This is the transcribed version of the podcast linked above ^^^
In this episode, host Matt Davio and new trader Tony discuss the scenario of making a game-time decision when a trade is not going your way and you must adjust your trading plan.
MATT: [00:01:10] OK Matt Davio back again with Tony. and Tony you had a question you wanted to ask me specifically and I figured we do a podcast on it before really talking about things.
TONY: [00:01:25] Yeah.
MATT: [00:01:25] So why don’t you go ahead and shoot me your question.
TONY: [00:01:31] So my question was thinking about this and you know I’ve been told stick to trade strategy and have an idea of what you’re doing when you get into that get into a trade. But I was wondering if you’re ever going to trade your stake in your strategy and as it develops if you ever mid-trade decide OH I need to change my trade.
MATT: [00:01:51] Oh yeah.
TONY: [00:01:52] But then do you deviate from your strategy? Is that a no no or do you know-. You know what I mean ?
MATT: [00:01:59] So a lot of people will ask and I think the question is a good question. They’ll ask hey you know if you’re in a trade do you ever flip. You know this is kind of another way of asking a similar question Do you ever go from long to short, or short to long.
TONY: [00:02:21] Maybe you’re being really conservative and you have two contracts and that was your plan. But now I only go I should put ten on.
MATT: [00:02:28] Like everything comes together and.
TONY: [00:02:30] A dramatic change.
MATT: [00:02:31] You really decided to put on some some serious size. Absolutely. It doesn’t happen often though the way I trade I tend to be a limit trader versus a market order trader so I tend to pick my spots like I know where I want to buy or sell whatever it is I’m trading in and I’ll put orders in reflecting that.
TONY: [00:02:53] OK.
MATT: [00:02:53] Now I can give you a real world example where I was very short for a long time crude oil. From the good chunk of when crude finally broke $90 in the fall of 15 summer of 15 fall 15 I’m going back and I don’t have the chart in front of me but it was one of those periods of time when that happened I was very short for months like you know.
TONY: [00:03:24] OK.
MATT: [00:03:29] That doesn’t mean I was short every day but most the time I was looking for rallies to sell. And when those rallies came I would sell and then I’d ride it down to the next level and rinse and repeat and do it over and over again.
TONY: [00:03:42] Yeah.
MATT: [00:03:43] There became a moment and it was I can tell you because I was working with a student who was then working with me in Bend from New York City and we had been doing this. He had been working with me for two weeks and we were short, short, short. But I kept telling him this is going to change and you may be here when it happens, you may not be. But what’s going to happen is we’re going to, at some point, want to get long. And I was looking at $25 was the area that I wanted to be long. And it never got there. It never got to 25 dollars. It got to 26.50 or so and I started buying a little bit and it took some of my short. Then the market all of a sudden there was a really significant buyer, like somebody came in and bought like 5000 contracts of crude, to the fourth to the point where we went from 26 50 to 27 in a heartbeat. I was still short some of my position and I told him I said “OK cover it and double the other way”. And I said Don’t ask me why. We’ll talk about it later. So here’s the why: what happened in that moment, you know, I was prepared for that yet I was still riding it short. Knowing that this was going to be short lived I was trying to pinch every, kind of, last move out of it because I was probably short from the 30s at that point. But what happened was in that moment there was no news there was nothing, there was no announcement there was no oil number that had come out. It was just somebody decided it’s over. Somebody with size.
TONY: [00:05:27] Isn’t that crazy.
MATT: [00:05:28] So it can be something as simple as time and it can be something as simple as volume. Volume comes into the market that is different than what the market had been doing and that usually is a point of exhaustion. You’re kind of even see that right now with the VIX. Everybody everybody’s selling the VIX.
MATT: [00:05:55] Yeah.
MATT: [00:05:56] They’ve been doing it for a long time because it works like the thing doesn’t go up it doesn’t spike what’s going to happen is everybody’s going to storm the exit doors at the same time. And if you don’t get out in the first stampede, you’re dead. Like those people will literally be carried out on a stretcher charred, burned this is the thing. It’s like they’re so broken into to doing it the way they’ve been doing it. They won’t even recognize it because they’ve built that muscle that oh it’s just going to come back but it’s just going to go even lower.
TONY: [00:06:36] Yeah.
MATT: [00:06:37] So at some point that changes and they get caught and-
TONY: [00:06:41] They’re a one trick pony.
MATT: [00:06:42] Yes their one trick pony and a lot people will be wiped out of the business. Think about it if the VIX hit at an all time low just a couple of weeks ago at 8.84. Previously it was just like it was like 9.08. So getting into the eights and I’m not saying it can’t go to zero, I guess, anything is possible. I always say this.
TONY: [00:07:02] Yeah.
MATT: [00:07:02] Anything is possible in markets if you think that it’s not you’re the fool.
TONY: [00:07:07] Yeah.
MATT: [00:07:08] OK. So you always this is the hardest thing about this game and it’s a game. But it’s no different than if you are you know playing Monopoly. Right? And let’s say you just have all the utilities and the railroads and you’ve got everything else but you’ve got everything. You’ve got boardwalk, Atlantic City you’ve got everything else. Guess what. I can still win. It’s unlikely but the dice can roll my way. And you could be pinched and you could you could basically get a margin call and you’re going to have to sell your properties. Right. And then I’m going to start swinging back that way. So nothing in markets lasts forever and you should always tell yourself “what do I do if” like you should always be asking yourself what do I do if this happens, how do I behave. Even if it doesn’t happen today.
TONY: [00:08:06] Yeah.
MATT: [00:08:06] That way the muscle is trained like you’ve been through the fire drill going back to the theater.
TONY: [00:08:12] Yeah.
MATT: [00:08:12] And you know what to do. This is why you have fire drills and this is why they’re so weird because like kids just goof around. But the reality is you don’t have time.
TONY: [00:08:25] Well it’s funny when you mention that because I was reading an article in Psychology and they were talking about moments where like natural disasters or times where people have to act in a moment and then they freeze like a deer in the headlights type of thing. Most people died because during the disaster emergency they just don’t act. It’s like counter-intuitive to when you think to survive.
MATT: [00:08:47] That’s correct. This is a whole podcast. Another podcast, we can talk about it, but the fight or flight is so powerful in human beings that it’s a negative. Now in our lives most of time we’re not going to die. Right. We act like it. But we’re not going to die if you know we cut our finger on a kitchen knife most likely today because we if it’s really deep we can go get stitched. You know even if we cut it off and we’re near a hospital they can, today, most likely even so it back on.
TONY: [00:09:27] Yeah. Worst case scenario.
MATT: [00:09:29] But in the past they would have been more like hey let it go. You’re going to just have that part of the finger. We’re going to we know how to stop the bleeding.
TONY: [00:09:37] Right.
MATT: [00:09:37] Right. And move on. But people today, we’re so comfortable like we don’t have predators in the sense that lions are going to kill us like they did in Africa.
TONY: [00:09:49] Today we will Instagram it. Before we get to the hospital.
MATT: [00:09:52] Today we will Instagram it, Facebook it, and Snap it, before we go to the hospital. And while we’re in the hospital.
TONY: [00:10:00] Live stream.
MATT: [00:10:01] Live stream, Exactly. And then we’ll tell you what we had at the hospital cafeteria. But seriously those moments happen and really the best thing I can say to people to suggest how to deal with that is think through the ultimate worst case it can’t happen situation every time. Most people don’t do this right.
TONY: [00:10:23] Right.
MATT: [00:10:24] If you’re long something and overnight risk is such that you’re comfortable and you can say “hey if we’re limit down tomorrow and the future will that put me out of business.” Then you’re too long, because it can be limit down for two days in a row. That’s five percent. So if you have 20 contracts five percent in those is 100 and that’s 100 grand every time.
TONY: [00:10:51] Ouch.
MATT: [00:10:52] So it doesn’t take long for that to happen.
TONY: [00:10:55] Yeah.
MATT: [00:10:57] But you have to think through: can I handle that. So because that can happen and it does happen so we haven’t. To that point, We haven’t had a 2 percent move in over ten months and one day we haven’t had a 3 percent move in 17 months. I just looked up this information yesterday. And a 2 percent move is normal we used to have those 20 times a year. I mean literally like we do. We haven’t had a 2 percent move in years we haven’t had a 3 percent move in a year and a half. So this is the point people get lulled to sleep into this will never end. Right? Good times, bad times, it doesn’t matter. Well Victor Neiderhofffer who I’ve met, he’s a friend of mine, a hero of mine. This is what he does. He sells, sells, sells options. You know this is what he’s done when he’s blown up in the past. Basically he is permanently long and then he keeps selling because it usually bounces but he can’t you know he runs out of bullets at some point. So everybody has limitations and you really need to prepare yourself for when you get stressed to that point. Either reverse, get out, the first thing you could do is just get out.
MATT: [00:12:18] Stop the Bleeding.
MATT: [00:12:18] Stop the bleeding and probably since that time in February of 16 with oil I haven’t had a trade like that. I mean this is the amazing thing is like I’m telling you this because I can remember it. So how often do you do that? Not that often because I’m not a daytrader. So I’m looking for bigger moves. But that moment for me was because of my tenure of doing this I can tell something had changed. Now, could I have been wrong? Yeah. And I also you have to think through that you know where am I wrong on this? You know, mastermind type behavior.
TONY: [00:12:58] You just can’t revert back to what you know.
MATT: [00:13:00] Correct.
TONY: [00:13:01] And depend on that.
MATT: [00:13:02] Again just because you flip it doesn’t make you right, at all. I could totally be perceiving that wrong. So I don’t do that a lot. A lot of people will say “I’m a daytrader I’m going to flip one way or the other” they might do that a lot. I don’t. So it depends on the time frame you’re trding what you’re trading how you trade it. But absolutely I would say most of the time my plan is 20 percent. Right.
TONY: [00:13:28] There you go.
MATT: [00:13:29] I say this all the time. Eighty percent of my winning trades go against me at some point during the trade before I make money. This is the hardest thing for people to accept. They’re like what do you mean. I’m wrong pretty much right away 80 percent of the time whether I’m long or short.
TONY: [00:13:52] And you get the emotional wear.
MATT: [00:13:54] I accept it and I know that it’s within my constraints of risk. As long as it’s there, then I exhale. If it’s to my risk point, I’m out, I lost. The best thing that I’ve been able to trick my brain is I expect the trade to be wrong. Like as soon as I buy. I know it’s going to go against me. I’ve accepted it. It the way I can trade. For me it works because I know if it’s $10000 I’m going to lose even though I’m down two, it’s not it’s not 10 so I’m OK. So I’m OK in the trade. So that’s the way that I set myself up for those situations also. So it’s a trick that I use. It’s one that works for me. You may have a different one, but I think you have to find a way to get comfortable in the discomfort. Which again is life.
TONY: [00:14:57] Quite a bit.
MATT: [00:14:58] I mean and I don’t mean that in a pessimistic, negative way. But guess what? life is up, life is down. There are peaks, there are valleys. Enjoy it all, enjoy the good, enjoy the bad don’t get too high don’t get too low. Those are key lessons I think about this podcast. So thanks for listening everybody want to keep it short. And if you have any questions, as always, send us e-mails at [email protected] , if you want to ask Tony and I’ll send it to Tony. Thanks for watching and listening and we will talk to you soon. Have a great day. And well we’ll see you on the other side. Also like us on an iTunes, Stitcher podcast. Anywhere you listen to us. We appreciate it and help us jump in the rankings.
TONY: [00:15:46] Share with a friend.
MATT: [00:15:47] Share with a friend.
MATT: [00:15:57] The One Minute Trader was devolved to bring you fresh trade ideas every day, of every trading week. Make sure you go sign up for our invaluable One Minute Trader daily emails along with our five minute video emails to get timely insights into evolving trade possibilities. Let One Minute Trader be your second set of eyes for trade opportunities, that may have passed you by. We appreciate you listening today to the podcast and we hope you’ll support the show by leaving us a positive rating on whichever platform you’re tuning in from. I’m Matt Davio and this is the One Minute Trader podcast.