of it's this way: if you turned $10k into $1 MM this year playing the lottery, and you had to live your life over 100 times, you'd never replicate doing that ever again. Same for following a set of rules that don't make money [have positive expected value]. You can trade those all day, and you'll do nothing but lose money on average over the long term. You'd have a better chance of making 20% YoY if you followed a systematized set of rules with positive expected values and traded them over and over. I'm sure Taleb and Ariely have said as much. Goals and systems need to be reviewed. You might not have hit your financial goals even though we're in a bull market. That might have to do with your risk per trade, overall risk in your portfolio, or markets to trade. It's possible to have too little risk as well as too much risk. You can trade good rules and lose money. That's bad luck, not a bad system. Keep a goal for minimizing losses. Let your upside goals run, like your profits. There are forces at work right now that are working to undermine your trading, more so if you are trading intraday or short term. Your trading should evolve with the markets. As Victor Sperandeo said in one of my interviews with him, "the markets are always evolving to try to kill you." He would know - he's been trading since 1968. I am continually testing my models to find my blind spots. I'm also looking to see if I can minimize my risk to achieve the same expected return. I'm also looking to make sure that what I trade hasn't become too correlated with each other so that I don't have the effect of a concentrated position in my portfolio. Don't be reasonable with your upside. Yes, "the market can remain irrational longer than you can stay solvent," but it also means that bull markets can run (while you're long) much longer than you think they can. How many people called market tops in 2017? They were all wrong. And these are smart people. My guess is that they felt the market had gone up enough so the "market callers" published their feelings about risk and what is reasonable to you in the form of a market call. Remember, your emotions and psychology effect your attitude, your attitude effects your behavior, and your behavior predicts where you end up in life. From a trading perspective, how and what you trade can predict your net worth over time. What you can do in 2018 to positively impact your financial future and net worth: 1) trade less frequently thereby decreasing commissions and slippage; 2) increase your holding periods by letting your winners run longer; 3) diversify across more markets to cut your overall risk; 4) learn to trade a new asset class to impact your reward to risk ratio; 5) rely on a system and stop drawing lines on charts thereby decreasing subjective reasoning in your financial decisions; and 6) make friends with 5 new people who are leagues smarter than you

Whenever you have a margin call, offset the instrument that is generating the margin call. Don't meet a margin call with cash. CTAs with margin to equity ratios of 12-15% are considered aggressive in today's day and age. Margin is set by the exchanges, but can be made more stringent by the IB or FCM. Margin levels are set to protect investors as well as the integrity of the exchange mechanism. Margin is considered a good faith deposit on the full notional value of the contract.

Favorite Yoga Pose - Ardha Chandrasana You have to practice your yoga the most when you're off the mat and not in class. That's the whole point. Like great trades, you have to take them home at night. Time Blocking Trading begins the night before. I run my systems at 6 pm Sunday night for Monday's trading. Call in the orders by phone. The orders are worked during the day and all I do is wait for the phone to ring with a fill. If I'm filled, I give them a protective stop immediately. Sometimes the there are no fills, then I repeat the process the next day with the same orders. Most of the time I'm reading and studying. I don't have cable - I've cut the cord about 13 years ago. I practice yoga most days from 12 to 2 pm PT. Risk Per Trade In establishing a position, I risk 0.10% (10 basis points) per trade then it grows from there. I am willing to add continuously if the trade continues to work in my favor. By risk so little at the beginning, I couldn't care less about any trade at any given time. I add when I'm making money, and that's how I decide. We are powerless over the markets and how the instruments perform once we're long or short. With such small risk at the beginning, I'm not emotionally invested in the outcome of any trade. Even after adding several additional 0.10% units of risk, I'm still indifferent. For example, if I get to add 4 additional units, I'm only at 0.50% risk or 1/2 of 1%. Peace is a choice. Too many traders are emotionally invested in having to be correct. I'd rather focus on making money over longer periods of time, and if that means having a commodity futures position on for 3 months, so be it. That does't make me an investor. Sometimes, it takes that long for "high tide" to come in. FYI - I loathe having to look at a computer monitor or screen so I don't do it. My brokers are incentivized to fill my trades so I trust that I'll get filled when my stops are hit. That probably seems blasphemous to day traders, but I want to make money and have a high quality of life. Making trading look like blue collar despair is not what trading is about for me. It shouldn't be labor intensive. Hence most traders lack the emotional intelligence to be their own best coaches. If you're struggling or not making money, do yourself a favor in 2018. Stop looking at 5 minute bars and start thinking longer term.

If the average person cannot explain to you what the blockchain is, how is the recent level of bitcoin a bubble? I've seen this before in the commodity markets and although we're likely to see volatility that's uncommon in the markets, you can study the spread of viruses to get a better feel for this type of growth. You can control the effect of volatility in your portfolio by decreasing your position size. You can further minimize your loss potential by using low to no leverage. If Amazon or Walmart decide to take a crypto currency as a form of payment, demand for the underlying will explode as none are currently considered mainstream in terms of usage despite a steady stream of headlines about them. Once this happens, I believe the best opportunity for adding crypto currency risk to your portfolio will be via an investment, not a trade. No crypto currency has gone mainstream yet, so all the talk is about "the trade" and that means the majority of people will leave the majority of the money on the table. McDonald's went public in 1965 around its 10th anniversary. It was not mainstream until 10 years later and it still had a ton of growth to go. For example, they did not begin serving Chicken McNuggets until 1982, almost 20 years after IPO'ing. If you'd bought 25 shares of MCD at the IPO price of $22.50 (a investment of $562.50 in 1965), your position would be worth over $3 million today at a price of $175 per share and adjusting for splits. That's more than 5,400 times your money over the same time period. That's also 50 years ago, so who can tell how they would have handled the position. MCD has split 12 times since the IPO. Sure there had been some great trades along the way. There have also been some dead periods too, but when people who have not been trained to time the market or to trade, they leave the majority of the money on the table. I think the reason is the people like to seem reasonable. Let's say you invested in MCD and you sold your entire position when it had doubled. Maybe you felt at the time you didn't want to be greedy. Or you feared giving it all back... What is the opportunity cost of that lack of emotional awareness or mindfulness around your process (or lack of one)? Where is the opportunity in bitcoin or any crypto currency at this point? While I believe there will be parabolic moves, great trades, big drawdowns, the best bet is to invest in it and hold it for 20 years.

Focus on process and stay out of the results. Performance will show up if you trade a system with positive expected values. By focusing on the process or your system, you become the casino. Each time your system is open for business [trading], you are making money. You should strongly consider investing in a backtesting simulator. When I started trading, I put a high level of emotion of making money on myself. That became expensive and I became frustrated about doing things that weren't paying off. They were never GOING TO PAY OFF, but I didn't know it at the time. I live by the adage that hard work will pay off...it was my turn. The thing is, I wasn't working smartly. And worse, I had no definable trading edge. The funny thing is that as soon as I detached from the money spiritually, my trading improved in leaps and bounds, both emotionally and financially. Nowadays, I think of the money as points in a video game. I don't actually play video games, but I still look at the net equity as how to keep score. As in poker, your money [chips] are your ammunition. I know when I make bad bets, I will most likely lose. Once in a blue moon, I'll get random luck and split a hand or everyone will fold to me. That's not a good business to be in though. I can remember that as soon I had become emotionally invested in the outcome of a trade before I put the trade on...I could feel the disappointment before I offset the risk. Such Betrayal. Losing Money But Making Good Mistakes One good thing that I can say about this time was that I was risking real capital - not paper trading. I also was taking the risk home with me which is what I always advocate. New traders should not be focusing on 5 minute bars. Focus on the intermediate to long term moves, and once you master those [in 2-3 years] come back to shorter time frames risking 0.10% on trades so you don't do any lasting damage to your portfolio. Holding a trade for three months doesn't make us investors. It says that we have stepped aside and let forces that are much more intelligent and powerful than us take over. All we can do is enter our stops and let the market go where it's going to go. If you find yourself trading 100 shares but offsetting them before the market close, consider trading 20 shares and taking them home if you making money on them at the close. You will learn about your emotions from the experience which is invaluable and can only be done by living it. If 20 is too painful, try 10. But I also ask you to do this: why the lack of trust? Is it you don't trust yourself or you don't trust your process? Where does that come from, meaning, what scientific study did you read where it delineated that you should offset winners NO MATTER WHAT at the close and go home flat? If you take home 10 or 20 shares of a winning trade, you'll learn a lot about yourself emotionally as a trader. That wisdom is priceless to us. Learn and understand what your emotions are trying to teach you. They want to be advocates, not antagonists. If you feel the opposite is true, your process is likely the reason why.

The measurement for volatility takes into account the magnitude of the vol, not the direction. You obviously don't want to be in high vol, directionless markets, unless you are trading option butterflies or condors that can take advantage of those types of markets. For equities, you can deploy what's called a "pairs trade." Anyone can gear their portfolio for 100% RoR, but you have to be willing to endure a 40-60% drawdown both financially and emotionally. Hard to do. Slower and steady growth might be a better fit for your tolerance for risk as well as what you are looking to do professionally, such as running public money. [I have a documented 100% monthly return, however I was in fact coming off of a 40% drawdown so my starting equity was only up 20% by the end of that reporting period/month.] Spread trades are about relative performance between the two instruments, meaning your are looking for the long to outperform the short. There has to be high correlation between the two instruments else there is no relationship. You can find good candidates for these types of trades by looking in each sector and going long the "best in class," and shorting the dog. I wrote about pairs trading in Inner Voice of Trading where I was Long MSFT and Short NSCP figuring that Netscape was going to have a hard time getting clients to purchase a premium, albeit superior browser, while MSFT was giving Internet Explorer away for free. One trade I'm in right now is Long PYPL and Short SQ in the mobile payment space. You have unlimited loss potential by being short a stock fyi. You can learn a lot about commodity spreads at Moore Research. Commodity spreads are a great way for newer commodity traders to get involved with those markets as you are both hedged and you are afforded lower margin requirements since you are simultaneously long and short the same commodity, but in different months. By trading equity pairs or intra-commodity spreads, you cut the volatility in your portfolio yet keep the directional bias that will bring the alpha.

By trading a complete trading system, you solidify places in your trading where your success can break down. Relying on system-generated trades, you get to focus on high expected value trades and eliminate the sub-optimal trades. Benefits of a complete trading system: A good cure for daily set-ups is a systematized set of rules. It takes out all the uncertainty around your decision making process. That can give you a sense of confidence and self-esteem. You get to trade from a place of personal power. Hard to make money trading long term without confidence. You won't have to interpret any chart patterns: the price will pick up anything about the instrument that is bullish or bearish. You will therefore be cured of the need to massage charts all day and night, thereby freeing up hours of time each day and the brain power that goes with it. You can trade any market around the world. You can blend several trading systems like an asset allocation to smooth out your equity curve. For example, you can put 40% in a breakout system and 60% in a moving average system. Or, you can put 50% in a short to intermediate trend following system, and 50% in a long term trend following system. Possibilities are endless. You don't need subscriptions, chat rooms, or premium research. Systems and Emotions Systems don't remove emotions from your trading although that has been included in many marketing materials. I believe that began by a clever marketer who doesn't trade and wouldn't know if that statement was true or not. You still have to put on the trades, and if you experience fear around losing money or greed around not making enough, you can hijack the system and blow up. Ed Seykota set up the Incline Village Trading Tribe for traders to get in touch with their feelings and psychology around trading for this very reason. We never spoke about trades, set-ups, or chart patterns. It was not only a complete snooze to do so, those don't help a trader become profitable. They do, however, provide fodder for good conversation and for building relationships and bonding I guess, but you can do that without becoming a trader if that's what your real goal is - to bond with people. Lastly, I think trading a complete trading system can provide you with a great quality of life. It makes no sense to beat the crap out of yourself to make it as a trader. Martyrs don't get paid and as Jim Morrison sang, "...no time to wallow in the mire..." Build yourself a simple system that takes care of your entries, exits, and position sizing, and in doing so you'll remove the weakest link in your trading: you.

Price targets cut your profits. Let the market tell you when the move if over. Price targets are about predicting the future and human beings are horrible at that at best. Read Expert Political Judgment by Phil Tetlock to get an idea of what I'm speaking about. Intraday data is not statistically significant, so uptime your charts and begin to focus on daily, weekly, and monthly time series. Longer time frames remove the randomness of price. Don't trail structure when you put on the trade. Focus on percentages - that's what professionals do. Once the trade is working in your favor, then you can trail structure if you want. But make sure you're looking at weekly or monthly support, not cloud-like chart patterns that change when you breathe on them. When you let go of price targets, you'll focus on "best practices" and that means financially letting your winners run, emotionally letting go of control (you don't have any in the first place), and spiritually living a life that's worth living.

Look at your equity curve like a price chart. You want the slope to be positive and upward. What the trajectory? Your equity curve can help you target your goals. Start by putting all your trades and the costs into a spreadsheet: Column A is today's Date Column B - Entry Column C - Exit Column D - Commissions Column E - Fees Column F - Final Balance Then you can chart the last column against the Date - Columns A and F. Do that every day and update the chart. You can study the results at the end of the month. Your Equity Curve shows you the efficacy of your process and trading rules. What does it tell you if you are afraid to create one? Not worth your time? My guess is that the truth might be hard to acknowledge and we can bullshit ourselves to eternity. The first step in getting healthy and making better trading decisions is to discover your truth. Nothing illustrates a failed or successful attempt at trading better than an equity curve. Drawdowns are not failure - they just delineate those times when your system was out of sync with the market. This will happen frequently, but if you've backtested your rules, stick with them as you'll trade yourself back to new highs by sticking to your rules. I find that day traders are fearful of this process. Position traders will find that their equity curves make the biggest jumps. Let the market and leverage work for you and you'll see those efforts and results on your equity curve.

Use your breath to control your breathing. In the process, you will quiet your mind over time and not need to fill your day with kinetic energy. For me, that includes making too frequent transactions. If you're in good trades, keep them, take them home with you overnight and over the weekend. First Technique: Inhale on a 4-count and exhale on a 4-count. You can increase your breath to a 6 or 7-count if you can slow things down enough. A variation of this is inhale on a 4-count and exhale on a 6-count. Yogis and buddhists find that if you can slow your breath down, you quiet your mind in the process. Second Technique: Inhale on a 7-count, hold your breath for a 7-count, and exhale for a 7-count. It might take you a few times to "catch your breath" so to speak. Try this for 2-3 minutes if you can and do this 3 times per day. You might try this for 2 weeks before you feel anything material - it's different for everyone - but you should feel more relaxed, calm, and more energized. Smartphone Meditation Apps 1. Insight Timer 2. Aura 3. Omvana 4. Stop, Breathe, Think 5. Calm

Enter Buy Stops above the market and let the market come to you. Do this for every trade you have and then sit back. The good news is that you don't have to look at the chart once you're Buy Stop is entered. This is huge in that it frees up your time and energy. You'll get an alert once the order is filled. Then place your protective Sell Stop at your predetermined price level. Don't use price targets either. Once the underlying is up 2 ATR, move your protective Sell Stop to breakeven and let it ride. Make sure that you are not looking at intraday data either. The key to all of this is to take yourself out of the equation. The more you are hyper-vigilant the less you're going to make on the trade. The more you watch the chart, the more you're likely to impose your will into the trade and cut yourself at the knees. The overall markets are in strong uptrends, so let your trades run in this type of environment. Let go of trying to guess where the move is over - the market is much smarter than all of us and humans are horrible at best at prediction. Having your Buy Stop orders entered will always have you in the right place at the right time. Why? Your orders are already in when the market moves and momentum hit and you can't possibly enter that many orders by hand in the heat of the moment. You're already positioned. If the moves don't rise to your Stop levels, you won't get filled - and that's a good thing. At the end of the day, the orders will cancel because they are only good for the day.

Develop a systematized set of rules that you can count on. You can calculate your levels the night before and execute the rules the following morning. The key is that you don't want to have to think in the morning - just focus on executing the plan. That means entering your buy stops to enter long and sell stops to protect your equity. Here are the components of a complete trading system: Breakouts - trading above previous highs or below previous lows; Trailing Stops - to protect your equity after your initial order and also once the trade starts working out in your favor (see Exiting Winners); Position Sizing - calibrated for volatility and your overall account equity; Adding to Winners - systematized so that you don't join the hubris or factors that you can't prove scientifically; Exiting Winners - getting out with the majority of your unrealized equity; Also to consider is the correlation risk between the instruments that are in your universe. These must all be conjugated to work together. One without the other is nothing - they are just data points. Think of them as a perfect complements to one another, like the starting 5 of your favorite basketball team or 9 players on the baseball diamond. For example, your position size only matters to the extent you know how much you are willing to risk per trade, where you get in and where you exit. Knowing how much silver is correlated to gold or how much or Facebook is correlated to Amazon will help you see the unseen risk in your portfolio before you add it. You can't get this level of thoroughness from chart reading or understanding set-ups such as cup and saucer. It's only achieved from backtesting through a simulator that lets you simulate at the portfolio level, not one instrument at a time. Examples of those are Mechanica and Trading Blox.

History is not going to repeat itself the way it did for my mentors and colleagues. Investment into the trading business is going to Artificial Intelligence and Machine Learning. If you are doing things by hand, you are putting yourself in a very disadvantaged position. You can't work orders on the floor anymore. There is no floor. How's that for a development?! Another example is the risk per trade in contemporary trading. Back in the 70s and 80s, it wasn't uncommon to risk as much as 2% per trade! That would be madness in today's environment, especially if you want to get an allocation from a global macro fund or if you want to work for a real prop trading firm. [A real prop trading firm will give you funds to run without your needing to add your own capital and you'll be able to take the risk home with you overnight and over the weekend, for example.] Take the humanity out of your trading. If you are looking at charts for subjective interpretation, more and more you'll be competing against trading machines that are "trained" to beat you. If you think trading is unfair already, in my opinion it's going to get worse. Whereas I think you should strengthen your sense of self through yoga and meditation, at the same time I think you should begin to extract yourself out of the trading equation by coming to understand that you are the weakest link in your trading. To put it in context, I think even if you had the self-knowledge and awareness of HH The Dalai Lama, you should still develop a set of computerized trading rules and manage risk systematically. Two good books on yoga are Light On Yoga: The Bible of Modern Yoga by BKS Iyengar and Yoga: The Spirit and Practice of Moving Into Stillness by Erich Schiffmann. Disclosure: Erich is a long time friend and my yoga teacher of 20 years.

Risk is an asset class. Keep in in your portfolio when it pays you to do so. That means overnight and over the weekend. When you day trade, you are churning your own account. In a recent interview with Chats With Traders, my friend Aaron Brown said that traders generally leave way too much money on the table. The real money is holding the best risks. You can define where you are going "risk off" by placing protective stop orders on your winners and Stop Loss orders on recent fills. Staying in good trades longer frees up time so that you can do more research, read, or go have fun doing whatever gives you pleasure. Exercise: Go to your best trades and enter them in a spreadsheet. Column A is your Entry. Column B is your exit. Column C is where it is now. Column D is what the worst price was between the prices in column B and C. Look at the percentage of those names where the price is Column C today is higher than Column B but also where the price is column D never went below Column A. This helps you understand the opportunity cost of short-term trading and how it works against you.

Value is what you assign to something, not an analyst. What others assign to bitcoin are none of my business. What others assign to speculation in general is irrelevant. There is no value per se in bitcoin anymore than there is in corn futures. Bubbles are what speculators (like me) pray for. Professionals know themselves and know how to express risk in a manner that is best for them (compatibility). Traders who have a systematized set of rules love to trade bubbles because although we cannot impose our will on an instrument, we can take advantage of the amateurs and day traders who don't know anything about managing risk. Trading is a voluntary action. Winning and losing is up to you. Buy the time the bubble pops, I'll be long gone...

Exits and entries are perfect compliments to your trading system. They are siamese twins that should not exist without one another - nor should they be separated at birth or otherwise. Risk management defines your P&L and the distance between your entry and exit is critical to how you manage risk. You can define that distance by calculating the ATR of the security that you're trading and using those as the entry and exit endpoints to your rules. Marry that with your position size given the size of your account and the volatility of security. So the three crown jewels to trading are entries, exits, and position size. They are all calibrated to work with one another and rely on one another to help you create alpha for you and your clients.

You cannot shield yourself from struggle. It's what helps shape your trading rules and over time turns them into a complete system. No psychologist, coach, or mentor can do it for you. You have to want to take a punch and learn to feel what it feels like to lose money and then use those emotions to affect your behavior accordingly. Very little of it is intellectual or logical. If you need things to "make sense" I think you're in for quite an education if you're open to it There are no external solutions to your internal issues. That should save you a ton of money in that you don't need a high clock speed computers, multiple monitors, nor televisions in each room. One way to generate peace in your daily activity is to start using stop orders to enter and exit trades. Professional traders use stops, not market orders. Buy stops are placed above the market and are used to enter trades long or to cover short sales and minimize risk. Sell stops are placed below the market and are used to enter trades short or to sell long positions and minimize risk. Stop orders show your conviction in your process. If you're trying to read charts or you've been sold on something amateurs refer to as "set-ups," you can absolve yourself from that lifestyle choice and at least act like a professional on your way to becoming one. Trading with a system will capture anything that is bullish or bearish and remove the need for your having to interpret charts. Plus, it's a lot less work as well so you save yourself a great deal of time. A third benefit is that you can eliminate having to trade frequently - something I believe is not necessary to becoming a professional trading. I think trying to read charts every day is exhausting. Moreover, if you are glued to your monitor, you might be giving yourself a false sense of security that you can avoid "the big loss" by doing so. You can't stop market volatility because you are sitting there hyper-vigilantly. What you can do is enter your stops are predetermined levels and let the market come to you. One benefit is that you won't find yourself chasing trades. Another is that if something unexpected does occur, your order will already be there to protect your capital. As a trader or speculator, job #1 is playing superior defense. By entering your stop orders ahead of time when things are calm, you also have the added benefit of avoiding the errors that can occur when you have to act under the gun and you're not used to doing so. Errors cost money and you can assume that if you make an error, it won't add to your P&L, but hurt you.

Professional poker players know (as best they can) the expected values of every hand they play. The best of them know what hands to play from what position. Like traders, poker players have to make decisions under uncertain conditions with imperfect information. They know what the percentages are of their hands improving. For example, if they are dealt a pair of Kings, they know the probability of getting another King to make 3 of a kind (a set of Kings), or quads - four of a kind. They know what the probability of making a straight if they have two connectors or making a flush if they have two cards of the same suit. This allows them to the knowledge to know how to bet given the odds and the size of the pot. Yet it's still possible that they can do everything correctly and still lose the hand. That's going to happen quite a bit if you play a lot of poker. Like in trading, you can become emotionally invested in the outcome of a hand. If you have a pair of Aces, you can get beat from time to time despite Aces being a strong pair. Professional traders can learn a lot from this type of knowledge. If you trade long enough, you will get beat when everything looks to be in your favor. I've been long stock that beat earnings estimates, but was greeted with a down market because of some external factor that took everything down with it - including my stock. Not fair you say? No one cares what my definition of "fair" is when trading. Nothing is fair. A good way to become mindful of what you could be in for is to study the winning and losing streaks from your backtested results. Most of them will tell you what you longest losing streak is (duration) and how bad it effected your equity (magnitude). I think this will help you learn to build your confidence and put things into perspective. The losing streaks that you'll have by trading a system will pale in comparison to those that you'll need to endure if you are day trading or trying to ready charts or "set-ups." Those are a thing of the past. The modern trader - the trader who is going to set himself up to win for the rest of this decade and into the 2020s will have 100% of his trading rules backtested, know the expected values, and have rules to eliminate sub-optimal trades, and have rules built-in to trade for the marathon of the next 20 years. That does not now nor will include trading based upon charts nor intraday data. Firms are investing tens of millions of dollars to trade against the short term lovin' traders as they are easy to pick off and bully. Plus, in that space, there are a million suckers born every minute so you've been warned: don't be one of them. Trading simulation software will allow you to vary start dates, the instruments that you are trading at any given time, how to measure volatility, and how to cut risk during losing streaks. A great book on how to understand what a poker player learns to contend with is "Getting the Best of It" by David Sklansky.

Go check out The Imitation Game on Netflix if you haven't seen it yet. It has many analogies to trading Good trading is about being able to distinguish signals from noise. In the short term, everything is noise though - even potential signals. When you don't have a plan, everything looks appealing. Any big move that you're not in gives you the emotional feedback that you've missed the move and that you should have. The Enigma code breakers had great motivation to crack the code: save English lives and end the war. Our motivation is to limit risk and be in high expected value trades. You can use price as your main signal, but admittedly, in the short run, it looks like noise. It's not until you look back to see the statistical significance of today's closing price to the past that you can begin to ascertain whether it's signal or noise. Your trading system is what you can rely on to decipher the data and create trading signals that you can rely on. Without a system, much of what you see can be construed as disinformation - even the price. This is especially true for short-term, intraday traders. This is why I think you're in for a life of frustration if you're trying to day trade: all the intraday data are random. If you're lucky enough that today's intraday data is aligned with significant weekly or monthly time frames, you might have a good trade. If that's the case, keep the trade though and let the momentum follow through overnight and over the weekend. That is the only way you can fight the manipulation that you'll otherwise suffer from the hands of the HFTs and their criminal counterparts - the exchanges. Keep in mind that most indicators only confirm what you already know the price is telling you. You can probably simplify your trading by removing all the overlays and indicators from your charts. Compare your daily data with weekly and monthly data levels to confirm your signals, not trading indicators, overlays, or lines that you feel compelled to draw on your charts. If you find yourself needing to do that emotionally, you're grasping for something that's not there. You can also test your models and from the ones that I've done, the tests that I've run without the technical indicators versus the ones that included them, the results weren't improved by having the indicators included. I wrote in The Inner Voice of Trading that I felt (and still do) that they are for the most part "emotional bandaids." Indicators won't help you "not" feel the feelings that are trying to teach you something. They will also add another layer of frustration to the mix and I've yet to see one that is foolproof. The best thing you can do is simulate your trading ideas over 10 to 20 years of data to see if they have any "rich" history.

Calibrate the risk that's appropriate for your account and your emotional constitution. Normalize risk across all instruments so that you can create risk units. This way, every instrument will be the same in terms of the risk that you'll represent in your portfolio. Many commodity traders use the 20-Day ATR (Average True Range) in order to calculate the daily dollar-volatility per instrument. Then, they divide that into the percentage of capital that they are willing to lose per trade. If the Gold ATR is $2.50 (it's not) then the daily dollar vol is $250 since the gold contract is 100 troy ounces. If you have a $100,000 account and you only want to risk 1% per trade, you can figure out the maximum number of contracts to trade. $100,000 x 1% = $1,000 Daily Dollar Vol on Gold = $250 ($2.50 x 100 oz) Therefore, you can only trade 4 Gold Contracts since $1,000 / $250 = 4 contracts You can also trade only 2 contracts and give them $5 of risk between your entry and exit. Then to manage the risk, if you enter the gold market long per your entries at X Price and place your protective sell stop $2.50 (the Gold ATR value) below the entry price. Keep in mind that measuring ATR can be done with a computer and you can backtest all your entry and exit rules with the risk across all instruments normalized. In doing so, you remove all the guesswork. You have the added benefit of not falling in love with any one instrument risk management wise since each trade will be the same percentage risk in your portfolio (at first, if you don't add to your winners). More importantly, you won't want to jump off the bridge when you lose money on any one particular trade since they all represent the same risk and therefore you'll not be married to the outcome of any one trade. It's hard to remain objective, especially if you are looking at the headlines of the day for your trades. Trading a system can remove all of that for you, but you'll still have to a) put on the trades and the protective stops; b) not over-ride the system and "not" take the signals; and c) not over-ride the system and put on trades that were not system generated. If the volatility in the commodities markets are too great for outright trading, you can consider trading intra-commodity spreads. In a spread, you are simultaneously long and short two contracts of the same underlying but of different expiration months. Instead of trading for an up or down directional trade, you trade the relationship between the two contracts for them to narrow or widen. You are afforded lower margin with spreads, so if your account is smaller, it might be a good fit for you to get going in commodities. The good news is that most professional traders know the spread markets very well so it's a good idea to learn them anyway at one time or another. You typically have lower risk since you are long and short at the time time and the seasonality of physical commodities tends to be very reliable. We have some free educational training videos for you on this topic. Go to MartinKronicle and set up your Free Account to get access.

You have to plan for 10-baggers in your portfolio and position yourself tactically and psychologically. Two things need to occur regularly: 1) big moves don't typically happen intraday 2) you have to believe that you are capable of doing it emotionally and psychologically Tactically speaking, you need to let time and money work for you for best results. A 10-bagger has to have been a 4-bagger first. Don't cut the 4-baggers at the knees. Place a trailing sell stop order and let the trend continue (if long). Don't impose your will on the trend. Sit on your hands and let the market forces work for you. Think in terms of percentages and not dollars. If you risk 0.50% per trade and it's a 10-bagger, you'll add 5% to your overall portfolio. What will that do to your Incentive Fees? If you're smartly abandoning day trading (smart move), you need to find a better way to deal with the discomfort that you feel when you don't take short-term winners at the end of the day or before the weekend. What is the discomfort trying to teach you? For each of us it's different. nwiUllingness to feel the discomfort in your trading is also denying the the feeling of what you'd feel by having a 10-bagger in your portfolio. In other words, the feeling of having a 10-bagger is on THE OTHER SIDE of not taking short-term profits. Why don't you want to feel the feelings around getting a 10-bagger? Aren't you worth it? I think you are...you are willing to do the work - you might as well get paid as much as you can for it. You can release that discomfort in yoga class or in your Trading Tribe - and replace the satisfaction you get and not sabotage your trading and still get to feel the feeling that you seem to want to have (because you're seeking it everyday - you must love it, unless you're a masochist.)

Here is chapter 2 of the Audiobook version of Inner Voice of Trading.