2018 was the year where I had finally found my footing in the market. After a year and a half of sacrifice, pain and stubbornness I felt my ambitions come to fruition. I made a 300% return on my account within 6 months following my strict compounding regimen. I had momentum, I had passion and I had done it the right way. I never traded a share more than I had planned, never sized up before my 2% compound allowed me the opportunity and when I had a large draw-down, I stuck to my low $ risk until I grinded it back up. I followed my rules, I had a systematic approach to trading: profit or stop, that’s it. I was inflexible, but invariably the expectancy of 3:1+ risk to reward setups and a consistent effort to cut losses exactly where I planned kept my progression steady and, at times, parabolic. My losses were tidy, I could justify on my overall PNL chart that a small dip was due whenever I made a massive gain and that it would continue trend doing exactly what I’ve been doing.
I posted on Twitter nearly everyday showcasing these immaculate charts that I felt extremely proud of. I made a lot of friends (and haters), got all types of solicitations to mentor, give tips and a tiny bit of clout. I would be lying if I didn’t say that it affected my psyche. I did feel validated, I felt a lot of positive emotions but what I wasn’t aware of was some of the reasons great traders do not even bother with Twitter (I’ll get back to this later).
Before I get into it, I want to say that I am fully responsible for my actions as a trader, no excuses.
Late last year, a few major events transpired.
You know when you’re a teen and you feel like you’re invincible? In part 1, I’ve told you the story of how I did the unlikely which, in a way, has always given me an air of self-confidence despite the odds being stacked against me. That ambition, that drive and pursuit of hope which the pragmatic scoff at. I was probably as delusional as Billy McFarland (FYRE festival) himself, saying that “Positive Mental Attitude” spiel. Don’t get me wrong, I whole-heartedly believe in optimism, but there also needs to be balance (thankfully my fiancée teaches me everyday).
The night before Halloween, My father passed away and it caused a lot of grief for my family. Needless to say, every aspect of my life had been pulled apart and needed mending. I no longer felt like life was this “game”. I started to view mortality in a drastically different light. I felt that my own goals in life should not come at a cost to family and health. Life is short, so what exactly are we doing here?…
I resolved in my mind that it’s not just the money. That being said… how could it not be when you NEED money? For the first time in my trading career, the NEED for money became extremely apparent. I was a student of the market, studying full-time nearly every hour of my day on the back of my family. I was, by no means, making a living from trading on my own, but that was the plan. I stared into the markets eyes with confidence that, with time and extreme dedication, I would be able to find my place. Every single indicator lead me to believe this too… like I said, my progression was, at first steady, then violently parabolic. I was just about to get there, I was hitting my goals hard and actually had the sense that I was ready to be totally self-sufficient.
As we all know, the market makes it a point to do the exact opposite of literally everything, a complete mindfuck. Nearly every proverb, ubiquitous saying/colloquialism is basically true. Values that successful and veteran traders often try to pass down to prevent the younger guys from making the same mistakes. Being humble, respecting risk, knowing that the only thing you know is that you don’t know, drowning out the noise, having a plan, not using leverage, having journals, being healthy, not trading when your mind isn’t clear, reading the psychology, having a system, risk/reward, having strict rules etc!
Unfortunately, these words often fall on deaf ears. Traders are human and we often learn from failure as a more visceral reason to never experience that feeling again and then change. We choose the path of least resistance, we ignore our human limitations such as the chemistry of our minds, and we also tend to see what we want to see and ignore other conflicting factors.
I took a few weeks off to spend with my family. I was really worried about coming back and forgetting everything. I was doing really well… but this is no time to trade. When all was said and done, I came back and actually with a lot of momentum. All of the skills I thought might’ve left me were there, I was in tune and had flow state when I traded. I knew what to press, where to look and how to do it. One of my best days was an incredible 30R day on 5 tickers traded in a single session. The crazy part was that a 10–12R day was not uncommon for me. I was on fire again. I thought, well, I’ve always been a pretty level-headed guy and instead of letting my father’s death affect me negatively I would use it as impetus towards actualizing my full potential, not only as a trader, but also as a human being. My confidence grew and grew. That’s usually the first sign, and you’ll see that conventional wisdom come from many great traders.
I mentioned compounding being a huge part of my trading. Well, when you make leaps like 30R in a single day, your numbers dramatically increase. My share counts rose, my $ risk rose sharply and some pretty important facts of trading hit my square in the face. Eventually I was met with brick walls of liquidity concerns and all sorts of limitations, not to mention fees. That perfect clean cut exactly at risk started to become slippage. My inflexibility started to affect my psychology, as the systems I used began to show warning signs. I could take the $ amount I set out to risk, but as soon as it ballooned I felt kind of in limbo. I never really played outside of my risk before and to this degree. Every single level 2 bid and ask became extremely important. I was able to move the market, in the short term at least, and that meant pushing it past my levels. It was NOT ok. I started acting irrationally and doing things I’ve never done. I started to act outside of my comfort zone. All of the classic mistakes, adding to losers being the king of them all. I established poor habits and got rewarded heavily. I managed to use techniques like volume exhaustion which I never really cared about too much before and top-ticked these huge parabolic moves. I would often get out scott-free by getting nearly perfect adds, often with a very very nice gain. This was not trading and I knew it.
I was so cognizant of this, I rehearsed in my head the situations, the emotions, journaling it out everyday, read all types of trading psychology books and blogs, meditating, exercising. I told myself if X happens, then Y. I tried to make it systematic and I built strategies such as scaling in or modified hotkeys to get out cleanly. I felt like I was done with it once I reached another few weeks of the old me. the consistent killer.
It snuck up on me, the things I thought I knew but really had no clue about, the other half of proper risk management: mental capital.
Excerpt from “The Inner Voice of Trading” by Michael Martin (pg. 1–2):
“A lot of traders love the Seykota chapter in Market Wizards and can quote what might be his most famous line: “Win or lose, everyone gets what they want from the market.” To this day, that line hits failing and mediocre traders right in their most vulnerable spot: If a trader is losing consistently, it is by design — it is the trader’s goal. For Seykota and his students, intentions equal results. However, I think that the most revealing thought in the chapter was another of Seykota’s quotes: “The goal for the trader is to develop a system with which he is compatible” — that is, a harmony between a trader’s emotional constitution and trading technique. In this case, a system is a set of rules for trading: what to buy, how much of it to own, when to get in, and when to get out, either to take a loss or to collect profits. These rules are intellectual in nature — at least, that’s how they look from the outside. “The goal for the trader is to develop a system with which he is compatible” — that is, a harmony between a trader’s emotional constitution and trading technique. Lurking below the surface are the emotional buttons they push when the trader employs them. The intellectual aspect of trading rules are what most aspiring traders reach for while learning the craft because they’ve had that approach ingrained in them since kindergarten. Unfortunately, most aspiring traders find out far too late that the act of trading is 20% intellectual and 80% psychological.”
This is a huge part of the equation. My system was no longer in harmony with who I was as a trader. I could not emotionally handle the outer limits of my strategy, especially without adapting. I could’ve easily been making as much or more than a dream career if I steadily kept making the same type of money day in and day out. However, I wanted more… I wanted that high score in the video game and my compounding enabled that. I justified that I wasn’t being irrational as the compounding lead me to this risk level, I didn’t just decide to 2x or 3x my size for the hell of it. My system under typical expected draw-downs and with the R/R I take gives me a positive expectation by a landslide. I felt that it was okay, but I didn’t take any moments to breathe and re-evaluate. It was just go go go. Green day after green day lead to more and more, that was it. I stopped being able easily accept losers and my emotions put me in fight mode. I began over-trading for the sake of keeping that beauty of a streak alive and continuing my growth. It worked every time until the time it didn't…
I knew my mind was being perverted by greed and fear. I felt it wash over me and I also felt the adrenaline of being in a high-stakes trade and coming out the other side. I felt the congratulatory praise from Twitter, my friends, myself. I won’t say which, but between three tickers I threw away a large majority of my profits back to square one. How did it happen? Adding to losers, leverage, and the dreaded margin call. I was literally marketed out at the exact top on two names that eventually faded into extremely profitable trades had I been able to hold on…
One systematic, and inherently psychological, facet of my trading is the concept of risk/reward. I knew that when I took a 3:1+ setup that I could take 2 losses and come out profitable. This lead me to be extremely successful as I cut losses without fear or hesitation. However, when the tickers just do not budge, paper cut after paper cut becomes frustration and revenge trading. I started to lose myself to the emotions. No one was going to tell me to stop except me. It was too late my monkey mind overcame me. All the diligent efforts into defense mean nothing. Discipline?… where are you when I need you?
I read and tried to pick up on as much self-discipline subject matter as possible before the storm. They all said generally the same thing but the one key principle that would’ve prevented this entire ordeal was this: Avoidance. Just like the phenomenon where we are extremely likely to acquire traits of the people we spend the most time with, or how we’re more likely to be overweight when we have junk foods in plain sight… some things we do because it’s just easy. The trick is that we have the ability to decide what we allow to influence us daily. We can cut toxic people out of our lives or add empowering people to our social sphere. Likewise, we can simply hide the junk food in a tucked away area out of reach or not purchase them at all! Make it fucking hard or impossible, simple. Make the decision, then, in a way, take it out of your hands. Imagine if I had just set a daily loss limit with my broker… say no more than 3–4 paper cuts and that’s it! The trade would be effectively over or severely limited, it would be a small pullback on an otherwise insane parabolic PNL curve… why does 1 ticker, 1 trade mean so much to me? My system was designed to win over a series of trades in the long-run not on a trade-by-trade basis.
Daily loss limit, this is the only thing I’ve found that does a predictable and effective job of limiting losses and it has a profound impact on my well-being. I can safely say that I will not face the widow-maker because I’ve learned from this experience and set defined parameters for getting the fuck off the computer. No bullshit. I can be confident to say that my future in trading is back in my hands. Protect yourself from you.
Twitter aka “FinTwit”
So what’s the deal with Twitter? How does it come full circle?
You may even notice that I tweet a lot more precautionary psychology, risk strategies, defense food for thought than charts. While I do think chart porn is beautiful to look at and try to replicate, I think there are a few reasons why these behaviors are harmful to the poster and the viewers:
- The only thing that matters is YOU and YOUR trading. You need to find that system where you find harmony between your abilities and your mental framework. You have literally no clue as to what risk I was using, how much risk I was putting on, where my targets were, my technical analysis, my fundamental research, none of it. At this point it is literally just porn for the eyes and a shot of dopamine for me.
- Dopamine is a powerful thing. You cannot ignore the fact that your human self will crave dopamine. Situations that give you that good feeling will become addictive and often times more enjoyable than the action itself, it is the thought that triggers the desire. All of these people on twitter patting you on the back makes you feel like you did good, but guess what? A lot of these traders are hiding their losses, they either don’t post it or they just crop a tiny ass fraction of their chart. I always had that pet peeve and tried to show my entire chart. But let’s imagine you broke some rules, but yes eventually you NAILED the move… you crop out the shitty parts and post your home-run and boom you’ve got dopamine. You trade for that clout, that praise… well now you want the perfect top-tick and the perfect bottom tick, it’s not even for you anymore. I don’t even really share my charts with my own trading partners anymore, and trust me, I have some disgusting charts still. I only share it if there is a way to be constructive and not to show-off or get a little boost, it’s just a trade… I want to get criticized, having people telling me “nice!”, “great one!” means nothing to me. *Please read “Atomic Habits” by James Clear, this is huge. If you need a reason, basically every Seven Points Capital (actual professional traders) was recommended this reading material and have read the book a number of times over.
- When you start comparing yourself to others, the noise, you begin to feel insecure. You feel that you didn’t nail this or that, or they did that much better than you, but it’s all relative. I can scalp a position that makes the exact same amount of capital as a huge intraday ADF hold toptick to bottom tick with smaller size… why is any better? We are just trying to make a living and the market is a vehicle to extract capital from our edges, money isn’t everything, nor is your ego. You start to want what others have, noticing all sorts of stuff irrelevant to you.
This is why I went dark on Twitter for a time. I went ahead and unfollowed/muted braggarts or those who caused me any FOMO. I selected the most impactful people on my feed, put alerts on everything they say and study their comments.
As an aside, you want to know the funny thing? This actually puts it all into perspective. When I was posting charts and nailing the moves I was getting so many messages everyday, I couldn’t even handle it. I stop and then it’s dry as a desert aside from the few great friends I’ve made or the odd disciplined trader. Offers on the table gone. I haven’t changed as a trader, I still execute at the level where I feel very satisfied, the only thing that has changed is I am not trying outwardly flaunt my success.
The Aftermath
The unfortunate truth is that most veteran traders experience a traumatic blowup at least once in their career. The light at the end of the tunnel is that the ones that stick it out and are too stubborn to quit pick up on valuable insights and make great leaps of progress.
Since that time last year, I’ve really evolved as a trader. I look back and think, “Wow, how did I even trade not knowing what I do now?”
I feel that I have a sense of what I’m made out to do and what my path looks like in the future. I have slowly built back the confidence brick by brick, doing what I need to do. I’ve done it the right way, compounding my account from minor risk levels and being satisfied with that. I know exactly when my compounding will end and when I will simply trade the same size for a long period of time, take it easy and then evaluate the next level. I plan on taking a paycheck for myself every week over my threshold and making these numbers on the screen tangible. Every system I’ve made is bigger, better, stronger and faster. I’m making optimizations every single day. Ego has no place in trading.
A few quick insights:
- Risk scales w/ the range of the trade, the risk you put on any of these parabolic runners needs to be getting smaller and smaller the higher it goes. Find a real systematic way to define your risk at different price ranges, a $5 stock is not the same as a $10 or $20 stock… don’t risk the same amount it is suicide. We are not taking .01 cent risk on SPY just because the numbers are larger and can make 10,000 R trades.
- Risk/reward systems are not the holy grail, emotional and mental capital need to be considered. You can take on less risk and have a higher win-rate and outperform high RR trades. Inversely, you can take on more risk with a lower winrate and not be able to handle the draw-downs/papercuts associated with more risk and throw a wrench in the calculation. I personally reduced my RR ratio to have a much higher winrate, I notice I lose my full composure after a few losses. Accepting the risk is the first step and sticking to the plan is the follow through.
- Be flexible and dynamic with your system, know when you need to play defense and how you’re going to accomplish that systematically.
- Take singles. I’ve saved myself by focusing on the humble single. Home-runs happen but not because I will it. If you go for home-runs you will inevitably get frustrated by the money you left on the table, one of the major fears in trading. Do not let that affect your psychology, lock that money in and take it stress free.
- Running a simulation on just a $ amount per day is humbling, compare that few hundred dollar gain per day 252 days a year minus tax to see how you’re actually blessed to trade compared to salaries of top professions.
- Act outside of the herd, shut out the noise. The masses can invert any trading setup by means of crowding the trade and the exact opposite will occur, at least it’s far more probable in the short term.
- Take the money out by paying yourself over a threshold, spend some and realize it’s actual value if you’re naive about the value. It’s hard to put into perspective how even my locate fees are often comparable to a really nice meal or clothes or something material or any little fee that you just blindly accept. Put it into perspective… I really feel grateful when I see what it can do in the physical world. Why do you even need that cash in your account? Why even make cash at all if it’s at risk? Lock it in IRL, lock it in on the single.
- Notable reading materials: Peter To’s blog — start here and you won’t stop reading http://ptotrading.blogspot.com/2014/11/the-day-i-lost-sht-ton-of-money-part-i.html , Epica Capital blogs: http://www.twitlonger.com/show/n_1s8hft2 , DGtrading Blog: http://dgtrading101.blogspot.com/ , Kris Verma Blog: https://krisverma88.blogspot.com/2019/01/day-trading-golden-nuggets.html , Books: Atomic Habits, The Inner Voice of Trading, Trading in the Zone, The Compound Effect, The Talent Code
When I reflect on everything, I don’t think about what if scenarios, I was irresponsible and deserved the outcome. It might be the most painful lesson upon one of the most painful years I’ve ever had and I’m damn well going to learn everything I can from it, to finally deserve my own definition of success.
Family, friends, health, love. Time is precious, life is short. Money is a means to an end and not the be-all and end-all. Trading affords us the potential to live our best lives, free from the 9–5 to spend with our loved ones, and the ability for financial confidence.
-Brian
Dedicated to my late father.
