Episode 2 Transcript: Understanding Day Trading Losses

For those of you who would rather read this interview, or who want to follow along as you hear, we offer transcripts of all our podcasts. Enjoy this transcript of the second episode: The Day Trading Authority Podcast’s Episode 2 – Understanding Day Trading Losses:


Coming from NetPicks headquarters, it’s The Day Trading Authority with Mark Soberman and Brian Short.

Mark Soberman: All right. Hello. Welcome. This is Mark Soberman. Thanks for joining us. This is the NetPicks Day Trading Authority podcast joined by none other than, I should say, Brian Short. Brian, are you with me?

Brian Short: Hi. I’m with you, Mark. Hello, everyone. It’s great to be doing our second podcast. I’m very excited to do it.

Mark Soberman: Definitely, yeah. We had a pretty good time, know why doing the first one. We got some great feedbacks so we figured, you know, why not let’s go ahead and do this again. So if you are able to listen to the first podcast, you kind of know what we’re going to do here. If you were not able to or you forgot at all, which is quite possible which, you know, is inexcusable but if so, you can go and listen to our first podcast again.

The basic format is that Brian and I myself will be talking about everything to do with trading and day trading that we can think of or come up with. We’ve both been day traders for many, many years. And of course, with NetPicks, we’ve played a part in training hundreds and probably make that thousands of different individual traders, really, from around the world. So we kind of follow a fairly standard format overall as we sit here and chat back and forth. We’ll kind of talk about sort of a current event or even an important topic to us, look over some of our personal experiences, really, since out last podcast. And then we’ve got a really steady excerpt from an interview that we did with Michael Martin who is an author of the Inner Voice of Trading. And we’ll talk about that and you’ll actually hear from Mike, an interview that I did, a piece of that as well as how to listen to the whole interview. I think you’ll really get a lot out of that. We’ve got some great listener questions to cover and then some announcements and even some neat little giveaways at the very end. That’s kind of your reward for listening to us today.

So Brian, that’s a mouthful. Are you ready to get started with us?

Brian Short: Let’s go.

Mark Soberman: All right. Well, first of all, I should ask, Brian, do you have anything that you’ve been dying to tell the audience, anything in your recent trading or anything that’s kind of come up that’s sort of stuck out to you that you’re just like, “You know what, I got to share this with the NetPicks audience.”

Brian Short: Well, there are all kinds of things that could be shared. You know, I think one of the things that’s interesting in the markets that we’re currently in, with all the volatility that we see in the market due to the European crisis, I think that’s shaken some traders up. I know some traders that have kind of stepped aside here for a little bit. You know, their methods that they were using were working just fine but this violent price action with the markets going up and down, I think is, you know, it’s got some traders on edge. But the good news is I think, you know, in the last week or so we’ve seen that kind of settle down a little bit and things get back to normal. So that’s what I would say that…

Mark Soberman: Sure. Maybe it’s — yeah, maybe it’s even the new normal, I guess. It reminds me a few days ago — and, you know, we — when you’re listening to this, there’s not — this isn’t like something — we’re talking about current events or current news. You could be listening to these two months after recording. And we hope you get value from it but there was an announcement a couple of days ago that hit the markets about 7:00 in are morning, New York time, it was completely unannounced and it’s either wreaked havoc on your trades. I actually talked a ForEx friend of mine, ForEx trader friend. And he got hit pretty hard from it. And, you know, ironically, that same morning, I know, Brian, you know this, we were trading some positions in gold and silver, and in about a split second they went from nearly stopping out to flying through the profit target just based upon this news. So I think that’s probably some of the volatility that you’re talking about. And, you know, no matter how much you have a trading plan that you execute on, there’s going to be some random events that you just cannot prepare for. You just got to realize that’s going to be part of what happens. And sometimes it works for you and sometimes it hurts.

Brian Short: Definitely.

Mark Soberman: So with that said, I think what I wanted to do is to actually — probably a pretty good segue into one thing we’d like to cover each podcast is our trading tips. And the best place to see these, if you want to see a whole bunch of great ones, is to go to our website at netpicks.com/trading-tips, but it’s actually trading [dash or hyphen] tips, T-I-P-S. If you go there it’s updated, you see several times per week. We have a great team of professional traders and educators who post there. And you’re going to get some real great information. You can actually, you know, opt in there to be notified in case you haven’t. But recently here one of our couches, James Kessick, posted an article on understanding day trading losses and the cost of business. And I thought it was a really interesting article and you can go there to, obviously, read the whole thing. Brian, you know, we talk a lot about what the trader is trying to convince them. And I know even in our first podcast we discussed this, how important it is to actually have to accept, and not just to accept, but to actually embrace losing trades as part of your business. And I know a lot of people who trade, maybe somewhere in their lives or even currently, own a business. Every business has expenses. I know, Brian, in your former life, right, you were a — you actually were not involved in trading and I’m sure you had a lot going on on the expense side of your business and that’s something that you always had to deal with.

Brian Short: Yeah, for sure. I mean that’s a part of every business. And in the case of trading, that’s no different. I mean, yeah, we have our fixed cost expenses in trading. But, you know, losing trades, if you look at them as part of doing business, as the expense of doing business and just accept it, I think that’s a unique way to look at it to help you accept it and help that process. I mean, you know, as human beings, we do not like to lose. I think I mentioned that in the last podcast that we did. You know, as human beings we do not like to lose. We’re taught from early on to be correct, to be right, we’re rewarded for that. So in trading, it’s really difficult to accept those losing trades. Not so bad with one trade, but when you start to mount that up, you know, two losers in a row, three, that’s where it really starts to get painful. So just think of that as a cost of doing business and expense.

Mark Soberman: And, you know, obviously, like any business, you have to make sure that your revenue, which is your profits, have got to exceed those expenses. So, you know, Brian is definitely right. I mean but like any business, you know, your PNL has got to be positive. And, you know, there’s obviously some discussion in this article of, you know, understanding that, you know, some traders try to avoid losers at all cost to the point that they’ll over optimize their system, they’ll try to change the rules the next day, they’ll try to account for what happened today. I can tell you first hand that today I did not have a great day of trading. I probably lost about $2,000 in my trading today. But the one thing I will promise you is that tomorrow I’m going to have the exact same approach to my trading that I had today. And I’m fully expecting to completely reverse that. And who knows, maybe pick up $3,000 tomorrow. But what if I don’t? It’s not going to be a problem. I’m going to go ahead on Monday morning, the next day I would be trading, and take the exact same approach. I mean I’ve just accepted the fact that not everyday for me can be a positive in trading. You know, I’m not going to have a net profit every single day and I really — the lost is just going to come with the territory. I don’t like it. I mean I’m not going to say I ever finished the day and I’m happy about it, but I’ve definitely gone well beyond the point of accepting that that’s the reality.

One of the things that James sort of mentions here a little bit is that it is important to at least, you know, keep track of your loses because he says, as much as you know you want to accept it and realize that it’s part of trading, you do need to make sure that it’s not being cost by some larger shift in the market or the markets that you’re trading, something with your system. I mean I’m never going to tell somebody that you should never adjust what you’re doing and adapt to the markets. I mean it is definitely very true. I fully expect a year from now to not be trading some markets I’m trading today and very well, probably, I’ll be trading some of those markets differently. So I think that’s, you know, something that he points out here as well. Anything else that jumps out to you, Brian, on that topic before we move on?

Brian Short: No, that pretty much covers it.

Mark Soberman: Yeah. So I would definitely recommend, again, if you want to learn a lot more, netpicks.com/trading-tips, there’s a little hyphen when I say dash. And you put that in and you’ve got all kinds of great stuff. And, you know, it’s all free, which is the perfect price just like this podcast, free of charge.

So this is — you see the point where we would like to move into a segment that we actually call, “Tales from the Stupid.” So let’s go ahead and jump in on that. All right. Well, now we have that out of the way. We’ve got the tales from the stupid. So what exactly is this? If you listened to our last podcast, you know when we talk about this, myself and Brian, we try to kind of relay something to you that we did that was really, really dumb since our last recording in our trading. The reason we do this is that I want you to understand that even as, you know, professional traders and people that have been doing for many, many years, we also do make mistakes, we also, you know, make some bas judgment decisions and some bad calls. The idea is to acknowledge them, maybe laugh at them a little bit. But the — you know, what you really want to do is you want to correct what you’ve done going forward. So I actually really have two tales from the stupid so maybe I’m sort of like — I should admit that there are two of them since the last recording.

But the first one is I trade a number of different markets. And right now some of those markets include gold, silver, crude oil, I trade — swing trade on the ForEx, also, probably, I’m forgetting trade the DAX futures. Well, I had a situation recently in the wheat futures where I came in on a given day and was literally trading the wrong month because I didn’t realize the contact rollover was happening that day. I just wasn’t paying attention to the fact that my contract was getting close to expiration and everybody else had sort of moved their volume to the next month and I was sitting there trying to trade the current month. The problem was I was trading with tick charts, and if you’re familiar with tick charts, they’re very much based upon volume. So if your volume goes way down, all of a sudden the way that your charts are plotted, it completely changes. Whereas, maybe in thirty minutes I would have like 50 bars on my chart, I had like 10 because there was no volume. And I just could not — it didn’t dawn on me that the contracts have rolled over. So once I figured that out, “Okay, great.” I went it up and changed. Unfortunately, that very day I ended up with no trade because there just was no movement. Once I rolled to the new contract I realized that I missed a perfect score for winning trade.

Now, you would think that would teach me a lesson. Well, the very next day gold and silver apparently rolled. And once again I wasn’t prepared because to me it seemed like, you know, my crude and my DAX I knew on those charts where they rolled but they were still plenty of time until expiration. They just turned out that they rolled earlier than some of the other markets, being DAXs and the energies. So once again, because I was trading some tick charts in there, it jumped out of me, this time much earlier. I should say I kind of learned my lesson from wheat. But what that kind of really knocked me over the head is if you are a futures trader, you absolutely have to know in advance when the contract you’re trading is supposed to rollover. It’s not the easiest thing to figure out, trust me. But if you do a Google search, you put in, you know, the market you’re trading, let’s say it’s wheat, and you go wheat futures rollover or S&P 500 futures rollover, you’ll get a number of different sites and articles, et cetera, that will tell you exactly when that’s going to happen. You’d be surprised when you think your broker should tell you or inform you how bad the information is and typically, for brokers, they don’t usually actually share that with you. I would think there should be one almost like repository for this, and maybe there is but I’ve never really found a great resource.

So that’s my first one. My second one, I’ll just be really brief and it was just actually yesterday. And I had a trade on DAX futures to go short. I missed it because I was just, you know — I don’t know — just kind of miskeyed something and the trade was a short and it started to do amazing. And at that point I was just kind of mad at myself for bullying with the keys and not getting on the short. I ended up marketing in about 5 points below where I should have got in. That trade ended up on my system making 2 points. But because I got in 5 points late, I lost three points. And at that point I should have quit because I already really at — my rule say to quit when I’m ahead. Well, I know realistically I was not personally ahead but my system was ahead. Well, I got stubborn. I decided to, you know, put on the revenge trade hat and I just wanted to kind of make up for my error. You kind of know the script from here. The next trade lost. The next trade lost and so I dug in deeper and deeper hole when I really could have quit with a very small loss overall. I was able to almost get myself completely out of that hole but what an experience overall. I haven’t done that in quite some time. It’s just going to add as a great reminder to me. Hopefully, you know, lock it in for the next six months so I don’t do that again.

So those are two of my tales from the stupid. Brian, I’m quite certain that you can enlighten us with one of yours.

Brian Short: I don’t have any. I mean–

Mark Soberman: What? That’s not possible.

Brian Short: Okay. I do.

Mark Soberman: I know you too well. I know you too well to know–

Brian Short: I do.

Mark Soberman: –that you might have multiple tales from the stupid.

Brian Short: I do. And this is probably one of my weaknesses but I think I’m going to be speaking to some other people too. And the key tale from the stupid for me this week was — I’m going to use a term here, it’s called, “Distractions.” And what I mean by that is — it was early morning trading, specifically silver, and at that point in the session things are really slow. Okay? And there’s a temptation to, you know, utilize that time for other thing, multitask, okay. And that ended up costing me this week in a big way. There was just an obvious swing level on the chart that I should have worked around on the chart. And what should have been one winning trade on the session ended up being two losers. And at the end of that process I was just kicking myself. And that’ll happen because I was being efficient in multitasking and not paying attention to the chart. For me personally, I almost like it when the market is active because you’re sit — you know, you’re in front of your screen, you’re focused and — but I guess the key thing that I want to say there is don’t get lulled into, you know, destructions. Don’t get lulled in when the markets are slow. Pay attention. And so for me that was a big no, no this week that I will definitely, you know, be on top of in the coming trading sessions.

Mark Soberman: Yeah, I think that’s a great plan. I mean that’s advice that everybody should follow. I definitely fall a victim to that as well. So really the moral of the story here, you know, is learn from Brian’s stupidity. I think that’s what he was trying to say. Is that correct?

Brian Short: Exactly. You couldn’t have said it better, Mark.

Mark Soberman: Thank you. Now, the good news is we do some dumb things in our trading, but we also actually do some genius things. So, you know, we’re not all dumb which is good because otherwise why would you listen to this. So the next little segment here — we’ll kind of, you know, share with you something that we did recently that we would kind of consider trading genius.

All right. So I’m going to go ahead and start this off because I always like to talk about myself and genius as Brian knows.

Brian Short: Oh, geez. Is that — can that go in the same sentence?

Mark Soberman: Well, yeah, because they kind of work hand in hand with each other.

Brian Short: Okay. I just wanted to–

Mark Soberman: They’re synonyms, right, Mark and genius?

Brian Short: Yeah, that’s what I thought you would say.

Mark Soberman: Yeah. That’s what I thought, yeah. So anyway, so the genius that I am, one of the things though in all seriousness, is that I was working on, again, as we’re trading some very — I kind of call them high profile markets but they’re the kind of the markets that can feel amazingly great when they go well, but they can be very painful when you lose because the dollar amounts per tick are quite large. It would be like if you’re a ForEx trader, for instance, you know, trading a micro and then jumping up to a mini, right, that’s a 10 times position, or going from mini to a whole size, it’s 10 times everything. The game, yes, but also the loss. So sometimes when you’re trading some markets like silver, like we mentioned, DAX, it’s sort of like trading on markets on steroids.

So one thing that I did was I was in a lot of tick charts, and at DAX for example, I was trading 233 tick and on silver as well, 233 tick which is time I do like for a lot of markets. And what I realized is I’ve been trading it over the last, you know, several months is I get some amazing days but when I have sometimes one trade that goes against me and it tends to be a day where there’s, yeah, lots of bars but the bars are very big. The profile gets really large, it forces the targets to get big which that may sound great, when it hits target, it is, but because the target is so much larger, it’s also harder to get there. At the same time that means my stop because all of our systems are dynamic, aren’t going to be larger. That’s just kind of comes with the territory. So what I did was I started to realize, you know what, the whole month’s trade is still amazing but I don’t think I always like to take the big hits when it’s wrong even though I know the next day I’m going to come back and, you know, completely wipe out the loss and then some, and that’s exciting. It just seemed like my equity curve was a little bit too — you know, the swings were a little bit too big. They were definitely going up which is great but in between it wasn’t always the best feeling.

So what I actually did was changed to some range bars. Now, we’re not going to be able to get into full definition of what range bars are, but it basically controls the size of the bars when I’m charting. So when I pull one of our systems on such as Seven Summits Trader, it immediately gives me a control target and stop, and actually know what those target stops are going to be in advance almost to the tee. And that for me really makes a big difference because what I realized was I actually am ending up with very similar bottom line. My average dollars per trade is almost identical. The difference is it doesn’t quite have the crazy swings that the 233 tick had. So I’m trading with — yeah, I don’t quite have the homerun days, maybe I’m hitting doubles and triples on my big days, but my losing days are quite a bit less painful. And my average dollars per trade, it’s the same overall. So it’s important to really pay attention to sometimes when you test or you optimize or you back test, you know, you look at your bottom line. And that’s always what people stop at. Oh, bottom line was $25,000 over the 60 days. That’s going to be my system. But you know what? The one at $23,000 might be a lot less painful than the one at $25,000. So for me that was a, you know, a revelation and has made a huge difference on these markets that I’m trading. I still got great up side but they’re actually a lot more controlled.

So Brian, I’m going to go ahead and shift it over to you. I know you can bring the genius. What is it?

Brian Short: Well, it’s pretty simple for me. And by the way, Mark, that’s really good stuff. If you’re listening to this, pay attention to what Mark just said. I think it’s really important to trade less. And sometimes I think we like to bang our head up against the wall. And so what Mark just shared there will allow you to trade less and you have the same profit.

So my genius this week is this; I had been banging my head up against the wall with an older trading computer for a very long time. And it was having issues with it not being up charts. And I finally made the decision; I’m going to get a new computer. So that’s my genius for the week. It just arrived today. And I’m really happy to get it set up and going. And it’s lighting-fast compared to my old equipment. So the point that I want to make there is this; if you’re a newer trader, make sure you invest in the proper tools to do your job. You wouldn’t believe how many traders I talked to. And we actually have the ability to log on to their computer and support them. And I can tell when I get on a computer that it’s not just trading quality. And, you know, I’m sitting there behind the scenes thinking, “How am I going to tell this customer that, you know, this trader that he needs to upgrade his system?” So my point again is make sure that you have up to date, you know, technology on your trading desk. You want, as a trader, the best tools at your disposal to make your trading decisions. You don’t want to have that get in the way. And for me, it was, here, over the last couple of months. And I finally made that decision.

Mark Soberman: Yeah. I mean that’s a great point. I think what happens — so it just happens to me, is that it’s kind of a pain the, you know what, to go ahead and start with a new system. I mean you have to reload to charting platforms, all of your indicators, your work spaces. I mean, you know, you can definitely move some stuff over. So it’s a bit of hassle. But like you mentioned, Brian, I mean when your system doesn’t lock up on you, it’s a great thing, when it actually, you know, performs the way it’s supposed to and it doesn’t lag, it may literally save you hundreds, maybe thousands of dollars. Sometimes you just sort of got to bite the bullet and go ahead and do it.

You know, I came in Monday morning and I had some issue with one of my systems. It was frozen. Five minutes before trading. It doesn’t take me five minutes to restart that thing. By the time I got everything restarted, we were 10 minutes in. I got lucky and I didn’t miss a trade but I very well could have got me into trouble. And you’re right, when people are using these ragged systems that are just over-tacks and overloaded. And then at the same time, which drives us crazy — they are willing to risk hundreds or thousands of dollars in trade. It just doesn’t make any sense. So well worth doing. And if you ever have a question, “Hey, where’s a great place to get a trading computer?” you know, feel free to contact us. I mean you can always go to netpicks.com, we’ve got contact information there. You can go to netpicks.com-podcast, same thing, there’s information there as well as the prior podcast. So great bit of advice from you, Brian, on that as well.

And that actually brings us to our interview, in this case, with Michael Martin. He’s the author of the Inner Voice of Trading: Eliminate the Noise and Profit from the Strategies that are Right for You. And it’s doing amazing on Amazon.com. If you’re interested in the book, he’s got 46 reviews, I noticed, today, 4.5 stars out of 5. It really was a fascinating interview. You’re going to like this guy. I mean he’s very entertaining. And so we basically have an excerpt from the interview. And then at the end here, once we come back on we’ll go ahead and tell you where you can listen to the entire interview. You can download it, get the MP3 and so on. And so without further introduction, here is interview with Michael Martin.


Mark Soberman: Like for instance, you know, one of the — maybe the mantras that we have in NetPicks is, you know, get in, get out, get done. You mentioned how, you know, you sort of like do not spend 10 hours a day in front of the screen. You know, we try to teach a concept called Power or Quitting. And people hate the word quitting because it seems so negative. We try to embrace the word quitting and say it’s actually a power. I know one of the things in your book that I remember I’m hearing a lot is, you know, the importance and the principle of, you know, really keeping, you know, your loses small, I would say almost that’s one of the mantras that I kind of took out of the book. And I think academically most traders and people who are probably listening, you know, I think that everybody would agree, that’s a word of caution. But I know and we try to teach people, get in, get out and get done, power of quitting, they can’t stop, you know. So it’s the same thing. You know, how do you really get people to embrace, you know, why it’s so important to keep your losses small and not sabotage yourself when you let those. I think you say somewhere how, you know, every big loss was originally a small loss or something like that. I’m sure I’ve misquoted you, but something to that effect.

Michael Martin: Right. I say something in the book that, you know, it’s very difficult in America because we’re taught to be capitalist from day one, which, you know, I’m a savage capitalist. And that, you know, winners never quit, quitters never win. But my take is that if you can, you know, like you say, get in, get out and get done or get down, you know, just chill, take a day off, put some time between yourself and the trading because you will have more equity in your count. I can’t tell you how many guys that I know call me back and say, “I feel humiliated to have to tell you are a great guy but my equity is down 90% and I’ve done nothing but spend the last month revenge trading, again, since the crude oil market.” And, you know, it’s really sad but, you know, people want to take it out and try to bully the market. And the sooner you can surrender to the fact that you are the small banana in the crop when it comes to any market that you’re trading, whether it’s Amazon, GE, foreign exchange, inter-bank, you know, foreign currency futures, it all comes back to your emotions.

Now, you can trade into bank and level yourself 200 to 1 if you want and find a way to do that. You can trade currency futures, you can trade the minis. I know guys that don’t want to trade the minis though because it’s emasculating. Now, that to me is completely retarded. I don’t know why anyone would think that because, again, they’re not trading for the games, they’re trading for ego and bravado and to pump their chest maybe. But that to me isn’t trading, that to me is being immature and childish. As far as getting in, getting out and getting done, you know, you have to keep your losses small. What I try to do in the book is actually breakdown the trades because that’s a truism and I don’t — you know, obviously there’s been a thousand people who have said, “Keep your losses small.” But saying it and not conjugating it to your emotions doesn’t do anything for anybody. So in the book I try to say keep your losses small and this is how you do it. And oh, by the way, this is the important part; this is what you’re going to be feeling when you have to keep your losses small.

So for example if I say, you know — is it get in, get out and then get done?

Mark Soberman: Right.

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

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

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

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

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

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

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

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

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

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

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

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

Brian Short: Let’s do it.

Mark Soberman: Well, you have no choice. This is what we’re doing. So here we go. Question here is: How much time should I commit to trading? And that’s from Allan B. So it’s a very general question. I’m going to speak from the perspective of a day trader. You know, obviously there’s different types and style of traders. But from a day trader, we referenced a lot a book and author Malcolm Gladwell who talks about you need 10,000 hours to master something, in fact Michael Martin on Inner Voice talks about that as well, it references the same studies. You know, so one could argue it could take you 10,000 hours to be a master trader and that probably is not inaccurate. Now, there are definitely many, many ways to shortcut that. That’s really our job at NetPicks is to come up with ways to reduce that dramatically for traders. But without a doubt you’re definitely going to have to commit some time in the beginning, you’re going to have a pretty steep learning curve when you first start out as a day trader. It absolutely does get better. You will kind of get over the hump, so to speak. In the beginning it’s going to seem fairly daunting but the people that I know who have kept at it, very much can do quite well. You just got to remind yourself that you’re learning for life.

Now, my second part to answer the question, maybe an answer, would be how much time during the day to commit to trading. I actually think that day trader should try to focus on no more than two hours a day and less if possible. You know, we have something called power quitting. And I’d love to be done in minutes when I can. It’s really hard to keep up, like keep sharp when you’re trading four, five, six hours a day. So one or two hours to me as a day trader is enough time to give any market or a group of markets. How about for you, Brian, can you add to that?

Brian Short: Yeah, the one thing I’ll add to that is this; a lot of new traders when they’re first coming in to the trading business, so to speak, the thought process there is — especially after they’ve had that little bit of success — the thought process goes something like this; you know, with the ForEx we’ve got 24-hour markets and with some of the other markets you can trade on hours on end, and so the thought process goes the more I trade, the more I make. But exactly the opposite we found over the years is true. You want to try to find a slice of time that you can curve out that, you know, whether it’s an hour or two hours, implement a strategy and that is where we find traders having the most success. So whether it’s, you know, I trade silver and I trade it from pretty early in the morning, 7:00, for a couple of hours and then I’m done for the day. And I found that to be almost refreshing as a trader. You know, I’ve gone through the times in my trading where I would trade for hours on end. I’d get up in the middle of the night, trade the third shift, you know, the European session and trade for literally hours. But to me, that’s what I would recommend. Any new trader coming into this is find that slice of time where you can get in and get out and get done.

Mark Soberman: Yeah, that’s definitely a great advice. And you don’t know how much better off you’re going to be if you guys are just sort of, you know, follow that. We’ve learned that over the years at school of hard knocks for sure. I got a question here from Franklin J. That’s a good question. He goes, “When should I make the move from paper trades to real trades?” So for me the one thing that has to happen first is your system has to be positive on the chart and in your back test, meaning if you were to put up all the indicators, learn the strategy and walk through the path, it absolutely right, it has to give you kind of numbers that you would be — you think anyway, would be happy with. We’re actually talking here recently in some presentations about how difficult it is to go from the chart and the back test into your account. The numbers — almost all the time for most people, they don’t match up. And it’s not you see a good match up, it’s you see a negative match up. What you end up within your account is not matching what you’re seeing on the chart, but you absolutely have to have that first.

I think next thing you need to do is, we call it, you know, sort of a 25-trade where we have to demo trade and flawlessly execute 25 trades in a row. But it doesn’t mean 25 winners in a row, that may be impossible and it probably is. But what we mean by that is winners or losers, you do 25 trades in a row on demo in real time and you don’t make a mistake, you just, you know, follow the system whether it’s 13 winners and 12 losses or 22 winner and three losses. I don’t really care as long as you do the trades accurately. And then the last thing you do from there is you open up an account and you trade the bare minimum. I don’t care if you have $1 million to trade in your account, you put in the bare minimum that you can and the smallest possible position because everything will change when you got money on the line.

So Brian, anything you want to add to that?

Brian Short: You know, Mark, you pretty much hit all the points there right on the head. I’ll just reiterate what you said. And it’s this, you know, practice makes perfect. Okay? And so many traders when they first come into this, get excited. They find a new method and they think, “Oh, this is it right here.” And they jump right to real trading without that practice element. And that is just a recipe for disaster. So I guess if I had any additional advise to add to that is just, you know, that’s what the 25 trades is, it’s forcing you to practice the execution of your trades before you invest real money and then you can take that step over to, you know, the real funs, like Mark said, with a low risk per trade and then work your way up from there.

Mark Soberman: Yeah, totally agree. So let’s do one final question and I’m going to give this one to you, Brian, to kick off. And it’s from Linda A. And what she asked kind of goes hand and hand is, “How much can I realistically afford to start an account with and what are my expectations of potential return?”

Brian Short: Yeah, Mark, that’s a great question. And, you know, in the ForEx market you can start with a very low amount. You can start with $100. But the key there is you need to have a risk level that is, you know, in that 1% to 2% range. One of the temptations with ForEx brokers, you know, they give you a lot of leverage to work with. And if I hear a story from a trader where, you know, he says he made 50% in a day, I know that’s a recipe there for disaster because the next day he’s going to probably lose it all. So again, the key there is to keep a reasonable expectation on the amount that you’re risking and start with that small account, build your way up.

And then the second part of that question is, “What are my expected, you know, potential returns?” It depends on your strategy but, you know, depending on your strategy, if you’re risking 2%, you should be roughly going for that in your strategy. Or in some cases you might be going for 1.5 times that or 2 times that, depending on what you’re looking at. And there’s a lot of ingredients there, it’s hard for me to say. But as long as that risk is at 2% you should be gaining that on the other side.

Mark Soberman: Yeah, I mean, Linda, obviously, we don’t know your specific, you know, situation but I think Brian is right. You can start with just a few hundred dollars in ForEx trading. Micros, it’s amazing education. You’re not going to get rich starting with $300. I don’t care what anybody tells you. But it’s a great way to learn. There’s nothing wrong with, you know, sort of getting your feet. I was talking to a friend of mine who’s gone pretty heavy into ForEx trading, and that’s what he said and that was the biggest thing for him. He goes, you know, “One of the best thing about ForEx is just it’s a great way to learn.” And he’s moving on to the futures market and trade the ForEx on the CME and like the Euro FX futures. But now that he’s ready for it, but he’s glad that he did not start there initially because he probably needed $5,000 or $7,000 per contract to trade those futures contract. So it’s heck of a lot better to risk it on a few hundred bucks than $5,000.

On futures, you know, that’s probably a good benchmark, you know, at $5,000 or more tends to be what you need to trade a contract in futures for day trader, you know. And obviously, a stock day trader, typically, even more. An options trader can start for a few thousand dollars. So there’s definitely, I think, something for everybody. You know, if you got a large portfolio, there’s no problem. It’s more of a challenge of what are you going to trade. If you have a smaller account, the nice thing is these days for the retail investor, you have opportunities but if you approach it like get rich quick and you want to know what your expectations of return are, I’m already a little concerned because you cannot guarantee returns in trading. You certainly will not have consistent daily profits day in and day out. It’s going to vary quite a bit. What I always tell people is, you know, in the years where buy and hold maybe works which these days seems to be rare, if you’re not blowing that away in actively day trading, then why do it. So I don’t know if that kind of helps give you sort of a top level if what you should expect or demand. It’s got to be work of your time and then some. Right? If you’re going to put all these time and effort into it, the reward has to be there.

So great questions, everybody. Please keep them coming. Again, podcast@netpicks.com, those will get to us and we’ll make sure we answer some more of your questions in the future.

So Brian, I think this is a good chance to sort of wrap up a little bit. We’ve got some good stuff planned for the next podcast. I think we’re actually going to, this time, maybe even interview one of our trading couches. I won’t say who yet but that’s always fun opportunity because these guys really know what it takes to become successful traders. They all started out as people who, you know, bought one of our courses and mastered them and have done well. And now are sharing that knowledge and teaching others how to do it.

We recently launched one of out trade system, an upgrade to it. It’s the Seven Summits Trader. And we actually released the, what we call the SST Pro, basically a pro level version. Certainly if you want to, you know, learn more about that, all you got to do is just go to netpicks.com, just, you know, put yourself on one of our lists and we’ll definitely keep you on the loop when we release the SST. It gets taken off the market usually after a week or two and then comes out every few months. So, you know, make sure you’re in there to take advantage of that opportunity. If you’re a ForEx person like we were just talking about and you want to learn, a system to consider. It’s low price and it’s a great way to learn is One-Day Swing Trades and that’s on the end, .com. Understand $100, onedayswingtrades.com. It reminds me because we got some really neat testimonials today from some people who have been trading that throughout the past month, have done well and, you know, a couple of them actually said that, “Hey, the nice thing about this is it just straight forward and easy and kind of set and forget.” That’s definitely a good way to learn. That’s a good way to do it when you can just place the trades and walk away.

And one final thing, actually, two final things I want to mention is we have an interview series with book authors like Michael Martin. If you want to hear the next one, that’s coming up. Another link I’ll give you is netpick.com-interview. So I know I’ve given you a lot of URLs today but go ahead to that one. You just want to make sure you always get notified of NetPicks stuff and events. Just make sure you’re on our master list and we’ll make sure you know about the interviews and the freebies and the software and all that good stuff.

And then the last thing I’ll end it with and then, Brian, you can have any of your closing comments as I overload them with URLs, is netpick.com-theinvestorsbrain. And that’s a really cool report where we’ve kind of boil down three best selling investment books, no charge, you just go there and you’ll be able to grab the special PDF report. So it’s just netpicks.com-theinvestorsbrain. It’s just a real good way to have a very top level summary on some great books including one from Warren Buffett, I think that might be interesting for people especially if you’re just getting and going and want to understand some of the top level things to do with investments.

So Brian, I think we’ve covered a whole bunch of great stuff today.

Brian Short: We did.

Mark Soberman: I appreciate you joining me. Anything to tell the people, the fine people on the way out here?

Brian Short: Just thanks for your time and attention and I hope that you were able to take away, you know, a gold nugget today that you can implement into your own trading.

Mark Soberman: Sounds good. If you are not leaving with a golden nugget, then I think you need to listen to all these again. There’s plenty of them in there. So anyway, if you can stand it, rewind and hit play again. With that, we’ll be back with you again soon, next day Trading Authority podcast from netpicks.com. Thank you.

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