The Solitary Trader
Well hello everybody. Welcome to our webinar. My name is Robb Reinhold and usually I am joined by Mr. Jon Frohlich, but Jon Frohlich could not be here because he literally this morning, well not him. He did not personally have a baby. But his partner had a baby so they welcomed a new baby girl into the world. So I am going to be here all by myself. And yes I understand the irony of the title of this webinar we’re doing about the solitary trader. Trust me, I realize the irony that now I’m all by myself, where I usually have some help. Please bear with me here.
That being said, feel free to ask any questions. We usually have a couple more people here to answer questions. So please, if you ask any questions just go ahead and type them in. Understand I will stick around after and I will stick around until the last question has been answered.
But thank you for joining us. Again, as I said, my name is Robb Reinhold. I’m the head of trader development here at Maverick Trading. I started trading myself back in 1997. I was one of the very first traders to walk into Maverick Trading. It has definitely been a very interesting ride as far as a career goes. It’s pretty nice that once you’ve been doing it for a while, it’s actually much, much easier. I tell everyone that, just make it through those first couple of years and it is a whole different ballgame. Much, much easier.
The reason that I assume you’re here is we want to go through the major reason most traders fail. Now, of course that sounds very negative. I know that. But really if you don’t understand why people fail and why people can’t do something, then it really gives you not much insight into why do some people succeed. So a study of why some people failed is, I think, a very very important study to take a look at it. There’s actually been lots and lots of studies about why people fail at trading. Why do some people fail with other things. So that’s really what I wanted to go through with everybody here today is what are these reasons and really what can we do to actually fix them and to make it to where it doesn’t really get us.
So real quickly here. I already see a couple questions here so I’m glad I’m going to go over this. Maverick Trading is a proprietary trading firm. Sometimes called prop trading. Prop trading is where a private equity firm like us, we employ and we bring on traders. We allow those traders to trade on behalf of the company. So we provide the traders trading capital. We provide them support, we provide them risk management. We provide them things and in return, we enter into a revenue sharing agreement where the trader keeps somewhere between 70-80% of profits they generate and the firm keeps 20-30%.
As you can see, this is a really good agreement because both sides have interest in profitability. If you simply open up a brokerage account at TD Ameritrade or E-trade, guess what. They get commissions when you click a button. They don’t get any more money when you make money on your trades. They get money when you click a button. So they are going to encourage you to click buttons. At Maverick Trading, we do not make any money whatsoever off of commissions. We are not a broker dealer so we do not take any money off commissions. So we have a vested interest in our traders profitability.
So let’s go real quickly run through the top five reasons traders fail. Poor or no trading plan. Lack of discipline. Poor trade management. Costs of trading and execution and under capitalized. Alright now my guess is that you are one of them, two of them, or possibly all of them.
So we all come into this world as a new trader. One of the sayings that we have at Maverick here is that traders aren’t born. There’s no such thing as somebody who is profitable as a trader from day one. That doesn’t happen. Traders are not born, traders are forged.
Now the reason I use the term forged is that when you forge something, you put it through fire and you burn it and you expose it to very, very high temperatures and lots of heat. When it comes out the end, it is forged, that is hardened. It is now much harder and much better then it was before it went into the fire. That’s what happens with traders. Traders are forged. Like I said, there is no one that is born a profitable trader. Traders are created and they’re made.
So as you go through the process of becoming a professional trader, some of these things are going to be in your way. So let’s go through them point by point. We’ll go through what amateur traders do. We’ll go through how professional traders do it. Then you really, you can take that information and decided how is that going to fit into my life. What are the things I need to do to become a more profitable or even a profitable trader.
So let’s start at the top of the list. Poor or no trading plan. Now, this is a pretty funny thing because in every single profession out there, there’s a process that you have to go through in order to be able to be successful at it.
Let’s take something like a doctor, let’s take something like a doctor. Well a doctor has to go through undergraduate, they’ve got to go to medical school, they’ve got to do residency. They have to do basically 11 years before they’re allowed to actually practice their profession, before they can really make any money whatsoever. Now we understand that. That’s the process.
To become a lawyer, you need to get your undergrad. You need to go to three years of law schools. You have to take the bar exam, you have to take a test. You have to go through all of that in order to practice law.
Let’s take something like cutting someones hair. Do you realize to be able to cut someones hair, you have to go to school. You have to train. You have to practice. You have to pass tests. You have to do all of that to be allowed to cut someones hair.
But in trading, trading is one of the only professions I can think of where everyone is allowed to do it regardless of what they know, regardless of anything as long as they have some money and they can open up an account. Go ahead, trade away. Now in any other profession you would say, “Wow, that is a bad idea”. But in trading people say, “You know what. I think it’s going to work for me”. It’s so funny. Everyone understands, yes, I understand you have to go to school, you have to practice, you have to train if you’re going to make money at this. I understand over here. Trading? Oh no way. I read a book. I read a book and I think that’s going to do it for me.
So really, the whole idea of a trading plan is the same thing as starting a business. The number one reason that a business fails is a poor or no trading plan. That’s the number one reason businesses fail. I would have to say the number one reason traders fail is that they don’t create a trading plan. Now at Maverick Trading, we require. When I mean require, I mean 100% of the time a trader must submit a trading plan to Maverick Trading to be allow to trade any firm capital whatsoever. That is a requirement.
Now let me give you a little history about this because I think this is a pretty funny story. Probably about eight or nine years ago, one of our traders who had been trading us for a year or two was in a rough patch. He was in a rough patch and he had gone a couple of months without making a profit. When I talked to him, I had actually watched his trading and noticed he was erratic. He was different than he used to do it. So I said, “Hey, why don’t you take the next week off and why don’t you write how exactly how you’re going to trade going forward”.
After a week, he actually called me up and he said, “Hey you know what. I’m going to need some more time”. I said, “Okay take all the time you need”. About two weeks after that he came back and he says, “Okay I’ve got it”, and he said to me, “You know what? I was going to do what I usually do with everything in my life. Throw down some junk on a piece of paper. Turn it in and start trading again. But I decided I was going to take this really serious because this is something I really want. I really thought about it and I really dug hard. This is the most valuable thing I have ever done in my entire attempt at being a trader”. Then he said, “And I don’t know why you didn’t make me do this in the first place”. I said, “Yeah, I don’t know either”. It was from that point on that we required every single trader to have a trading plan. So if that’s something you don’t like blame him. Don’t blame me.
But the whole purpose of the trading plan is to predetermine everything. Now this comes down to visualization. Now I have been really into the idea of training and training of elite athletes. I love watching documentaries on like J.J. Watt who is one of the, probably the best defensive linemen ever. J.J. Watt, his training that he does is crazy. He works for one hour a day on his first step he takes. Can you imagine that? On his first step he takes.
All pro athletes and pro sports are now getting into visualization and they’ve done so many studies that show that visualization can really help performance. For example they did a study at the University of Chicago. They took one control group and had them shoot free throws. They took the other group and had them sit in a dark room and practice just in their mind shooting free throws, shooting free throws. They had them do that for a week and when they came back, the group that never even shot the free throws actually made 23% more then the control group. All they did was visualize it in their mind. So this visualization is a huge thing.
So most people when they get into trading they say, “Hey you know what. I’ve read a couple of books. I think I’m going to do this”. They get in, they make a trade and then it doesn’t go right. And because it doesn’t go right then they react. They have feelings, “Oh my gosh it’s not going my way”, or, “Oh my gosh it is going my way. I better get out of it because I want to keep the money”. All of these things will go away if you actually write them down and predetermine them.
So if you spend all of your time going through and really thinking about every single trade you make from start to finish exactly how you’re going to do it. And you’ve predetermined every single thing like what does the market have to look like before you get in. What is your entry criteria. What has to happen before you actually click that entry button. When you get into the trade, what’s your position sizing going to be. How much capital are you going to allocate to that sector or to that currency. Are you going to make adjustments and if you do make adjustments, they need to be predetermined. If this happens, I’ll do this. If this happens, I’ll do this. When are you going to get out. How are you going to execute it. What kind of orders are you going to use.
All of these things are so important. If you think about it, how in the world can anybody think they can make money in the market without a trading plan. I just don’t even understand it. Now, I know that a lot of you, you have your trading plans in your heads. We have a lot of traders that we bring onto Maverick Trading where they have their trading plan, it’s simply in their heads. They’ve been trading for years, they’ve developed it. We just tell them look, just write it out. Write it out, put it down on paper. Do you know what the great thing is about the process is when you do that, you realize that there are still some holes in your trading plan and you can actually spend the time to actually go through and put those together.
So right here the first thing is just so important, a trading plan. Have you completely determined how you’re going to do this. My advice to people is do not put a penny in the market until you’ve gone through this process. Because I’ll tell you what. If you put a penny in the market, you’re going to lose a penny. If you put a thousand bucks in the market, you’re going to lose a thousand. If you put in 200,000, you’re going to lose 200,000. It doesn’t matter how much money you have if you’re an unprofitable trader. It starts here with your trading plan, then you go into testing your trading plan. Once you’ve tested your trading plan then you start out with a small amount of money, make sure that it works in a live environment and then you start scaling it up over time. That’s how you make it in this business.
So again, number one and hopefully you can tell how absolutely serious I am about a trading plan. If you don’t have it, I’ll short your chances of making it in this business right away. For those of you that don’t know shorting, I’m betting against you. I’m betting against you, I’m betting that, again, the stock is going down. I will absolutely take the other side of that bet of anyone who thinks they’re going to be profitable without a trading plan.
Alright let’s move on to the next area. Now as I said earlier, there’s been lots of studies about why traders don’t make it. In my opinion, this is just my opinion. The best study out there was done by a company called FXCM.
Now FXCM is the largest retail Forex broker in the world. For those of you that know a little bit about their history, they basically went broke when the Swiss National Bank removed their hedge against the Euro. They had too many positions that were on the wrong side of that trade. Basically their loses on those positions wiped out the entire value of the entire company. Now, again, what I mean by that is the value of the company were traders deposits.
So if you had an account at FXCM, you basically lost it because they lost all the money. Now, luckily there was a company that came in and bailed them out and made all the trader deposits whole. Again, if you were with FXCM during that period of time, you lucked out because back in 2011 there was a company called MF Global that did the same thing and people did not get their money back.
But FXCM I think they did, for all their shortcomings, I think they did the absolutely best study ever on trading. So they took all their retail trades and they analyzed 43 million trades over a one year period. That is a lot of trades so again, huge sample size. They found that out of those 43 million trades, 59% of those trades were winners. Look at that. Look at that, the average person is pretty darn good and picking trades 59% of the time. That’s amazing, right?
Well, then you find out that the accounts that were profitable that year, 17%. So wait a second. That doesn’t match up. How in the world, how in the world did 59% of all the trades be profitable, yet only 17% of those accounts made money that year?
Well it wasn’t about the entry, it was about the exit. It was about the trade management. So here they broke it down by currency. So as you can see here, the currency with the lowest win/loss percentage was AUD/JPY. So AUD/JPY, they were actually less than 50/50. The best was AUD/NZD, the second best was GBP/JPY. So I’m going to look at GBP/JPY here, 66% of the time traders were profitable on GBP/JPY. So you think, “Oh you know what. I bet that was the pair that people made the most about of money in”. Well here’s the problem. Take a look at Pound Yen, the average win on GBP/JPY was 52 pips. A pip is kind of like a cent in currency. The average loss in GBP/JPY was 122 pips. It was the worst currency as far as actual results.
So if you can see this, people know how to get into trades. Now this is something I have said for years and years and years. I have met thousands of traders. I’ve gone to so many trader expos and been to so many groups of training. I’ve met so many traders. I have ever, ever, ever, ever met anyone that failed at trading because they didn’t know how to read a chart. Or that they didn’t know how to get into something. Ever. That’s not the problem. This here shows you that this is the amateur traders. These are people that really don’t know much. You can see that they were able to pick winning stocks most of the time. The problem is human beings are terrible at managing risk. Report and report and study and study after study show that human beings are bad at gauging risk. They’re not good at managing risk. You throw in emotions into the mix, they’re even worst.
So what it really comes down to is people are bad at managing trades. They’re just bad at it. And really what it comes down to is discipline. Discipline. The lack of discipline. That’s what we have as problem number two. People aren’t disciplined enough. Now look everybody knows rules like sell your losers and hold your winners. We’ve all heard that. Guess what, that’s really hard to do. Don’t take too big of a loss. Position size correctly. We’ve heard all of that stuff. But the problem is we can’t do it.
Now I actually heard something years and years ago from a gentlemen up in Canada. I can’t remember his name so I apologize. But he told me, “Rob. Procrastination is life’s way of telling you you’re bad at it”. And I said, “Oh my gosh, you’re right”. I realized that the point he was making was the things that I like to do and the things I’m good at, do you know how many times I’ve procrastinated those? Zero. Absolutely zero times in my life. The things I procrastinated are the things that I don’t like to do. And I procrastinate those all the time. He said, “Stop beating yourself up. Why don’t you just do the things you want to do and have other people do the things you don’t want to do”. That has really stuck with me. As I really got into trading, I really realized that discipline is not the answer.
Now, this is, what I’m talking about you today is basically the same thing that I talked about when I was a speaker at the Traders Expo in Dallas a couple of years ago. I was asked to give a talk on trading. This is what I chose to talk. I started out the entire session. I like to be a little brash sometime. I got up and I had a big audience and I said, “Listen. You’re here at the Trader Expo. There’s lots of great booths. There’s lots of great software here. There’s lots of great people that will coach you”, and I said, “Guess what. None of it’s going to work”.
Now you could have heard a pin drop because most of the people there were working at those booths. I said, “None of it’s going to help you out”, I said, “Do you want to know why? Because you suck”, and I pointed at everyone in the audience. You suck. I said, “Look, look, look. Before you get mad at me, let me say this. I suck. I’m terrible. Oh my gosh I am a constant over trader. I trade too much. I’m constantly letting my trades sometimes go against me too far. I’m constantly doing this”. It kind of became my AA meeting moment where I stood up and I confessed all of my sins. I said, “Look. Until you fix you, you have no chance of making money in trading”.
It really comes down to what we’re talking about here. Discipline is easy when you’re doing something you like. Discipline is hard when you’re doing something you hate or is unnatural. Your personality will dictate what you can and can’t do. This was really big for me.
My first couple years of trading, I look back on it and I say, “Oh I’m so lucky”. I feel like I just had enough luck and enough good personality traits to make it through because I over traded way too much. I took too big of loses on my losers. I did a lot of the things that are very common to people. I would get mad at myself. I would beat myself up and say, “You idiot. You’ve done this before. How could you do this again”. Don’t screw it up. You know what I do? I’d go ahead and screw it up again.
Raise your hand if you’ve actually done that before. I say raise your hand, you’ve got a little hand button. I’ve actually had people literally raise their hand and then they ask me, “Hey, how can you see me?”, and I’m like, “I can’t”. Okay. I see a lot of hands coming up.
Look, we’ve all done this before and not just in trading but we’ve done this before like in, I’m going to go to the gym and I’m going to eat right. And you know what. We end up not doing it. And then you beat yourself up. You beat yourself up and you say you idiot. Why don’t you have discipline. Well guess what? You have discipline. You have lots of discipline in the things you like to do.
Like for me, I really enjoy going to the gym. I know some of you are going to dislike me for that but I love going to the gym. I go to the gym every day. I love it. For some people, it’s really hard to go to the gym. Now for me to just say, “Be more disciplined. Why don’t you just get some discipline. Why don’t you just get some resolve”. That’s really lame because that’s easy for me. It’s easy for me to go to the gym. It’s something I like to do.
But if you say, “Robb I want you to”, I’m trying to think of something I dislike, “I want you to go out and garden”. Ugh, garden, ugh. Now look, I know people that love to garden. I don’t get it, I don’t understand it and I feel a little sorry for them to be honest with you. But they love to garden.
So that all comes into play in trading. Your personality will dictate what you can and can’t do. When I finally stopped beating myself up and say, “Just be more disciplined”, only to screw it up again. When I finally got to the point, and again this is the AA moment, when I said, “This is who I am. I’m Robb. I’m an over trader. There’s nothing I can do about it. This is who I am”. Then what I did is I actually developed ways and methods to where I wouldn’t have to fight my battle through discipline.
One of the ways, and it’s a really pathetic story and I even hate to tell the story. I had a security key that I had to use to get into my trading account. I would give it to my wife and I’d say, “Do not give me this until the end of the week”, and I’d give it to her. And I said, “No matter what I say, do not give this to me”. And of course a day later I’d be like, “Hey I need that security card back”. The first time she gave it back to me and then it ended up costing me money, I lost a couple thousand dollars and I’m like, “Why did you give it to me?”, and she’s like, “You told me to!”. I said, “Don’t give it to me. Whatever I say, don’t give it to me”. The next time she wouldn’t give it to me and I tried to be so persuasive. I was like a drug addict. Like I need the security card, I need it. I need it so bad.
I realized that I couldn’t overcome that through discipline. I had to figure out different ways. So understanding yourself and not trying to beat yourself through discipline is so key in trading. We all look at trading as, oh you have a lack of discipline. You keep making the same mistake. When I work with our traders, I say, “No, no, no. That is your body’s way of telling you you’re always going to do this. There’s no way you’re ever going to beat this. So let’s figure out a way that you don’t have to fight the battle”.
For example, I gave my security card to my wife. I have traders that will contact us all the time and be like, “Hey can you suspend my trading account for the next week. I’ve already made my money I need for the month and I’m worried that I’m not going to be able to control it”. Sure, absolutely call us up and we will absolutely help you out with that.
Winning in spite of yourself is the key to trading. Now one of the very first things we have our traders do, and this is actually the first thing we have our traders do when the start, is they take a trading personality test. Now this is simply based on the Myers-Briggs Personality Test. Many of you have already taken that. But we actually go through, we have our traders take this test and it puts them into one of these 16 personality traits.
Then we go through, okay if you are a certain personality. Now I am an ENTP. This is me. I’m an ENTP. Ironically when I took this score years ago, I was an ENTJ. The J is for judging. Someone who’s a J sees the world in black and white, right and wrong. Someone who is a P, perceptive, sees the world in shades of gray. So I have definitely changed and I really look at trading as the reason why that has changed is because I realize that I’m not right all the time. In trading, look, I’m going to make a trade. I could be right or wrong. I used to be convinced I was going to be right. But now I realize, look, it may win, it may lose. I just need to make the right trades.
So, again, this is just a little bit about my personality type. I’m going to give everybody an opportunity to have access to our members area of the website that you can go in to take our trading personality test and then see kind of what your strengths and weaknesses are.
But here are the strengths of an extrovert. And again I just took the first one. We don’t have the time to go through all of the possible personalities. I’m sorry. I’m just going to look at the first one. E, you’re either an extrovert or an introvert. I’m an extrovert, it’s the reason why I’m here talking to all of you.
But again extroverts, we’re not afraid to act. We like action. We take action well, we like to trade in groups. We love to debate, oh I love to debate. This trading personality is called the debater. I will debate everything. Even if I believe what you’re saying, I’m going to argue the other side. Trust me, it is not a very endearing quality of mine. It is not endearing for me to argue with you on every single thing you say, only to say, “Oh I agree with you thought”. But in a group it’s great. We love to have people around to talk to. We’re quick to react which is also good and bad. Meaning that we don’t get stuck like deer in headlights. There’s personality styles that get stuck. We call it getting stuck in trades at Maverick. And if we see a trader stuck in trades, we reach out to that trader and say, “Hey, what’s going on. You look like you’re stuck. You should have gotten out a while ago”. We’ll talk to them about it and we’ll talk them through acting because of that personality style sometimes has a hard time to act.
E’s, they have no problem reacting and that’s actually a problem. Sometimes we react too much. We’re very energetic. The problem is, we’re very excitable. Sometimes the market can get our emotions going. We’re not very good on our own and what I mean by that is that we have a feeling. And again you extroverts out there can probably relate with me. We have a feeling if no one’s really watching us, we can do whatever we want. We can kind of take that trade we know we shouldn’t because no one’s watching us. We can do what we want.
So people like me, it’s actually really good for me to have people looking over my shoulder. I actually send out all of my trades to our group and it’s really helped me over the years because when I send a trade out to other people, I need to do it well. I need to do it right because if other people are going to follow me and potentially have wins or loses because of me, I better make sure that I’m not breaking my rules. And my last one wants to be right.
This is one of my favorite stories and this is so me. As it says, I’m the debater. I’m the debater. Back in 2000, I was talking with one of our long time traders, Joe Jensen here. We were arguing about a position. We were arguing back and forth and I said, “Joe, I know I’m right”. He looked at me and he says, “I don’t care if I’m right, I just want to make money”. I realized oh my gosh, I’m more concerned about being morally and logically right then I am about being on the right side of the trade. I realized I don’t care, I just want to be on the right side of the trade too just like Joe. But the debaters, we want to win the debate. We want to be proven right. We did all this research, we got into the trade, we want to make sure that we win that debate.
So again, most likely mistakes of an extrovert. Overtrading. Being too quick to change your mind. A lot of times we make adjustments too quickly, we do things a little bit too quickly just based on what the market is doing. Like I said, we’re likely to take risks when no one is watching and we stay in losing position because we want to be right. Moreso then making money, we want to be right. We want to be able to say, “I told you so”.
Look, I’m sorry, this is all the time I have to go through trading personality. Like I said, I’m going to give everyone an option to jump into our member site and take the personality test and see how you act. But the biggest thing is, and I said, is understanding your personality. Once you understand your personality, you can now develop your trading plan that you can actually follow. That’s the biggest thing is that if you can’t follow your trading plan, your odds of success are zero.
Let’s take the example of someone who wants to lose weight and get in shape. Well let’s say this person absolutely hates swimming. Now, I’m talking about myself. I did a mini triathlon years ago and I was good on a bike, I like riding the bike. I like running. But I wasn’t good at swimming. So I decided I need to get good at swimming so I don’t drown. I learned I absolutely hate swimming. So if someone developed a weight loss plan for me and they said, “You need to swim an hour a day”, I can guarantee you I will never swim an hour a day and I will never succeed at it. So again we have to develop strategies of something we can do and something we like.
That really comes into position management. Position management is the next reason why people fail and position management is linked to discipline. This whole things is linked to having a trading plan. They all are actually linked altogether.
What FXCM showed was that people stink at position management. They sell their winners too early and they hold their losers too long. And a very classic thing that people do is they buy a stock at 20. It goes up to 21, it goes up to 22 and all of the sudden it starts to look a little shaky so you know what they do? They say, “I better sell it here. I’ve got a 10% gain. I want to lock that in”. They say dumb things like, “You can’t go broke taking a profit”. I hate that saying so please don’t every say that saying to me. That’s the dumbest thing in the world. Taking a profit should only be done when the stock tells you to. Or if you’re trading Forex, with the currency or the future. Again, it should all be based on the chart.
But they sold at 22 and they say, “You know what. I’m smart. I won, I made money. That’s what I want”. The next stock they buy at 20, it goes down to 19. Then it goes down to 18 and they say, “Ugh, I can’t sell it here. I can’t see it here because I’ll lose what I just made and I won’t be a winner anymore so I’ll just wait”. And I see something in the chart, I see the stochastic is turned up and I’m getting a pretty good signal from my MACD. So I’m going to hold onto it.
What happens? 16, 15. Now at 15 they say, “Oh my gosh how did this happen. Now I’m at a lose. I’ve not only loss my last gain but now I’m in the hole. You know what, if it just can bounce up to 18. If it bounces up to 18 now, where I wasn’t willing to sell it before. But if it bounces up to 18, I promise I’ll sell it”.
You get down on your knees, you pray. Just make it go to 18. And again you look at your chart and you say, “Oh you know what. This oscillator and the relative strength index is in really good spot. It’s really deeply oversold. I think it’s going to bounce up here at 18”. And you commit yourself to hold it.
Well it goes down to 12. Then when it gets down to 10 you come up with this idea, this awesome idea. Oh my gosh if you were to buy more at 10, what a genius idea. If you bought more at 10 and did some dollar cost averaging, you would bring your cost down to 15. All it would have to do is bounce to 15. And you’re actually glad it went to 10 now. You can buy it for cheaper. How wonderful, how wonderful.
So you load up the boat at 10. It goes down to nine, goes down to eight. You buy some more at eight. It goes down to seven. And the next thing you know, your money’s gone. This is how we’re built. Raise your hand if you’ve done this before. And understand my hand is up in the air as well. I’ve done this before. This is human nature. This is what we will all do, even the most disciplined person here is going to do this. Is going to do it.
This is why we really like options at Maverick. We really like options at Maverick because you can basically just quantify your risk with match risks. Again, if that doesn’t make any sense for you, I don’t have time to go into it. But to put together a strategy where you never have to even make that decision is fantastic. It’s absolutely fantastic. So the reason is we do this all the time. We make so many mistakes in position management and all the studies show that this is where people lose in the game of trading.
Now I’m going to share with you one of our strategies here at Maverick. We have a lot of position management strategies. We actually focus more on position management then we do about entries because we think it is the more important part of the trade.
So this is going to be an little exercise in craps. If you don’t know how to play craps, do not think you know it after I go through it because I’m definitely not going to go through it. But of all the table games in Vegas, craps actually has the highest odds. Now, every one of the bets you can make on a craps table will have different odds. The best odds you can get is what’s called the come line. The come line has the best odds of any table base and especially if you can get a high odds table. Again I’ll explain what that means in a little bit.
Now this is my craps strategy. Now look, I’m not saying that I’ve become wealthy through craps. There’s been times where I’ve left a craps table a loser many, many times. But there’s been times I’ve left a craps table with a lot of chips and this is the strategy I use. I’m teaching you this just to show you the concept of adding onto positions.
So when you put money on the come line, when you put a bet on the come line, they’re going to roll the dice and the dice come out as a four. They move your bet to the four. Now you are now allowed to add odds. Now on the four you can add chips behind it and you can now get five times odds. So you actually did what’s called pressed your bet. So you now have one to one odds over here but now you have five times odds over here. Then the roll the dice again. You put another bet on the come line, they roll the dice again. Let’s say it’s an eight. They move your bet to the eight and then you back it up with odds.
Now my strategy I would always start out and once I got $25 out on the table, I would always play a $5 table, I would wait. I would not put any more than $25 out on any roll period. Now, if a four is rolled. Let’s say a four is rolled again. Well I get paid $5 for my first $5 bet and then I get paid $15 for my second bet. So I get a total of $20 back in my bank. So this point I now have $5 of risk.
So let’s say I put another bet out there on the come line. Let’s say it rolls a 10. Again I’m going to speed this up. Put another bet out, let’s say an eight is rolled. Okay well an eight is rolled so I get paid $5 here, I get paid $8 here. I have a total of $13 at come down here. At this point I now have $33 in the bank. At this point I’m playing on the houses money. Let’s say the next roll comes out and it rolls a 10. Now I have a bet on the 10.
What I do is I now, since I have money in my pocket equal to the amount of risk I originally took, I now put that $20 back into investment. So I bump up all of these bets. I bump them all up. Now I’ve got $10 on all of the numbers. I go until someone craps out. So again I’ll be putting money in my pocket this whole time and when someone finally does roll a seven, it’s called crap out and then they clear the board and I might have made $50, $60.
Now, again, if it’s a bad roll I’ll lose $25. But what’s going to happen is somewhere in the statistical probabilities, if I can be on that table for three hours, somebody will roll 25 rolls in a row without rolling a seven. That will happen in statistics. Of course sometimes it will happen two or three times in three hours. Sometimes it won’t happen at all. But, again, if you play there long enough and when you keep doing this where you keep pressing your bets and increasing your bets on the houses money, I’ve had it to where I’ve had $200 on every single number. And every time a number was rolled, I would get paid anywhere between $250 and $300.
Now look, this is not a session on how to play craps. But I wanted to show you a strategy that someone uses in craps where, again, you place out an amount of risk that’s acceptable to you. If you lose it, you walk away. Or if you lose it you’re okay with, again, putting another bet out on the table. Now of course you have a max loss at a table at all times, same within trading.
But let’s talk about pyramiding or legging in. We call this legging in, we use this all the time in Forex trading. Let’s say that there is a currency that is in a nice little uptrend and it’s hitting some resistance at 110. What we do is we put in a buy order for, and again I’ll just use a one lot trade. We put in a buy order for 100,000 of the currency. And again let’s just call this, let’s call it Euro Dollar. Let’s just give it a name. This is the Euro Dollar. It’s really more about 114, 115 at this point. But we’ll say it at 110.
Again we’ll put in our order that says okay if we buy it at 110, we want to sell it with a stop order at 1.0960. So this means if this happens, this will be a $400 loss. That is our acceptable amount, we’re putting out a right amount of capital, we’ve got our acceptable loss. Now that means if it does break out above 110 we get filled. But if it does turn back down, we lose $400.
But what we do is we also stick out orders up here. We stick out an order at 110.40 to buy another 100,000. Alright so let’s say we do get one and it does go to 1.1040. So we now have 200,000 at an average cost of 1.1020. What do we do? We move up our stop to 110. Now at 110, we still have a $400 risk, our risk did not go up at all. Again we have another order sitting out there at 1.1080. And again I’m just throwing out numbers everybody. And this one gets filled. So we now have a 300,000 position at an average cost of 1.1040. At this point we move up our stop to break even.
So at this point we now have no risk on the table. If it goes against us, we break even. We did a lot of work, we ended up with a zero. But what happens is sometimes these things will keep going. And again let’s just say that our exit was 1.1140, that makes it easy. We just made 100 pips, well that was equivalent to $3,000 and we never carried more than $400 worth of risk. At one point we had taken all of our risk off the table and we were playing on the house’s money.
Now take a look at this strategy versus the average strategy of buying a stock and doubling down when it goes against you. As you can see, this is vastly superior, vastly superior. But yet, people don’t do this. Why? Because they want to make money and they don’t want to lose money. So again, having the right strategy, so important. Having an understanding of yourself and making sure that you’re in there at the right time and doing the right strategy. It all comes back and falls back to the trading plan.
So again let’s take two traders. One trader that’s buying, losing stocks, going against them and averaging in to buy more. You compare it to a trader who’s only buying more of things going their way. Who do you think is going to make more money? Of course, the trader buying things going their way. The problem is how many of you can do it or are actually doing it right now. Not many, not many. I see one or two hands. Well that’s because that’s the right way to trade. That’s the correct way to trade. That’s how professionals trade.
Alright next let’s jump into cost of trade and execution. Right so cost of trade and execution. Again, we have commission spreads and slippage. Every time you click a button, you’re going to pay a commission. Now of course every little place is going to be different. TD Ameritrade is going to charge you $7.95, and some where’s going to charge you $3.95, some where’s going to charge you a half a penny a share. Again, it’s all going to vary but those are going to be costs. Now, obviously, commissions are important. They’re a cost of doing business. It’s going to the same market. Why in the world did you pay a higher rate for something that you can get the exact same amount of service for the same rate. And frankly it’s not even the same amount of service. Because slippage comes into play. This is speed of execution.
What slippage is is when you in an order and the market is moving. If the market’s moving quickly, you won’t get the exact price that you want. So let’s say there’s a stock. And again I watch Amazon and when Amazon has bad news against it, you could put in an order that I want to sell it or you could have a sell stop in and your stop will be filled $3 away from the price that you put. That’s called slippage because the market was moving so fast, that’s the earliest they could sell it. So slippage is a cost of doing business.
Then spreads, this is the spread between the bid and the ask. It’s a huge deal. Every time you buy and sell, you’re going to be paying the spread. So all of these costs, so obviously if you’re in the business, you want the lowest commissions, the fastest execution and the tightest spreads. Well where can you get that?
Again we trade at Interactive Brokers. Everybody, this is not a commercial for Interactive Brokers. And look, if you decide to go open up an Interactive Brokers account, I’ll never know. I will get nothing for it. Even if you say, “Hey I heard specifically. Robb from Maverick told me to do this”. They’ll say, “Who?”. It doesn’t affect me at all. But this is where, again, really spend some time in getting the right companies that you’re going to be working with. Make sure that they have good commissions. Make sure they have good speed. Interactive Brokers always wins for execution. Every single year they win.
Also, one of the things that the CFTC required of Forex firms, if you’re a Forex trader is for Forex firms to publish every quarter their profitable accounts. Most of the brokers are down in the teens and the 20s. You can see the Interactive Brokers is always right around 50%. Why? Because this is where the pros trade.
Now for any of you that don’t know, the SEC recently made a law, it was actually last September, where regular brokers such like TD Ameritrade and E-Trade, you cannot trade Forex with them unless you have basically $10 million. If you don’t have $10 million, you have to go to foreign currency merchant or what’s called an FCM, someone like FXCM, someone like Oanda. You’re going to find out that you’re paying much bigger spreads there, much slower execution, the slippage is bad.
Our traders are able to trade with Interactive Brokers because they are part of a firm. They’re part of a firm that does have that kind of resources so you get that awesome execution and that awesome service. But like I said, this is not an advertisement at all for Interactive Brokers. I just want to point out that cost of doing business are important. As a trader you’re going to have costs. If you think you can get into this business with no money, with no cost, you are sorely mistaken. The costs are everywhere, you have to be mindful about the cost. Make sure that you’re putting in the right place.
The last reason I want to talk about is undercapitalized. Alright now this really is going to tie back into psychology. Everybody understands it takes money to make money. Most traders, they just lack sufficient capital to make enough money to justify the time they spend trading.
So let’s say you want to get into trading. Let’s say you’re going to dedicate a couple hours a week, maybe even a couple hours a day to trading and you’re just passionate about it. You love it, like I was. In the beginning, in the first couple of years, I literally would spend all day long reading about trading, practicing trading.
My old way to practice, I would print out charts on a printer and cover it with a piece of black paper and move the paper slowly and do my paper trading that way. That’s how I did my back testing. It was crazy. It’s a lot of work to get to be professional. As I said, traders are forged. It is hard to become a professional trader. It takes a lot of time and a lot of effort.
Now if you have, let’s say you have $5,000. Let’s say you have a fantastic year and you make 50%. Or let’s say you have a better year, you make 100%. That was $5,000. If you break down your $5,000 divided into the hours you spent, do you realize you made probably a dollar an hour, if that?
So here is the crux of it. Because traders start out with small amounts of capital. They see that okay if I make 25, 30% a year. You gotta understand that if you’re in equities, and you’re making 25 to 30% a year, you’re a superstar. If you were a fund manager, they would pay you hundreds of millions of dollars to have that kind of performance. So 25%, again is fantastic.
If you started out with $10,000, do you have any idea how long it would take you? Well, I have a chart here for you. So, again, this is starting with $10,000 and this is having a 50% return which is, again, just crushing it. That is a fantastic yearly return. Over 10 years, if you were to dedicate hours and hours and hours over 10 years, look at how small it starts. Look how small it starts. First year you do all that work for $5,000. Next year, make 5500. As you can see, you’ve got to go 10 years.
Now I know people, most people aren’t willing to put in that much effort. Now again that’s assuming you have 50% return, that’s for someone who’s been doing this for a long, long time. So what happens is that this reality, this reality because you can’t really make any sort of real money doing this off of $10,000. I’m sorry you can’t.
Traders end up taking more risk then they should which puts them in positions of position management problems. They have lack of discipline. They over position size. They don’t want to take that loss because then they won’t have enough capital. There are so many problems that it springs. So again, undercapitalization is a huge deal. That’s one of the main things that people want to join Maverick for is that we give access to capital.
Now, just real quickly here. In our options division, our stock and option division, our traders start off with $25,000. In our Forex division, they start off with 10,000. And what we do is we have a very structured graduated program where if you are profitable for two consecutive months above what’s called your high water mark. If you don’t know what high water mark is, Google it. I don’t have time to explain it. But if you have two profitable months, you get a bump up in capital. So you’ll go from 25 up to 45. Or up to 50. Then you go from 50 up to 80. Then you go 80 up to 110.
Again we’ve got a structure in place to where at some point you can actually start to make decent money. Just think about it. If you’re looking to make a 25% return a year, which again is a killer return, and you’ve got $500,000. It’s so much easier to be disciplined with your trades. Just think about it. Think about your goal is to make 25% a year. You’ve got all year to do it. You’ve got 500,000 in capital to work with. All of the sudden it’s a totally different game. Do you see how it’s a totally different mindset then you starting out with $3,000 and trying to make it big? You’re going to screw that up, that’s just the reality of it. You’re going to screw it up.
So again the capital is a huge deal. For people that have access to the capital, you’re already going to be better off. Here is from the FXCM study. This is just profitability by account equity. This isn’t strategy. This is just hey, how profitable were you by how much money you were trading. Just this alone increases the profitability of someone being profitable. And it’s because there’s not that, everything we talked about.
You don’t have to take all that risk because you have so little money that you have to risk it big and one thing goes against you and you’re done. So the more money you have it absolutely, absolutely it’s a benefit. I hate to say that, I wish that wasn’t the truth. I wish I could tell everyone with a small account, “Hey you know what. You’ll do just as well as someone with a $10 million account”. That’s not true. It’s a totally, it’s an easier ball game when you have more capital, absolutely.
Alright well let’s go ahead and wrap this all up. I think we’re running to the end of our allotted time here. I want you hopefully, you came here. Hopefully you enjoyed some of the things we talked about. That’s great, I’m not here for your entertainment even though hopefully it was mildly entertaining. Let’s give it mildly entertaining. But I really hope every one of you takes something from this and you look at what you’re doing.
Now if you’re not trading yet, oh that’s awesome. I love to get people that have never traded before. I love to because I can train you and teach you and beat in your head how to do it the right way. One of my best friends growing up Joe, again, some of you may meet. He knew nothing about training. And I frankly wasn’t sure that he could do it because he knew nothing about trading or stocks at all. Actually he was one of the last people I approached to see if they wanted to do this. And of all the people that I personally have brought in, my own personal life, he learned it the fastest and the best.
It surprised me at the time but now I look back on it I say, “Of course. He was a blank slate”. When I told him that he had to put a stop in here, he didn’t know that can’t put a stop in. When I said you have to position size correctly, he doesn’t even know the other way to do it. The wrong way to do it.
So if you’ve never traded before but it’s something you’ve wanted to get into, I highly recommend that you start with that trading plan. Just say look I need to put in all the time and effort before I risk money because if I risk money, I’m going to lose it if I don’t know what I’m doing.
So if you’ve never traded before but it’s something you’ve wanted to get into, you’re in a great situation. Just spend your time on the things I talked about at first. Go in, take our trader personality test, learn what your strength and weaknesses are going to be. Start to think about how you’re going to trade. Again, you’ve got a great benefit.
If you are already trading right now or if you have traded before, haven’t done so well. Hopefully you’ll take some the things you’ve learned here and say, “Okay. Well yes when Robb talked about that, that was exactly me. Yes I beat myself up about it but what he said is don’t beat yourself up about it. Find a way to win in spite of that. Realize that you’re always going to do it”. If you’re an over trader guess what. You’re an over trader. Come hang out with me. I’m an over trader too. Start to think outside the box of ways that you can not overtrade.
For me, as I said, I like going to the gym. I hired a personal trainer every single day at the gym. Now look I don’t need a personal trainer. I’ve always gone to the gym and lifted, I was always active in sports from when I was 15. Why did I hire a personal trainer? To me it was money that I didn’t need to spend. But if I hired a personal trainer, I went to the gym. If I was trading and I didn’t have a personal trainer, I didn’t go to the gym sometimes because I wanted to trade. It forced me to get out from behind my system and go to the gym. Learn how to win in spite of yourself.
Position management. Hopefully I stressed that enough. This game is won and lost in position management. Every single one of you are going to make a hundred trades. Every single one of those hundred trades you think are going to be good. Guess what? 40 of them are going to be garbage. No matter what research you did. You used Elliot Wave theory. You used Fibonacci. Whatever you used, 40 of them are going to be garbage. Out of those 40, there’s going to be five that are the worst trades you’ve ever made before in your life.
Now on the other side there’s going to be five of those winners that are the best trades you ever made. How are you going to manage those positions. You need to cut the losers and hold the gainers as much as you possibly can. Then capital, again capital is capital. There’s places you can go get capital. You can go work for someone, you can join a PRA firm. There’s lots of places you can go.
Alright so to wrap this up, understand yourself, what you can and can’t do. Don’t work against yourself. It was one of the things when I finally figured that out and I stopped trying to beat everything by discipline and I started developing systems to work in spite of myself, it got so much easier. I wasn’t fighting with myself anymore and I was only doing what was natural which is much easier to do.
Spend the majority of your time in visualization. Spend it on your trading plan, plan it out. Spend it in back testing. Practice, again, if there’s other traders you know run it through them, hey can you take a look at my strategy. They’ll poke holes in it, they’ll tell you what’s wrong with it. You go back to the drawing board. It’s so much better that way. And as I said, find people, groups and companies to support you.
Surround yourself with traders. Surround yourself with people that are helpful to you. It’s going to be much easier. The whole thing about this was being a solitary trader. Doing this all by yourself with no help and no one to check you. No one to knock you over the head when you’re being an idiot. No one to pump you up or pick you up when you’ve had a lot of loser in a row because that will happen statistically. It’s really, really hard to be all by yourself. So surround yourself with people for sure.
Alright real quick before I let you go. So, again, we have two separate divisions. We have Options/Futures and Forex. I want to extend an invitation to you to join us for our Sunday Trading Rooms. I will be running the Sunday Trading Rooms. That’s been what I’ve been doing for, we started doing online meetings instead of in the office meetings in 2007. So this will be my 11th year of basically every Sunday I hang out with our traders and we talk about the market. We talk about trades. We talk about setups, we share ideas. It’s awesome, I love it. We do it in the summer on Sunday mornings. Between Memorial Day and Labor Day we do it in the mornings. After Labor Day we do it at nights. So we come in at night, we plan out the day and then Monday morning when the market opens we are ready to get going.
I also want to extend a trial to our member’s area. So your recruiter is going to be reaching out to you. This is something you want to check out. I highly recommend to take our trading personality test. It’s awesome, it’s really going to give you some nice insight on yourself. So that’s going to be, again, just tell your recruiter you want a seven day trial. They’ll set you up for it.
And if you’re interested in becoming a trader for Maverick, let your recruiter know as well and they will start you in the recruiting process. That process takes anywhere from a couple days to a couple weeks. We want to make sure you’re the right fit for us and we want you to spend some time going through our site and what we do and make sure we’re the right fit for you.
So again every one of you are going to get an email somewhere in the next 24 to 48 hours from your recruiter. So if it’s something you want to take advantage of, go ahead and please answer them. They’ll get you set up for everything.
Thank you so much for joining me and sorry that I was solitary. Again, I found the irony of that very funny. But hopefully I’ll have someone with me the next time we do this. Everyone take care. Thank you very much for joining me. Good evening, good night.