I would say that day trading stocks has taught me more about life than anything else I have ever done. What??!! You may say. But Mike! You have traveled the world in a band and hung out with rockstars! You have attended and graduated a top notch University with tons of delicious babes all over the place! You have loved and lived with a beautiful woman! You have extremely good looks and an amazing personality and everyone that I know would give up their right arm just to be you for one day! I know, I know, it’s a blessing and a curse to be this awesome… But seriously I am not conceited. I promise. In fact, I would hope that most people would think that I am pretty grounded. It’s not too hard to be in my situation actually, there are a lot of things about my life that are lacking compared to a lot of people I know. And if I ever forget that, there is always Julie Spolidoro.
Who is Julie Spolidoro? You may ask. You may want to know. Well, Julie is my longest standing friend that is a girl. We have been friends since we were little tykes in Duxbury, MA. And we’ve never kissed. Okay, I’ve tried to break the streak so that I didn’t have to admit that. But she’s held strong. And did I mention that she was an All-American high school runner? Or that she was an All-American and part of the Nationally Ranked Boston College Eagles running squad in college? I think her team’s best finish was 4th in the country while she was at BC. Yeah, she’s the real deal. And just as good as she is at running is how good of a friend she has been for me. She has always been there for me, hell, that’s why I keep her around! Ha. And she is always there (and more than happy) to tell me when I am out of line.
For example, I might happen to say something that is slightly offensive, or egotistical, or I am pushing the envelope in some way. I know. Hard to believe. “Michael!! Stoppp it!” Julie’s voice rings true to the heavens. I just look at her and can’t help smiling. You see, Julie is honest, and I love her for it. We all need checks and balances in our lives. Julie Spolidoro is mine. Thank God for her sometimes. You see, I respect her so much that I know she is right. So if you ever catch me being an idiot, just ask me if Julie would approve. That will teach me!
Back to trading. So what lessons can you take from trading? Why have I personally taken way more from trading than any other experience I have ever had? Well, first of all, let’s talk about the market. The stock market is just a bunch of people buying and selling stocks to each other, which means money is flowing from the losers to the winners. This also means that the market acts and reacts based on human behavior (because it is humans buying and selling these stocks). It is not hard to see that the stock market is pretty irrational in regards to its behavior. And it makes you realize the same thing about humans. Human behavior is naturally a bit irrational! However, there are some distinct patterns in the stock market. They don’t happen all the time, but they are most certainly there. Meaning human behavior is quite irrational, but it does follow a sort of pattern.
To be a decent trader one needs to first realize that his or her actions are naturally a bit irrational, and that he or she needs to use patience, perspective, and control in order to be consistently successful. Think of this as the Julie Spolidoro clause. You’re irrational by nature, don’t refuse level headed advice. The other piece to the puzzle is that the trader needs to only blame himself or herself for his or her mistakes. The market is this big moving force that has no obligation to you, and cannot be controlled, and it is your job to find out where and how you fit into this scene, not vice versa. It’s kind of like life. You need to know your surroundings the best you can, try your best to fit in, and if things don’t work out then you need to realize your limitations, accept the ambiguity of the world, and move on with patience and grace. Wow, that was deep, wasn’t it?
So I have this day trading theory I use that builds up to one possible trade per day. I call it ‘The 9:30 Decision’. It is a combination of The Gap Play, Runaway Gaps, Pivot Points, and analysis of current events/market conditions. If this makes no sense to you right now then you are probably in the majority of people reading this book. And I’m not going to take the time to explain the technical side of the ‘9:30 Decision’. Instead, I am going to let you all in on a little introduction I wrote about the 9:30 Decision, which describes all the emotions you might go through and the general perspective that I feel is necessary for a trader to be successful. You might actually find this part quite interesting, and insightful, because it definitely ties into the human condition in a very real way. Like I said before, this part gets deep, doesn’t it?! So here it is, my introduction to ‘The 9:30 Decision’:
The 9:30 Decision
So you want to be a “day trader“? Alright, fair enough. Let me ask you a few questions to see if you would qualify for the job… Okay, here goes: Do you like to gamble? Do you like to geek out on spreadsheets and charts? Do you like to look for patterns within numbers? Do you enjoy a challenge? Are you patient? Does the prospect of having your hard earned money on the line every time you go to “work” excite you?
I hope so. Because if you answered “no” to any of the above questions, then day trading may not be the profession for you. Day trading should be exciting, not scary. Day trading should be viewed as a long term career, not a short term hit. Day trading is hard. You will have to overcome many, many obstacles that you could not foresee before taking on the task. You will need to be resilient, disciplined, dedicated, patient, trusting, focused, have reasonable expectations, time to let the project develop properly, be able to control your emotions, and be able to beat the overwhelming odds. Sound like a lot? Sound tough? Well, yeah, it is.
Because the odds are against you. Let me give you a breakdown. 70% of traders blow out their account in the first year. That means they lose all the money they put into their account. They fail flat out. So they either have to re-up (put more money in their account) or they have no more money to put in and they are out of the game. Just like that, a flash in the pan. So a reasonable goal for year one: Don’t blow out your account! Easy, you think? Easier said than done, believe me. I was close to a blow out in my first year. A common saying in the industry, “Live to fight another day”. Remember those words, use them to your advantage.
In a given year, roughly 70% of traders lose money, about 20% of traders break even, about 7% of traders make some money but not much, and about 3% of traders absolutely kill it (they bring home the bacon, make tons of money). The top 3% of traders are what we call professionals. They take money from the amateurs, the undisciplined traders. Because all a market is really, is money being redistributed over a pool of participants with a broker and an exchange taking the fees for the people’s right to play the game.
So how do we get that money to flow to you? Well, that’s the hard part. Before I get into the number crunching, you will need to be aware of the headspace you need to be in. You need to find your “Trading Chi” or you’re toast from the start. So, let’s ease into this whole trading thing before we get to the technical side of things. Let’s get our head on straight and get the right attitude before we even look at a chart.
Trading Chi
At first, I couldn’t stand the mental aspect of trading. I kept thinking, “this is all semantics, when do we get to the stuff that I actually do! How do I actually place the trade?! Show me already!”. But now this is my favorite part of the trading puzzle. Why? Because this is the most important part! To realize this you must have experience, and be a mature trader. So, if I were you I would pay special attention to this part of the game and always keep your “Trading Chi” on the top of your priority list. Day Trading is a lifestyle, a way of life, and Trading Chi is very real and very important. It is important for our mental and physical health, our well-being, and our trading. Lock into it now, embrace the concept, and formulate the winning even-keel attitude that you need. Don’t be overanxious or have unrealistic expectations. It’s time to create our Winning Chi!
First order of business. NEVER blame the market for our losses, or get angry at the market! I repeat, NEVER! It is not healthy and it makes no sense. It also shirks responsibility that the trader should own up to. Does the market “force” you to enter a trade?! No. Does the market have an obligation to little investor Bob Jones from Littleton, Massachusetts to move the way he wants it to? Hell no. Is the “market” a living entity that is even aware of the way you want it to move?! No. It moves by other people’s actions, actions that you can’t control. You do your research, you stay disciplined, you make your trades, you blame no one for your losses but yourself. End of story! So let’s be an adult and own up to our actions, you make your own fate here, only you. You win and you lose based on your own decisions that you make for yourself. You make your own luck in this game, no excuses, no regrets if you are truly doing your best. Get in that headspace to start. Are you in the driver’s seat? I hope so. Feel good? Well, damn partner, let’s move on with that Positive Chi!
Think Long Term. In order to be a professional in trading you need to think long term. Think of it as a career. Recalibrate your hopes and dreams of instant riches to thinking about any business in its starting stages. At first most businesses lose money, they require an investment of time, hard work, and capital in order to be successful. Such is the case with trading as well, especially considering the high odds of failure. So don’t let one trade get you down. I’ve heard many traders say that after a year of trading they can barely remember the individual trades that got them to their end point. It’s all about patience and consistency over time. And believe me, there are times when you feel so distraught over losing a trade, or a little string of trades, that you feel like you will never forget that feeling of horror pulsing through your veins. But in time that feeling passes, and as you learn and become a more mature trader, that feeling passes more quickly each time. You learn self-control and perspective of the long term, patient, successful trader, not a short term unrealistic trader that is doomed for failure right from the start. Think long term, control your expectations.
Limit yourself. (1 trade a day, realistic goals). Again with the theme of patience and perspective. Have you ever been to Vegas? Or Foxwoods, Mohegan Sun, or any casino? Well, here’s what happens time and time again to the amateur gamblers: They go into the casino with starry eyes, cash in hand, and high hopes to make a bunch of money. Instead, they lose their money and become so enraged, or bummed out, about their loss that they take out more money to continue gambling in order to “make their money back”. They lose the new pool of money, become even more enraged, sad, scared, and frantic to make back their money that they start to realize they shouldn’t have even gambled in the first place. They desperately want to get back to even and forget this whole debacle. More determined than ever, they scramble to the ATM to take out even more money to make back twice the amount which they were willing to lose in the first place. They aren’t in a good headspace and gamble wildly.
The nightmare of a downward spiral begins. How many times have you heard this horror story? I’ve heard it a bunch. Why? Because it’s human nature to want to win! To want to make back what you lost. It’s harder to show restraint, walk away, cool off, and come back when you can gamble in a smart fashion. And that’s why you need to limit your trading. The 9:30 Decision calls for a maximum of 1 trade per day. But I’m a day trader, shouldn’t I be trading? No. You should be looking for high probability trades, not just trades to make. Day trading just means you are in and out of the trade that day. And a successful trader makes more money than he or she loses, it shows up on the P/L. Would you like to make more money by making fewer trades because you are waiting for your high probability plays to set up? I hope so. Some of the best trade decisions you will ever make will be trades that you choose not to enter. Restraint: smell it, breathe it in…
Stay on an even keel. One time I read that a man would clap his hands in triumph and say “yes!” after a loss. Why? Because it helped him get over the loss. He was not congratulating himself on making a trade that was a loser. He was congratulating himself on sticking to his stop loss and cutting his losses early according to his trading plan. He was congratulating himself for keeping his morale high even on a loss, and not letting his trading chi take a turn for the worse. Even better was when he won a trade he wouldn’t do anything but remain calm. Why this? Because he didn’t want traders euphoria to set in and give him a false sense of invincibility. You need to be calm and be resilient, manage your emotions and try and stay on an even keel. Your account will definitely thank you in the end.
Setting is important (office). When making trading decisions it is clear that you must be in the right headspace. Is it helpful to your mindset to have a disgusting office area with papers everywhere, old pizza lying around, and flies buzzing around your head? Hells no. You need to surround yourself with positive chi. You should have a comfortable chair, a clean office area with good lighting, enough desk space to comfortably fit a few computers and comfortably complete other business tasks. Your office should be decorated with things that promote positive energy (maybe pictures that are special to you, cool decorative items, furniture that you like). Even my spreadsheets that keep track of results have the word WON in capital letters and the word lost in lowercase. Your office is a place you should feel comfortable and clean. This is the space where you will be making trading decisions that will decide the fate of hundreds of your dollar bills! Take the time to set it up right. Make it into a place you want to spend time in. Maybe frame an encouraging poem that you can read to keep your trading perspective. There is one in my office. I am not a morning person and I trade in the mornings. This is what it says on my desk to get me going and get my head in the right place, “Today is a new day, a new beginning. It has been given to me as a new gift. I can either use it or throw it away. What I do today will affect me tomorrow. I cannot blame anyone but myself if I do not succeed. I promise to use this day to the fullest by giving my best, realizing it can never come back again. This is my life and I choose to make it a success”. This framed poem was given to me by my cousin Ryan Gillespie. It is meaningful and powerful to me. Find and display what moves you and make your office setting something you are proud of.
Make sure your set-up is reliable. Would you ever try to drive a car that has a flat tire, no power steering, and worn out brake pads? Did you just say maybe? Unless you are Johnny Knoxville I wouldn’t recommend it. The same thing goes for trading. You don’t want to have to worry about your gear. At this point in the development of technology, it is very easy for the average trader to get on a fast internet connection, access a platform, charting service, and place a trade order that is filled extremely quickly. You are going to be gambling hundreds of dollars within seconds so make sure your gear is all in working order! This, in the end, will ease your mind and help you make better trading decisions.
Be realistic. Please. Thank you. It is always easy to say, “Well, if I had moved my stop loss and stayed in a bit longer I would have made a ton of money right there!” or “If I had entered the trade early, when I wanted to, I would be rich!” or “I was going to do that! I can’t believe that just happened!”. Well, believe it baby, because it’s going to happen all the time. Woulda, coulda, shoulda. Hindsight is 20/20. The truth is you are going to make mistakes, have bad luck, experience emotional turmoil after, before, and during trades. This is normal, natural, and something that has to be managed. I never said sticking to a method was going to be easy! But, on the other hand, when you avoid huge losses because of your discipline, well, that might just make you feel pretty damn good.
So, your job is to manage and limit risk and trade within the parameters of a researched theory. A few common sayings in trading are “don’t be a pig” and “don’t be a dick for a tick”. In other words, don’t get greedy! In order to be successful in the long term you need to be disciplined, and you need to know exactly what your exit points are (your target (winning point) and your stop (losing point)) before you enter into the trade. No exceptions to this rule. None. And you need your targets and stops to be reasonable, and it needs to be a high probability play. Put it this way, if you are confused about why you are entering the trade, don’t enter it. The market is always going to be there, it will be there tomorrow and the next day and next year. Don’t get overanxious, or greedy, because that’s when mistakes are bound to happen, emotions are bound to flow hard, and you are in deep trouble if you can’t control your impulses to trade. Just patiently work on making your way to profitability, get your piece of the pie and get out, and if you lose a trade, cut your losses according to the plan and limit your risk, your account will thank you for it later.
One last huge piece of advice that should be heeded: Make your winners worth more than your losers. With my method I always risk the same amount to lose (20 Dow Points) but I must win at least 25 Dow Points to 60 Dow Points. This way one of my winners will take care of 1.25 to 3 of my losers. Hypothetically, I could lose more trades than I win but I could still be profitable. Remember, I am patiently waiting for high probability plays within these parameters.
Letting your winners run, and cutting your losses short, is essential in trading, and essential in life. And it is against human nature. It is very hard to admit you are wrong and take a loss. Most traders want to keep moving their stop loss (losing point) to give their trades more room to roam. NO! This is disaster area 101 and can drain your account really quickly because you are needlessly risking more capital. Cut your losses according to the long term plan!
It is also very hard to let your winners run, even in a high probability play, because you need to not count your chickens before they hatch. It can be very hard mentally to be winning a trade by a decent amount, see the market almost hit your winning target, and then see the market fade back to your starting point. You have already counted your trade as a win in your head, and can’t bear the thought of a potential loss. You, therefore, want to lock in any sort of gain, to avoid a potential loss, instead of letting the market move where it needs to go before it can actually hit your target. Thus, it is human nature to panic a little bit and cut gains short, to ease the mental anguish.
However, with some training and poise you can be a professional who defies human nature and beats the odds. Cut your losses short and let your winners run. But remember; don’t get greedy with your winners! Stick to your method and set a reasonable target and stop based on research. Be a professional, use professional wisdom.
These are the essentials to a healthy Trading Chi. Congratulations, you have passed Phase 1 of the 9:30 Decision! You must always cultivate this Positive Trading Chi, even through the rough times, and you must never lose sight of this. This is the true test of your success and longevity in this game. Be patient and move on to the technical stuff. Good Work!
So there you have it. An introduction to a book I began to write on trading. And then I abandoned that book and started to write this one. In general, I got a terrible response from most people when I told them I was writing a book on trading. Not terrible in the sense that people mocked me. Far from it. People were supportive and impressed that I was actually going to write a book on such a technical niche subject. But the most common response was, “That’s cool, not something I would read, but still cool”. In contrast, I got a good response to the theme of this book and had a lot of people say they would actually want to read it. So, in my own way, I have now successfully tricked many people who had no chance of reading my trading book into actually reading my trading book! Nice one, huh. I am a sneaky bastard, aren’t I? But, if you have any interest in trading at all, or care to take in the life lessons that can be learned from trading, then you might have taken something out of this section. And in that case I will feel vindicated for beginning to write that book on trading and in a roundabout way forcing you to read it. And as you might start to see, trading is actually a pretty interesting human experiment…