Trader Mindset

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.

Some investors will test you by asking you questions that are deliberately off the mark. Stick to you message throughout even if they try to knock you off balance. You might take a meeting as a CTA and someone interviewing you might say something along the lines of "We're looking to allocate $10MM to a crypto-only portfolio in the next 5 days" when they know you're looking for assets. It's ok to laugh at them and say "good luck - I hope there is a short selling component to the model." Tell them that it's "not terribly wise to make such an allocation on short notice." Most want some fight in the dog. Stick to your message and what it is you can do and leave it at that. Otherwise, you'll look amateurish if you're all over the place.

Every once in a while, the market will open below the point where you would have stopped out your long position or above where you would have covered your short position. The best practice is to offset the position right away. Bad situations become worse. Your first loss is your best loss. Aggravating as it might be, this has not happened enough to me to convince me to stop holding positions overnight or over the weekend. In fact, I'll go so far to say that holding my positions are what I attribute the majority of my gains to.

You need a great deal of help when you're getting started. That doesn't mean you have to give away the house in order to get it. For one, I'll help you as much as I can with what I know that will save you time and money. Second, pay as you go compensation plans have the most flexibility, as opposed to "you were here at the beginning, there are two of us, so you get 50%." That's a bad deal. When you align your goals with your overall behavior, you'll have harmony in your life and business.

Coach your clients about what they should expect. It will save you tons of time in work and having to explain things, and in the process make you look like a pro.

It's the differences that sell. Your potential clients are looking for more than just performance from you. Spend some time taking notes on this episode if you're looking to get new assets from potential clients.

There are a ton of moving parts to your trading business. Pick your partners carefully - sometimes you can't unwind things as fast as you set them up. Everyone flirts hard to get your business and the best deal you can strike is on the day you walk in the front door - it only gets worse after that - and that's why people change firms. Measure 8 times and cut once.

If volatility increases while you have an existing position on, you should probably cut the size of the trade down to reflect the new vol.

Market vol is increasing due to higher level of discomfort and uncertainty, but don't go adding new indicators now. They're not as telling as you'd think.

In this episode, Michael Martin discusses the various reasons you might consider to add short selling to your portfolio. You can short sell for real returns, or you can use it to cut the vol in your long-only strategy.

If you enter a short sale late as can happen with breakouts to the downside, you might have it rally in your face before it becomes meaningfully profitable. In today's episode, Michael Martin discusses one way that you can enter the market short with a more improved entry - and potentially less risk.

The most valuable information is not necessarily the recent data. Michael Martin discusses what you can learn from a historical chart. Names mentioned CMGI, Munder Net Net Fund, Vertical Net, Cronos, Bitcoin, and Cisco.

Most rookies are looking to take profits when the have a winning trade. Professionals look to continue riding the trend for all it's worth. As I've said here before, inexperienced traders need the boost to their self-esteem by posting smaller wins to validate their behavior as traders. Small or not, a win is a win and that's what's important to them. We advocate something that takes a little more evolution. I have found in almost 30 years of teaching that a trader's unwillingness to add to winners is more of an uncomfortable, emotional problem than it is to understand the math involved. Like any behavior, it takes some getting used to, but if you do it enough times, you can make it a good habit and replace the bad habit of having price targets.

You're doing the work anyway, you might as well get paid for it. Study how the security behaved after you took profits at your price target. What percentage of them continued to move in your favor? What was the average gain beyond your price target that you might have earned had you stayed in the trade?

It looked like some of the markets were about to run, but they all came back. How do you handle snap backs? Michael Martin discusses how he handles quick reversals in the markets immediately after he establishes a position.

When it's time to chill, it's time to chill. Spying on the market during the time you've earmarked to put some distance between yourself and the market defeats the purpose of the break.

I don't use them per se, but I test the intraday data around key inflection points in a simulator. I don't look at nor study intraday charts.

Your max risk per trade is just that - your max. You might consider trading within that risk measurement. Why? Murphy's Law. Take that into account when you are position sizing your trades. You can normalize risk across all instruments so that you can think of each security in terms of risk units, that is, shares or contracts per unit. That's achieved by calculating the volatility of each instrument. In position sizing this way, you won't trade one more aggressively than another. They'll all be the same risk % to your overall account. For example, given the prevailing volatilities, 26 contracts of Sugar might be equal to only 6 contracts of Crude Oil in terms of percentage risk to your capital. Each would be a 1% risk unit even though Sugar has 4x plus more contracts than Crude Oil.

You have to surrender control for this strategy to work for you. If you're hyper-vigilant once you're filled, or you have a strong emotional need to monitor your trades tick-by-tick, this isn't for you.

Despite the enormous "want" from investors from this growth opportunity, the stock is low priced. Why is that? Does price move first and fundamentals follow (as PTJ said), or is it the other way around? IMHO, price is the only thing that will tell you the truth, and in this case it doesn't matter if you uptime and downtime the chart - the answer is the same. Investors are in a "wait and see" mode. Two things the price tells you are 1) what everyone is thinking about the prospects for growth; and 2) the overall trend of the security. If it's cheap, it's cheap for a reason.

Ultimately, blockchain technology is solid, but Bitcoin is a tulip bubble.

Don't put all your hope in one trade. If you trade a basket of names, the net upside can be greater than that of the one name you're counting on - and you've diversified your risk. Trade smaller positions and manage risk with protective stop order placement.

In his guest post at MartinKronicle, Victor Sperandeo stated that he believes the market high is in for the year. Maybe he's wrong - maybe he's right. But if you trade the S&P 500, listen up. Trading rallies in a downtrending market is a different environment - and different trading style - than trading long in a bull market. It's a new dynamic that you have to get used to, mostly by doing it. If you become frustrated, think about trading smaller or sitting on your hands until you learn how to short the market or find another vehicle that works for your trading style.

Michael Martin discusses the roles of luck and skill in your trading and offers a fool-proof way to create a greater amount of luck.

All you can hope for is that you use the frustration to motivate you to find another solution to decrease the frequency of what brings forth the frustration in the first place. That is of course, unless you want to continue feeling frustrated - then keep doing what you're doing because you already have a perfect system of generating frustration.

Has this every happened to you? You're in a great trade, you have unrealized gains, and you're feeling good about your execution. You're about to add to your winner, when the market craps the bed and takes the entire market down so that your gains are wiped out in less than an hour. Worse, the market rebounds entirely over the next few days as you watch your former position rally to new highs. Do you chase it? Not a good idea. Getting back in because you're angry is another form of revenge trading. If you don't have a bona fide rule for re-entering such a trade, consider looking at reversal patterns. If your market sells off with the overall market, but rebounds, it might show up as a reversal pattern. A good one to start with is Victor Sperandeo's "2B Reversal" as depicted in his book "Methods of a Wall St. Master." You can trade this as a chart pattern or code it into your systematized rules.

You will get fired for trading in a way where you don't have a defined edge faster than you will for poor performance.

Your "leads" or potential clients are not going to understand some of the industry terms that you might use during your presentation, so they are not going to know what questions to ask. They are not going to want to look stupid, so don't expect them to ask you what a certain word means. Here's what I would do: 1) avoid jargon - don't use big words that the average person won't know 2) stay on message - answer every question in terms of how your system or trading rules would perform 3) take a breath and take your time - it's better to take a beat and put some thought into your answers, than be rapid-fire. It's not a race. 4) "I don't know" - you'll gain a lot of respect if you have to say "I don't know, but let me get back to you in X days." You might have to research something or double-check on an idea before you open your mouth. It also gives you a specific reason to follow up with them. Don't let curveballs throw you and take you off on tangents. Focus on your trading rules while your trading, and when you're marketing.

This is a brief glimpse of some of what we cover in our courses. No one wants to hear how great a trader or PM you are in a raging bull market. Everyone has it all figured out. Then something bad happens and they're equity gets hit by 10%... You enter the picture and show people how you can remain calm under pressure and capture the majority of the up moves and not capitulate at the market bottom. Position yourself as a trusted advisor who the HNW individual will hire no differently than they would an estate planner or CPA.

Live instruction from Michael Martin who is joined by Peter Borish and Brynne Kelly. Other lessons by Scott Kaminski and Tony Saliba. Plus, special guests...

The more frequently you trade, the worse it is.

Peter Borish joins Michael Martin for his weekly visit.