Rebel Traders 045 : The Elephant in the Room

Did you see that big grey thing with a big nose in the corner of the room? Well, the Rebel Traders and going to break with tradition and talk about that thing no-one wants to talk about…

There is one thing traders hate talking about, they willfully ignore it and pretend it doesn’t exist. Put 10 traders in a room and they all talk about their wins, their year-to-date profits and more. However, mention this one thing and they all clam up tighter than a ducks-butt.

So, Sean and Phil are going to talk about the HUGE elephant in the room and how its a natural part of trading that you have to deal with…

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Sean Donahoe: Did you see the big, great thing with a big nose at the corner of the room? Let's rock.
Automated: Rebel Traders takes you inside the world of two underground master traders, who take an entertaining and contrarian look at the markets to cut through the noise of Wall street and help you navigate the trading minefield. Together, Sean Donahoe and Phil Newton are on a mission to give you the unfair advantage of a rebel trader. And now, here are your hosts: Sean Donahoe and Mr. Phil Newton.
Sean Donahoe: Hey, hey, hey. This is Sean Donahoe and welcome to the Rebel Traders podcast. We've got a lot going on today and I am joined by my partner in podcasting, Mr. Philbert Newton. Phil Newton, how are you doing sir?
Phil Newton: I don't know why, but I thought you were gonna say Phil Ding Dong Newton, for some reason.
Sean Donahoe: Ding Dong. Yes, go very Leslie.
Phil Newton: Ding Dong.
Sean Donahoe: Leslie Graham-
Phil Newton: Leslie Grantham or, yeah, Graham.
Sean Donahoe: Yeah Leslie Grantham was Eastenders dude.
Phil Newton: Yeah, although, with the intro that you made, I had looked... we're having lots of little flashbacks. We were talking about movies once again, so I'm in that frame of mind, but you had a little flashback to the Tom and Jerry cartoon where they found a baby elephant.
Sean Donahoe: Oh, yes. Yes. Yes. That's correct. They did.
Phil Newton: The elephant in the room.
Sean Donahoe: They paint it as the mouse. Yes, one of the classics. But there you go. All good. So anyway, yes, today we are talking about the one thing most traders absolutely hate talking about. They willingfully ignore it and pretend it doesn't even exist. In fact, if you put 10 traders in the room, they all talk about their wins and everything else. Their year-to-date profits.
Phil Newton: Look at my gains, bro!
Sean Donahoe: Yeah, tell me about your gains, bro. And however, mention this one thing and they all clam up tighter than a duck's butt. So we're gonna basically pry open the subject. That was gonna go out really badly.
Phil Newton: We're gonna pry open the duck's butt.
Sean Donahoe: Where the hell I'm going with that. That was not where I meant to go, but anyway.
Phil Newton: That's where you nearly went, but Phil's gotta take the bullet and run with it.
Sean Donahoe: Absolutely. Thankfully, the other direction, so. We're gonna talk about the huge elephant in the room, and how it's a natural part of trading that you have to deal with.
Phil Newton: We've also got our Rebel Trading mail bank, where your trading questions are answered. Our favorite section continues and remains, as always, the bull shit of the week. We got a lot of of all the sharings, the nonsense, the bullhondry, the plum foolery, and the anything else that we can find that rhymes with fools and idiots. As always, somewhere amongst all of this, our own shenanigans, we're gonna ask the core question of: where is the trick?
Sean Donahoe: Perfect, so yeah. So let's dive right the hell in. So, like I said.
Phil Newton: We need a lot more splash. Again, I'm full of little flashbacks at the moment. I'm thinking Yosemite Sam off the tall high board into a shallow pool or pond to dive in, so we can dive right in.
Sean Donahoe: While Josh, if you're there, and you know, in the podcast production, insert a splash right here.
Perfect. There you go.
Phil Newton: With one of the comedy splatters. I mean, what was it? It wasn't but one of those cartoons that all used to do that, wasn't it?
Sean Donahoe: Uh, yes. It was, yeah, it was the
Phil Newton: Wile E. Coyote-esque.
Sean Donahoe: Wile E. Coyote, yeah, Chuck Jones era.
Phil Newton: A little sign with yelp.
Sean Donahoe: Yeah, that's it. Man, it's funny. I was in Santa Fe a little while ago, and I was at the Chuck Jones museum and they had original stills from the Wile E. Coyote cartoons and stuff like that. So I had to go and get some of the original stills from some of the-
Phil Newton: Did you know that Wile E. actually spoke once? And this is a constant argument with people who, when the subject comes up. Wile E. Coyote does actually speak, and it was in a Bugs Bunny feature length, and it was the only time he spoke. And he basically just introduced himself to Bugs Bunny, and said, "I'm Wile E. Coyote."
Sean Donahoe: Super genius.
Phil Newton: Super genius.
Sean Donahoe: Yes. And then at the end, he goes, "Hi, my name is Mud. I remember mud spelled backward is dum." Yes I do remember that particular one.
Phil Newton: That's kind of like the phrase, kind of like the theme we're talking about. You know, the elephants in the room. The thing that people don't wanna talk about. Everyone just wants to pretend that their Wile E. Coyote, and they are a super genius. And the reality is is that it's usually far from the truth.
Sean Donahoe: And that's okay. That's the thing. It's okay.
Phil Newton: That's fine. But guess what? As we keep saying almost every week, it's just like every other business out there. Some times are gonna be good, some days are gonna be bad. But on average, just like every other business, that's what we're aiming for.
Sean Donahoe: So here's the thing guys: what is the big elephant in the room? It is losses. Anyway, so yeah losses are a big part of trading. A lot of people don't like to talk about it, because it's painful. For a lot of people, they have... They love talking about their wins.
Phil Newton: It's almost like admitting that you're wrong, and no one likes to admit that they're wrong.
Sean Donahoe: Well it's not only that, it's also a psychological element to it where it actually physically pains us.
Phil Newton: It's painful, yeah.
Sean Donahoe: There has been many studies in regards to, not only the physical loss, but also the mental... even if you're losing on paper, so to speak. When you lose money in the market, it's just numbers on your account. It's not-
Phil Newton: And it's not necessarily the size of the loss. If you'll pardon the euphemism angle again, it's not necessarily the size that counts.
Sean Donahoe: It's how you use it, yes. You keep telling everyone that.
Phil Newton: No, but yes. I keep telling everyone, and I'm hoping someone will agree with me. But the point I was gonna come to is that I've spoken to many, literally multimillionaires. They're already very successful in other areas of their life and they're trying to master the code of trading, if you like. And I've seen multimillionaires break down and cry over a $50 loss. Now, again, for some people that $50 is a lot of money, but for a millionaire, it in proportion to their existing wealth it's not a great deal.
But the psychological trauma of yet another $50 loss. Basically you know been hugging people and they're on phone calls and how do you deal with the loss? And it's like, how much did you lose this time? And I remember the conversation vividly, this one time it was $50. And it wasn't the $50, it was just because it was the straw that broke the camel's back, as it were.
Sean Donahoe: Yeah.
Phil Newton: But you're right, it's painful. I mean, we've spoken about it in the past, but how do you overcome that element is reframe the way that you view a losing trade. And for me, it has nothing to do with a monetary loss. If I have done everything that I set out to do, from my trading plans viewpoints, I know that losses are gonna be a part of it.
So how I can reframe a loss is, when I've deviated from the plan, so even if I put a monetary loss, it's accounted for. It's still a winning trade, so psychologically I'm still very comfortable with the less, because I've reframed that viewpoint of what I consider a loss to actually be.
Sean Donahoe: No, it's a very interesting point, but one of the things I was wanting to reference is, and kind of just linger around for a second, is that the actual emotional toll of a loss physically pains us. Like we've lost like a dog or a pet or a person. There's actually a lot, but the significant-
Phil Newton: I think significance in our lives is missing.
Sean Donahoe: Yeah. It actually triggers the same emotional pathways and psychological pathways, and the problem is that that then leads us away from things that cause us pain. Now, this can be a good thing. It can be a bad thing, but to what Phil was talking about real quick, it's very important that you understand that... I mean, this again, this is one of the things I talk about is the divestment of emotion through money, is you've got to look at things with, as Phil said, the reframing. If you do everything wrong, but it still wins, that's not a win. That's a loss. You've got to look at it
Phil Newton: You don't want to do that again.
Sean Donahoe: Because, again, what you're doing is, and this is one thing that's very psychologically important, is because losses and we have an inherent captain caveman fear of loss, here. It goes back to when we were living in caves and we had to survive. So the loss and the loss of material
Phil Newton: It is that Danger, Will Robinson experience, isn't it?
Sean Donahoe: It is.
Phil Newton: We're not necessarily in fear for our lives in this scenario, but it's an emotional reaction that's ingrained into our DNA. The fight or flight is sometimes how similar situations might be described, but it's ingrained. You can't avoid it. Something is causing you pain, and you wanna get away from that.
Sean Donahoe: But we inherently walk away from things that cause us pain, but even if it's the right thing to do. Now we talk about a positive expectancy strategy, so if you have a positive expectancy strategy that is gonna work, say like one of the strategies that we teach our students has a expectancy for around about 70%, 68%-72% depending on application and everything else and some fine tuning.
Phil Newton: It fluctuates, yeah.
Sean Donahoe: Yeah, but if you've got a 7 out of 10, just to keep it simple numbers, of your trades are successful, that means 3 out of 10 are gonna be losers. But that's okay, as long as you've got that-
Phil Newton: Well let's stick with the theme, Sean. Let's reframe it to help people understand what we're trying to get to. They're not losers, they're monetary losses.
Sean Donahoe: Monetary losses, indeed. Yeah, that's a better way to describe it.
So taking it from there, if you then take some of those 3 out of 10 monetary losses, where it's the right thing to do but you feel that physical pain, are you going to then deviate from your strategy because you don't wanna feel that pain again? Unfortunately most people do. Most people in business, in trading, in many walks of life, will avoid deliberately anything that can cause them any level of emotional pain.
Now, again, one of the things I'm very, very much an advocate of is the divestment of emotion, so that again, you can take that dispassionate view of it's just numbers. And while you're trading with money, and your own money, I don't care about that money. What my goal is to make it grow, but I don't care. And this is the problem with a lot of people is they care too much about their money. They care or they have an emotional entanglement with that money.
And there's a couple of studies recently that was very fascinating to me. If I can find the documentary, I'll link it in the show notes, but it was a study by a French team in, I think it was the University of Paris, if my memory's correct. And what they were doing is they had a whole group of people, like 50 people they were running this experiment with, and they were taking where you would take this bet with a positive expectancy. And they were all traders, or it was testing traders, and they would test them on this one thing, and if they have a positive expectancy, they would take the risk. It was like would you risk 50 to make 100 or something like that. And you know, boom boom boom. And most people were doing it, however, what they said is would you take that $50, but instead... and they did it where there was still a positive expectancy, but they brought in the element of loss. Now, if you lose we'll take 25 from your pot, but if you win... It was something like that. It was like you'd get 100, but if you lose, we take 25.
Now here's the thing. It was basically a 50-50 shot on whether they'd win or lose. Well it was just like the flip of a coin. However, what happened is most people became very hesitant about the trading or the decision making process because of that element of the loss. And it really warped their approach to the test. And they were, again, that fear of loss added such an element of concern that people were taking the safer route. That's what happens a lot, even if you've got a fantastic strategy. But people tend to walk away, because of that fear of loss.
It's natural. It's okay to have that, but you've gotta have the discipline that if you've got a strategy that is a positive expectancy strategy, then let the winning trades win
Phil Newton:
Sean Donahoe: And let the monetary losses play out as well. Now, it's very important what Phil said there, and he kinda corrected me and it was very, very perfect, is monetary gains and monetary losses, but winning trades be all of them. If you're playing the strategy. If you're deviating from the strategy, boom.
Phil Newton: If you apply your strategy, every trade's a winner.
Sean Donahoe: Exactly.
Phil Newton: Yeah, I mean the same mindset attitude is, I think was it Nick Felder or one of those golfers from years ago? When was the last time you missed a shot? And he was like, "I've never missed a shot in my life." That was the conviction that they had. You know, it might have been they intended to swing for the ball on the golf course. They way that they did it just didn't play out, but in their minds, they've never missed a shot that they intended in 20 years. You know, because that's the mindset. Now the reality is very different, but it just reinforces what we're doing.
You know that the people who are at the pinnacle of their game, their career, they've always got that a different way of viewing success. In their minds, they've hit the winning shot every time, because they've got to do it. They can't have any shadow of a doubt that they're not going to miss, or they're gonna have a losing trade this time in the case of trading. But you get what I'm trying to say. It's that mindset that keeps you doing it five, ten, fifteen, twenty years down on the line, to reframe and have the way that you view the undesired outcome in a very different way.
Sean Donahoe: Absolutely and it's the warping of the strategies that creates the most liability in a trader's portfolio, because once they start down that path, it will forever shape what they're doing. And it's a habit you can't unlearn. You can start looking at things dispassionately, but the other thing is, you've also gotta actually have a strategy that has a positive expectancy. A lot of people don't.
Phil Newton: On that assumption, on that assumption. But it would be like if we just take some of the business. We like the business side of business at the end of the day, as it was. So we always compare it to having a real world business. By not putting the trade on because you're fearful, that would be like having a business on the high streets or the main streets or wherever and not opening. That would be like going to your business, the shoe shop on the main streets, and standing outside the business and not opening up your business. So you've got all the stock, all the employees, all the staff, and you've just turned over the closed sign. You're not letting any customers in. That would be like the same thing for not putting the trade on.
And you wouldn't do that. You just wouldn't do it in a business in the real world, you brick and mortar type of business, but yet traders do it all the time. I'm not putting this trade in because I'm fearful of not working out. Well you're just gonna create more overhead. You've still gotta pay your debt, you still gotta pay your brokerage, you still gotta, you know you might have inactivity fees. You've still got all of the other expense. You know the time that you just sat there twiddling your times. You've still got all of that expense. But if it was a real world business, you would turn the sign over and open for business. And the trading equivalence of that is putting the trade up.
Sean Donahoe: Absolutely.
Phil Newton: And we've got to be open for business, so reframing that winning trade helps. And as we always say, to help with the psychology of it, reduce your position size and trade more frequently. It sounds totally counterintuitive, but they're the two main contributors to having an open and profitable business. That is, like again, the shop on the high street that's opening for business. That's letting customers come in. That's letting them peruse up and down the aisles to look for the product that they're looking for. That's what we need as traders. We need lots of small occurrences in our accounts. So reduce your position size. That's gonna reduce that emotional impact, and put more trades on. Let more customers in.
Sean Donahoe: Absolutely. Now this is the flip side of this, and again, Phil's touching on something here that is very important, is how do you handle the actual emotional rollercoaster of the loss. And as he said, put more trades on. This way, a lot of-
Phil Newton: And counterintuitive. It's so counterintuitive, but guess what? It works. It really does work.
Sean Donahoe: It does, but one of the big things that, and again it's one of the big problems for a lot of traders, is the position sizes are too big. Thus, there's a lot more on the line, thus they feel more nervous about that individual trade. They've got a significant portion of their capital tied up one or two positions, and it's like playing Russian Roulette with the markets. And you ain't gonna win by doing that. I mean, unless your strategy, is again positive expectancy, your trading that realm for a deliberate reason that's great, but I'd prefer to be able to sleep at night. I'd prefer to be able to step away from the markets, not watching every single damn tick to see if that giant positions gonna come home or not.
Again, my intent is to put on my trades in the morning, walk the hell away, come back in the evening. Okay, how did I do for the day? Eh, okay cool. Set up the stuff for the next morning. Done. You know, and I just look in the evenings.
Phil Newton: Again, just to try and keep with the analogies of what we're talking about, was it Babe Ruth? The baseball player. Was he the one that -
Sean Donahoe: Always swing for the fence.
Phil Newton: Always swung for the fence.
Sean Donahoe: Yeah exactly, pointed it out to the outfield.
Phil Newton: And if you think about it, through history, he was an anomaly. He always swung for the fence, because that was his strategy. So we appreciate that there are strategies that have that one or two positions on, coming back to the trading guide here, one or two positions where that is the strategy. Maybe it's based around an economic event, like there was quite a few people that foresaw, the smart people who have their eyes open I might say, who all saw the financial crash for what it was. It was on the horizon. The writing literally was on the wall. I was talking on it two years prior to it happening, but the point is is the people who saw it coming up, they were positioned for that crash. They were swinging for the fence, but that's a once every decade type. It happens somewhere once every ten years. It's not an every day occurrence, is the point.
But Babe Ruth was the anomaly. He swung for the fence every time, because that was his strategy. And to be fair, as I understand it, he did pretty well. But most baseball players would do better trying to hit the ball and go for a first or a second base.
Sean Donahoe: Exactly.
Phil Newton: Get moving, because the chances of that happening are statistically, significantly greater than swinging for the fence and going for the home run.
Sean Donahoe: Absolutely.
Phil Newton: And again, if you're a baseball fan, this will really resonate. I can almost hear you nodding. But you can't deny that there's more first and second bases happen compared to the home runs. Statistically speaking, it's a significantly greater occurrence. And that's what we're doing. That's what this strategy allows us. We'd rather go for the first or second base type of trades. Occasionally, we're gonna hit a home run. And we don't know that it's gonna be that we've swung for the fence, because we're not trying to swing for the fence. Occasionally, we just hit the ball right. And bloody hell, look at where that went.
Sean Donahoe: Indeed.
Phil Newton: You know, no one knows what's gonna happen next, but we know that if we hit hitting off balls, first or second base, we're gonna get to first, second base every time. Occasionally, maybe a third, and maybe once every... and usually it happens around once, to be fair on average with my strategy, the way that I trade, it's usually around once a week I'll hit 100% return on capital on the auction. And that's what I always consider, not necessarily a big stock move, but from the auctions point of view, that's like the home run. We've got a nice triple digit return. Sometimes it's in the two, three, four hundred percent return on capital range, and those types of positions they happen about once a month for me on average. I don't know which one it's gonna be, but it happens on average enough times for me to put the next trade on.
And that's what we're talking about. That's what trading with smaller position sizes is gonna do and put more positions on and increasing the frequency and aiming for that first or second base. Sometimes you're gonna catch the ball right and swing for the fence and get the home run, but that's what we're talking about here. And by doing that, we know that losses, again on the assumption that we've got this positive expectancy strategy, which is just a fancy way of saying we expect to win money on average. Then... lost my train of thought, there, Sean. Help me out here.
If we have that expectation, then on average, I know I'm gonna lose a portion on some monetary loss on some. But on average, I'm gonna win around about 65% of the time, and that's what we're talking of here. That we understand that losses are a part of it, but how can we get past the mindset of is this gonna be another loser? And ergo not put a trade on, which is that fear that holds most new traders back, or even the jaded traders who have been trying to chip away at success for many, many years. This is how you get past it. This is what a breakthrough looks like. This is how you break past that cycle of fear or not putting the trade on or having yet another monetary loss. You know, how do you break through that cycle? Reduce your position size. Increase the frequency, on the assumption that you've got a positive expectancy strategy.
That really is the secret sauce there, Sean, isn't it?
Sean Donahoe: It absolutely is. And just to think about this, I mean, another baseball analogy. If you hit three out of every 10 pitches, you're a Hall of Fame-
Phil Newton: Wow, that's amazing.
Sean Donahoe: You're a Hall of Famer.
Phil Newton: But in trading, in trading-
Sean Donahoe: We're doing seven.
Phil Newton: Most people consider that bad. Funnily, let's talk about strategy for a moment and kind of like this losses and the feat that prevent you from trading. Now, on average, we know that 65% of the time we're gonna be making money, on average. And if that was the other way, I mean, I've got a strategy that 95% of the time, it loses money. And it's one of those strategies that you don't trade all the time, but when the conditions are right, and it happens when there's major volatility usually in some type of crashing or bare market it's great, but it loses money 95% of the time. Really, really, really small amounts, but it produces absolutely phenomenal profits because of the compounding effect when you catch the moves that you're expecting to happen.
And 2008 was actually the last time I actually deployed it, surprisingly in the financial crash, it produced about 75% of my year's profits for that year. Just by having... but 95% of the time, it lost money. And most people can't trade that, because the fear of losing, but I know that if I've got the... again this comes back to the positive expectancy strategy side, on the assumption that you've got a good strategy, I know that loss is gonna be a part of it, but when the move happens, it's gonna be a huge payout. So it's worth it. And again, how I trade it is I trade small, and I trade frequently by having multiple compounding in points. And again, it's very mechanical. Very rigid.
But I think we're skirting around a theme here, once again, Sean. It all comes back to on the assumption that you've got a strategy, and if you need help with one, we've got strategies that we will happily share with you. And you can pick up a phone and we can talk about them. But on the assumption that you've got a strategy, it's small position size, trade frequently. And that's a key theme with any strategy and being successful, and that's what again it comes back to, if you're stuck at that ceiling of the fear of putting the trade on, what's gonna help you break through the cycle? It is to apply those two elements that we keep talking about, is trade with smaller position size.
Imagine the volume dial is your position size, so the fear, the voice in your head that's screaming at you, "Is this gonna be the one?" And it prevents you from putting the trade on, because you're worried about the losses, or you just can't sleep at night, or you've got the sweaty palms. You've put the trade on, but the position size is too big and you bail out of it too soon, for example. The fear of losing profits can have just a greater impact for the same reason. Position size can be big. So reduce your position size is like turning the volume dial down on that little voice at the back of your mind that's just the devil and the angel on your shoulder, just whispering in each year. Do this, do that. Don't do this, don't do that. And that's the psychology of trading that we're talking about: the fear. It's like turning the volume dial down. It's not gonna go away, but if you turn the volume dial down, it'll be just like a little murmur in the background. It's gonna allow you to deploy the strategy that you know on average wins. And then trade more frequently.
Again, I know I'm harping on this strong, Sean. But it literally is quite pivotal. It literally is the secret ingredient to making any positive expectancy strategy work well enough to deploy.
Sean Donahoe: Absolutely, and one of the things that I wanna add into that is if you do actually make a mistake, if there is a monetary loss and you're not getting your positive expectancy, it's time to reexamine that strategy. It's time to reexamine that process, and see okay we need to figure out what's going on here.
Phil Newton: Is it a one-off or-
Sean Donahoe: Is this a, yeah-
Phil Newton: You know did I just push the wrong button? What did I overlook? Do I put a circuit breaker in to prevent me from doing it again? All those things that you might ask yourself, just so that you don't repeat the same mistakes twice.
Sean Donahoe: Yeah, there's a lot of people who will go into this blindly thinking, well you know I think I've got positive expectancy. And they keep throwing money-
Phil Newton: They're shooting from the hip.
Sean Donahoe: Into the market. And they're shooting from the hip. They're just going with their singles, the doubles. They're not going for the home run. They're doing all the things we talked about, but ultimately there's a fundamental flaw-
Phil Newton: But the strategy is not fantastic.
Sean Donahoe: Yeah exactly.
Phil Newton: Yeah. We've gotta put that thing in. On the assumption that you've got a positive expectancy strategy, it works. The numbers add up. On that assumption, everything else worked. But it might be like you were just saying there, Sean, it might be that that strategy is just not quite up to expectation.
Sean Donahoe: Yeah, it also might be the fact that, hey, that strategy works in a particular environment.
Phil Newton: yourself. In the development of it.
Sean Donahoe: Well that's true, but some strategies require certain conditions, certain market styles.
Phil Newton: Yeah like my 95% loss strategy. I need absolutely months of volatility for it. The last time we saw that was 2008. No, the brief sell off that we've seen, it didn't last long enough to deploy the strategy. It's a once in a decade strategy. You need the range of movement. You need the volatility, and you know, and great ones have it in the back pocket for just such an occasion.
But like, yeah, so it's positive expectancy strategy, but it's not an every day strategy. What we've got here is an every day strategy. I can find something to trade every day and get singles and doubles and every day and every week, and occasionally we're gonna hit the third base, and occasionally we're gonna hit the home run. And that suits me fine. That's just, guess what Sean, I gotta say again, it's just like every other business that makes money on average.
Sean Donahoe: That's exactly it.
Phil Newton: Sometimes you get a customer comes in. Sometimes a customer comes through the front door and wants a refund, because hey the stitching's not up to par on whatever they bought on their fancy shoes. Sometimes you're gonna get someone come in with deep pockets and say, "I want one of everything." And those happen, but it doesn't happen every day.
Sean Donahoe: Absolutely.
Phil Newton: But that's just like every other business.
Sean Donahoe: Absolutely, and that's a very important part. Now the other thing to do is, if you've taken a particularly bad hit, if you've had a big draw down, something you just did screwed up and you're like I can't do this, I need a break. Don't be afraid to take a break. Take a rest. Just let your positions roll
Phil Newton: Work within your limits. Yeah.
Sean Donahoe: Work within your psychological limits, because even with a divestment of emotional like I talked about-
Phil Newton: I've got different views on this, Sean, if I'm gonna be honest. But for most people, absolutely that is the right thing to do. If you feel you need a break, take a break.
Sean Donahoe: Yeah, I mean one of the first things I would say in top of this, and I'm talking about an extremer and you've taken a real big hit. First thing is get back on the bike. Put a trade up. Put another trade up and keep doing that. But if you need to take a break-
Phil Newton: After you've crawled out from under the duvet. I had a little flashback to one of my major mishaps. First thing I did was crawl and put a stop loss because I realized I had not put the right order in. Australia was stop losses back then, and it had gone the wrong way, and the first thing I did was put a stop loss in and then I crawled onto the duvet and went back to bed.
Sean Donahoe: Funny.
Phil Newton: After about an hour of self-pity and loathing and all the stupid things, you know, the shock of it. Now I've finished crying and weeping and rocking metaphorically in the corner, what can I do about it? Okay, I can't fix it. Okay, so damage limitation and then what I ended up doing was closing the position anyway. And that relief-
Sean Donahoe: That's one of the things I would automatically say if you've done something like that, close the position.
Phil Newton: Yeah. Having been through it a few times, and I've flown 50% of my account twice now, and it's not an...and it was through stupidity, it wasn't through strategy or... I literally pushed the wrong buttons and didn't notice. Hence why I bang on about certain things at certain times in our conversation, Sean. Because I've lived through. And God dammit, I don't want you to experience that.
So the point is is that, hey, if you can learn from the lesson without having to go through the actual lesson yourself, then that's great. So yeah. So close the position. If you've made a mistake and you've got the position open and you're wondering what to do, I think that's the clue. When you're asking yourself, "What should I do here?" Close the position. Get rid of the emotional attachments. Get rid of the shock, because what I've certainly experienced on many occasions when something's not gone my way is close the position. Get rid of it. You know, you can't recover that loss. A miracle is not gonna happen. A 100% u-turn is not gonna happen.
Again, it's like that home run. It might happen. It has happened for me. I've been in that situation, where oh my god, it's turned around and now I'm making money. I'll take that, thanks very much. But it doesn't happen every day. So close it. Get rid of it. Release... I'm tempted to say release the kraken. Release the emotion that is tied up with that spirit, because you've just had a punch to the gut. Get rid of the punch to the gut experience by closing the position and then you'll be surprised at how clear thinking you can start to do. Then you can start to think about, okay, you can start a better recovery plan. Surprisingly, it's probably gonna be something along the lines of reduce your position size and put more trades on.
Sean Donahoe: There you go.
Phil Newton: Because this is what I do. You know, that's how I've recovered. Sorry Sean, just a little bit of rambling Side Bob. But yeah, it's just the voice experience there. I've had many of those punches in the guts.
Sean Donahoe: Absolutely, and one thing I would also kind of wrap this part of the show up and this segment at least is use your losses as inspiration. If there are things that are going on, you've made a mistake, or if you have actually made a mistake, it's a lesson. It might be a little bit of a painful lesson, but it's lesson.
Phil Newton: It's an important part, there, Sean. Very important.
Sean Donahoe: Yeah, so I mean.
Phil Newton: Because that's gonna develop your person. This is what we refer to or what is referred to as your personality as a trader, and all that means is, when you've experienced something that you don't want to experience again, or you've experienced something that you do want to experience again, what rule can you put in place to usually prevent that thing from happening again? And that trait's your personality is a trait, and all that means is it's just a fancy way of saying the things that I like and the things that I don't like. And they take your personality. Just like it would in the real world.
I don't like vanilla ice cream, or well actually I do. But you know, different story. I don't like mint chocolate chip, for example. I do like vanilla. That's part of my personality. I've tried them both. I know it's a really flippant example, but that's the trading equivalent. I don't wanna experience that again. That was a horrendous experience, even if it reduced the profits, I don't wanna go through that experience again. Let's create a rule or some circuit breaker to try and prevent that situation from happening again, and that will become part of your very personal trading strategy.
Sean Donahoe: Absolutely. So again, lessons are learned. They can help you either refine or make sure that you're sticking to your strategy, and if you're sticking to your strategy and if you're going through reverse engineering your trade, did I do everything right and everything checks the boxes yes I did everything right? Then guess what? Again, coming back to what we said at the start, that is a win. If you made a mistake, guess what? You paid for it. Okay, boom.
Phil Newton: What can you learn from it?
Sean Donahoe: What can you learn from it? And again-
Phil Newton: Can't change it.
Sean Donahoe: Refine. Refine.
So with that being said, let's move on.
Automated: And now, it's time for the Rebel Trader Tip of the Week, brought to you by Ready to take your trading game to the next level? Discover where smarter traders come to get coached by the best, and learning to trade just got way easier. Trade Canyon, smarter traders live here.
Sean Donahoe: Okay, so the Rebel Trader Tip of the Week. It's keeping everything in perspective. This is one thing, again, that we talk about a lot in the show, but trading is a business. We need to treat it as a business, and you have days when you have ups and, as Phil said, you have days when you have downs. You have your shoe shop on the high street. Some people come in for a refund or customer service complaints. Some people come in and buy the entire damn shop.
You're gonna have days. You're gonna have weeks. You might even have months where things are going great or not quite going according to plan.
Phil Newton: Or so, so. Or eh.
Sean Donahoe: But you need to keep the entire longterm view of perspective, because at the end of the day, we know that we're in the right place at the right time. We have one of the easiest businesses to basically run without all the overheads. We just sat at our computers at our desks at home, working, rocking, trading, getting on with our life. It's all about perspective. Don't get too overwhelmed or overwrought with everything that is the business of trading. Step away when you need to. Dive in when you want to. Keep a level head at all other times. It's a business and you're the boss. And we're here to trade today, tomorrow, next week, and next year. This is what we're doing every single day so it's a process. It's a systematization of the application of strategies that allow you to trade the markets and basically grow your nest egg, whatever that nest egg may be.
But it's all about keeping a perspective. You're not going to Vegas, baby. You're not jumping into the Thunderdome, here. You versus the markets. Two idiots enter.
Phil Newton:
Sean Donahoe: Yeah, exactly. It's about... it's a business. And it's just like any other business, so if you treat a lot of this with the perspective of being a business owner and that you are running that business every single day, then boom. You're gonna have a lot better time of it than just going in like you're in your Elvis suit with a couple of loaded dice in your hand hoping for the best.
Phil Newton: Well people treat it like a hobby.
Sean Donahoe: Yeah.
Phil Newton: And they don't realize that they're doing it. They think they're treating it like a business, but the reality is it's like a hobby for them.
Sean Donahoe: And I'm gonna tell-
Phil Newton: Because they've not transitioned from the learning phase into, okay, I've got knowledge here. I've got enough to start the business of trading, and they don't transition from that mindset of learning to, okay, I've got enough that I need to know now. Let's start the business. They don't move, they don't transition. They just stay in the learning, hobby-ish type phase and try to do a business, and the reality is it's certainly a very expensive hobby for people.
Sean Donahoe: Yeah, take up fishing. It's a lot cheaper.
Phil Newton: And it's sad to see, and it's even sadder when they don't realize that they do that. They're in denial about it, and hey, it really is an expensive hobby for a lot of people.
Sean Donahoe: Absolutely. It really is. So yeah, I mean, I don't wanna get all Mr. Ranty Pants over here, but if you're gonna be a trader, treat it like a business. If you treat it like a hobby, this ain't the show for you and this ain't the industry for you because it will eat you up. It's business. And that is something that, unfortunately, we do occasionally see and usually it's people who've gone from the hobby and wanna take it seriously. And they come to us and they say okay... I actually do have conversations where people say, "I want to get serious about this."
In fact, I was just talking with someone just a couple of days ago who's about to join us as a new student who said that, yeah, they've been- and I'm gonna be very cautious, they're trading crypto or have been trading crypto, and they got their ass kind of... they've done okay, but have not done fantastically well.
Phil Newton: You really know what Mr. Press On needs to make my blood boil, don't you?
Sean Donahoe: I know. But the guys have been a, you know-
Phil Newton: Phil's biting his lip.
Sean Donahoe: Absolutely, but they've been doing that as a hobby, because it was their first exposure. But now they realize that there's a much bigger, broader market with a lot more consistent-
Phil Newton: But that's the transition we were just talking about. They've had the realization that you've gotten a hold on now, I think that there's more to this trading thing, and maybe I need a little bit of help. And that's fine, and a lot of people do make that progression of, okay, what's the fastest way to get some type of success is to find a mentor or coach that has what you want. Again, it might be us, it might be someone else. But find someone who's doing it the way that you want to do it.
Again, as we always say along these notes, learning how to day trade is not great if you don't have the time to day trade.
Sean Donahoe: Exactly.
Phil Newton: Or if you don't wanna be in front of the computers all day along, then day trade's probably not for you. But if you wanna sit up with your feet up, smoking jacket on, metaphorically speaking, or vape jackets on I suppose these days might be more correct. You know and reading the newspaper and just do it for a short amount of time. That's the way I like to trade today. And then there's various degrees in between all that, but it depends how much activity you wanna be involved in.
Sean Donahoe: Absolutely.
Phil Newton: Again, and then that also skirts around perspective. What do you want out of trade? What's your perspective on how you envision envisage at your trading life to be? Is it side hustle? Is it something that you do with minimal time invested, or are you gonna be at it all day, every day? There will be a mental for you, it depends on what you want. When you figure out what you want, then you can go down the correct pathway for you. That fork in the road that will help with that decision making.
Sean Donahoe: Absolutely. Love it, love it, love it.
Okay. So with that being said, strug on kitty.
Automated: If you've got questions, they've got answers. Sean and Phil dive into the virtual mail bag for this week's Rebel Traders quickfire round.
Sean Donahoe: Okay, so rummaging around in the mail bag. Your questions have been forwarded to us, so we have got everything in front of us. So I'm gonna fire this one at Mr. Seven Years a Day Trader, but also spent many years-
Phil Newton: Twelve years, but there we go.
Sean Donahoe: Twelve years. Okay. So, I was all screwing that up, but we've said it enough times I should know it. You say it every bloody show, pretty much. But yes, twelve years a day trader, but also had-
Phil Newton: I didn't win an Oscar for the movie title, though.
Sean Donahoe: No, apparently not. So forgettable. But here's the question for you.
Phil Newton: There was a movie released at the same time, you know, with a similar sounding name.
Sean Donahoe: There you go. So the question is, is it still worth trading Forex? I still see a lot of people hyping that. Now, I'm gonna let you, because you were a very prominent 4X trader back in the day, and I wanna say back in the day.
Phil Newton: Used in the literal sense. In the literal sense, yeah.
Sean Donahoe: So you were pretty much focused on that, but is it still worth it and if not, why not?
Phil Newton: Is it worth it? And I think it's a two-pronged question, because yes there are a lot of people still hyping it. I think that they would typically fall under the category of they're not aware that there's other markets of the trade. Is 4X trade still worth it, broadly speaking? Yes, it is. It's worth trading any market that you can profit from with fluctuations in price movements, but as a trader not married to one particular market or country or investment vehicle, I've got to figure out where is my best use of time and resources. So, for me, that answer was stocks and stock options.
But to be fair, for lots of reasons that we've mentioned many other times in other shows, so I won't kind of go on Mr. Ranty Pants explanation here for a change. But is it still worth it? Yeah, it's still worth it, but the volatility's not there anymore. It compared to 2004, 2005, 2006, where the price volatility, the range of movements, was astronomical. To get the same range of movements as I saw back then that you'd get in one day because I was day trading, it would take about three to four weeks now to get the same type of movements in one trade.
So yeah sure, you could increase your position size, but then as we've already said, we wanna reduce our position size. So that goes counter to how I want to trade. I don't wanna have lots of position size to makeup with the same amounts of movements in one day. So that factor is why I'm thinking that 4X is not worth trading my, the way that I wanna trade today, not necessarily not worth trading at all. It comes down to what you want from your trading.
I do believe firmly that you've got to figure out what is the best use of your time and resources. And again, that's what we've touched on and that's why I don't think it's trading right now, because there are better uses of my time and resources.
Yeah, a flippant example of that I always use in this illustration is if my time and resources were better spent flipping beanie bears on eBay, then I'll be flipping beanie bears on eBay like it was the 90's again. So that's the business decision. 4X, it's had it's heyday, and now onto a better market with greater opportunity and we have not seen that opportunity unfold. The opportunity for me is an increasing volatility when the coming bear mark happens. That's the surest answer that I was skirting around.
Sean Donahoe: Perfect.
Phil Newton: So the really, really short answer is yes and no. Is it worth it? Yes and no.
Sean Donahoe: Depends on your goals. Depends on your-
Phil Newton: It depends. It really depends. It's great market to trade, and you can actually trade really small position size, you know, pennies if you want. If you wanna kind of test ideas with real money, then you can trade with pennies very, very easily, or fractions of a penny with a real money account. And if you wanna just risk ten cents worth of risk, and you can do that, you can get really, really small. But there's better markets to trade at the moment.
Okay, so I feel little Bill has a few words to say. And that I think is said that in the background, that he's obviously with me on the same subjects. That's my parrot in the background, for those of you who don't know that I've got a parrot.
Sean Donahoe: In case you didn't notice.
Phil Newton: He's my original squawk box. I tried to teach him how to say "buy" and "sell" and "get long." But he's having none of it.
Sean Donahoe: That's funny stuff.
Phil Newton: And I've got a question for you. It's, I feel like it's a good one. If you could start from scratch, where would you start as a trader?
Sean Donahoe: I have to say, knowing what I know now, it would be options. I started off as an investor, and with a long time buy and hold, Benjamin Graham Buffet style mentality. And the problem I had with that was obviously my capital was tied up waiting for those situations to change. I was seeing consistent growth, and I actually became pretty good as an investor. It was very successful. I had a few very painful lessons, very much at the start of the dotcom bubble is when I actually got my first investment on. It was right at the end of the dotcom bubble and took a big hit, and learned a very painful lesson. That was a big loss for me, but it did make me wanna come back in and learn. So okay, I gotta get better at this. I've gotta understand. Rather than listening to everyone, I've gotta figure this out for myself.
So, I mean, that was where I got my start, and I'm grateful for that start I had. Because it was a painful loss lesson, like we've talked about at the beginning of the show, but it got me involved with the markets. And that has evolved over many years to becoming a swing trader, which is primarily what we do. We are swing traders. We are looking at the-
Phil Newton: Resisting the urge to go all Austin Powers on you. "Yeah, baby."
Sean Donahoe: Yeah. So looking at that, I mean, I certainly want to have the ability to be in and out of positions, to catch the upsides without the downside risk, which is one of the things we're doing now. And again, trading just a few minutes a day. Trade under 30 minutes in the morning and 30 minutes in the evening, just because I'm looking at what's going on around the rest of the world and seeing where my positions are and setting stuff up for the next day. So, I mean, that's all I do and I could live my life the way I want. I run multiple businesses, so the way that we've adapted trading over time for both myself and Phil is very similar.
He doesn't want to be involved and he wants the rest of the day to himself so he can relax. Me, I've got too many other things going on, so I need a system that allowed me to have a flexibility to do that. It's because time is our most valuable resource. So that's where I wanted to start. That's, if I could turn back time and go all Cher here for a second, without the g-string. We'd be okay there. But if I could go back in time and change one thing, then I would be doing this a lot sooner than I was. I wouldn't have that investor mindset, I'd be catching the shorter term positions. Usually most of my position close within 14 days, and that's absolutely fantastic, rather than holding onto positions for two to three to five years, or a few months.
Phil Newton: There's nothing wrong with investing, just a little bit of a side part.
Sean Donahoe: Absolutely not, no. Absolutely nothing wrong with it.
Phil Newton: It comes back to I just wanna underscore what you said. What do you want as a trader? If you think of the end in mind first, then where you start if you start from scratch is gonna be slightly different for everyone. Because if we'd asked you that question maybe, oh, fifteen years ago, maybe you might have had more of an investor type of answer. Well, maybe I would have got into investings... you would've had a very different answer.
Sean Donahoe: My needs changed. And evolved.
Phil Newton: And evolved, exactly. Yeah, it's very, yeah so. This is a common question that we... how do you start trading is essentially the hidden question, or what do you want as a trader, first of all? How do you envisage yourself trading? If you've not got the time to day trade, then to learn how to day trade really is pointless. But if you want more free time for whatever reason, you know, we come at it from two different perspectives, because you're a busy person. I don't wanna be busy anymore, because I've done that, and as a result, we wanna spend minimal time without having any degradation of the of your performance. And that's fine, but with that end goal in mind means that I'm not gonna day trade. It means that I'm not gonna do all those things. I'm probably not going to invest. I've not got the patience for investing ironically, despite that I get paid to wait. Because that's what we do as a trader.
I think if you could start from scratch, I think I would've tried to go more down, not necessarily the mathematically algorithm route, because the way that we both trade now, Sean, it is an algorithm. But we're trying to turn the discretionary decisions into a very clinical yes/no answer. So we still trade almost discretionary in that we have to have some interpretation, but we've both got it to the point where how's this situation happens. And we wanna be able to have a definitive yes. Is this chart going up in the last twelve months? Yes. It's an up trend. That's the type of decision. Because you know, that still is a discretionary interpretation, but we've managed to mechanize it to the point where we've got a yes/no answer, and that makes it an algorithm. Are we in a up trend in the last 12 months? Yes. Great. This looks like a great job. Is price retracing in an up trend? Our starter strategy is at the lower end of the Bollinger Band, and that's nice, so we're in an up trend, we're at the lower end of the Bollinger Band, looking left, we're at logical stopping points. All the usual things...
You know, we wanna be able to get yes, yes, yes all through our process to then put the trade on. Most people still consider that discretionary trading, so it took me a long time to get to there, so I think if I could start from scratch, I think I would've tried to mechanize that decision making process sooner. And I tried to, I just didn't know how to go about doing it. So a lot of it was just trial and error. So yeah I think that's what I would try to urge my younger self to do, try and mechanize those decisions.
Sean Donahoe: The funny thing is, though, and this is one thing we say a lot is it's taken 20 years to make it as simple as we've done it. Because we came to it from different angles, and I think we really had to learn those lessons to get to where we were.
Phil Newton: It's a catch-22 isn't it? It's a paradox.
Sean Donahoe: Yeah, exactly. If we could go back and knowing what we know now, then yeah, we'd be doing this from the start. But it's taken us a lot to go from different circular routes to get to the same point, and that's one of the very powerful things about what we do is, yeah, we could fast track that for you. It took us a long time to get there.
Phil Newton: But because that it makes it replicable is the other point as well.
Sean Donahoe: Yeah, and that's really it.
So okay, last question then. Are the traders who make money in the stark market smarter than us? Now I should-
Phil Newton: No, you can be dumb as bricks.
Sean Donahoe: I was gonna say.
Phil Newton: Dumb as bricks.
Sean Donahoe: Some of the traders I know who are very successful can't tie their own bloody shoelaces, you know? Now, also I've met some bloody geniuses who-
Phil Newton: Generally speaking, Sean, I firmly believe that academic intelligence is no indication of success in life.
Sean Donahoe: No, absolutely not. I would agree with that 100%.
Phil Newton: Now, it can help. It can help. I believe that the ability to know what to do with the knowledge, we might call that common sense for example, but the ability to know what to do with what you know is a greater skill. Because you can learn anything new you want, if you put your mind to it, but having the ability to apply that knowledge, that's what makes people seem smart or successful or...and again, that's in any walk of life. That's with sporting achievements or business or sporting achievements or business. Let's just stick there. Because that could be a big laundry list, but you get what we're trying to say. They don't have to be smart.
I don't consider myself a particularity smart person, but I suppose some could look at me and consider that I am quite smart. I've just figured out what buttons to press and in what order, but the secret skill is the ability to continue to do that every day.
So trading, when you've figured out strategy or you've got a strategy, it's like a production line. And to be quite frank, it is pretty
Sean Donahoe: To be honest, I've gotta say this and I've gotta put it out there, I don't want trading to be exciting. Because when you've got exciting, that's an emotion. When you have emotion-
Phil Newton: Oh, hard work.
Sean Donahoe: That's an influence.
Phil Newton: Hard work.
Sean Donahoe: And, hey, that's Vegas. That's not what we do. And while we say it's boring, that says well okay well why would I do it? Because of money, baby. That's, at the end of the day, it's the capital growth.
Phil Newton: It comes down to a business.
Sean Donahoe: It's making that... every dollar I have in my pocket or in my account or what have you, is an employee and it needs to be out there earning me more. It needs to be out there cloning itself and growing. If it's not, let's just stuff it under the bloody mattress and not worry about it, but it's never gonna grow. It's only gonna diminish. If you're not outpacing inflation, and I could go into a whole economic rant here, but if you're not growing your capital at a rate greater than inflation, then your monetary value is not increasing. If you just stuff it under the mattress, you think well that's safe because it never changes. No, inflation is gonna outpace what's under your mattress, which means your money is becoming less and less valuable as time goes on. So you need your money out there growing. It doesn't matter what you're doing, whether you're trading the way that we teach students, whether you're-
Phil Newton: Flipping on eBay as we like to talk.
Sean Donahoe: Yeah.
Phil Newton: You know, do something. What we said earlier, the best use of your time and your resources.
Sean Donahoe: Absolutely.
Phil Newton: Now my time and resources is different from yours, Sean. So you trade slightly different from even me, because you've got different time, different resources and different objectives. But I think if the best use of my time and resources is flipping beanie bears on eBay, then yeah. Great. That's what I'll be doing. At the moment, it's not. But if that's your best use of time and resources, then yeah. Go for it. Go down to the thrift store. Find something for a dollar and flip it for fifteen. If that's your secret sauce, then go for it. Do it. But this should almost just encourage you: go and do something with what time and resources that you have available. Maybe that's your stepping stone into saving for a trading account. Because really you wanna end up with enough money to trade and be financially independent, but you've not got the money or the savings, and a job's not gonna help you get there. So maybe you spend the weekend at car boot sales, or whatever the US equivalence is. Thrift shops. Thrift stores.
Sean Donahoe: Garage sales.
Phil Newton: Discount stores.
Sean Donahoe: Garage sales.
Phil Newton: Yeah. A garage sale. So maybe you spend some weekends there, you know, and you try and find those little diamonds in the rough and you can get this for a dollar and you can go and flip it for fifteen. You do that enough times, and you've made $100 in a day. You can buy it at the garage sale, flip it on eBay and you're making some money. Maybe that's what you do to save up enough money for your trading account. I don't know, I'm just throwing it out there. But that is the best use of time and resources if you've not got any financial resources to draw on to start trading.
And while you're doing that, you can spend a little bit of time learning the skill of training on Paper Trading or Demo Accounts while you're getting enough actual resources to be able to deploy the knowledge that you're fine tuning. I don't know, just throwing a random idea out there. What to do if you've got nothing.
Sean Donahoe: That's exactly it.
Phil Newton: We kind of tied those questions together. What to do if you're starting from scratch, you know, you're dropped off in the middle of nowhere with a pair of shoes and a horse.
Sean Donahoe: Indeed, and my gut
Phil Newton: Sell the horse.
Sean Donahoe: Yeah, exactly. Dear me, funny stuff. Anyway, with that being said. Let's rock out.
Automated: Don't forget, if you have a question you want to ask Sean and Phil, just go to and your question may be featured on a future show.
Uh oh. What's the smell? It's time to call out the Wall Street shenanigans, mainstream confusion, and outright hi jinks and hokum of so-called experts. Yep, it's time for Bullshit of the Week.
Sean Donahoe: Funny stuff. Now we're coming to the end of the show, and that is the Bullshit of the Week. And this one just made me cringe. Now, we're talking about the dotcom bubble, and my painful lesson was actually on a company called Yahoo, hoo.
Phil Newton: Hoo.
Sean Donahoe: And back in the day, that was-
Phil Newton: Back in the day.
Sean Donahoe: Yeah, back in the day, 1990. Or 1999, that was the-
Phil Newton: That is legitimately back in the day, you know, it's more than 20 years ago.
Sean Donahoe: It is. It was funny, I was actually talking about movies we're doing earlier on I think on a sidebar, my wife is always quoting lines from the movie Hocus Pocus. Disney movie, Bette Midler, Sarah Jessica Parker and everything else. It's a cheesy Disney movie, and she's always quoting lines from it, and I've never actually seen it. So she made me sit down and watch it last night, and it was absolutely hilarious. Funny, funny movie. And I just realized it was 1993 that movie came out. 25 years ago.
So back in the day, yes back in 1999, my first investment, my first foray into the markets was investing in Yahoo. Literally one month before the dotcom bubble burst, because everyone was talking about how internet stocks are wonderful and yada yada yada.
Phil Newton: And of course, on the internet the stock market only ever goes up.
Sean Donahoe: Absolutely. That's the lesson that I learned the hard way. So anyway. Now, it's funny because at this time I was actually in Nantucket, and I have lots of stock market brokers and traders that would come, like they'd go to the Hamptons, they'd go to Nantucket for the weekend and what have you. And lots of people saying, hey Yahoo, invest in Yahoo. Look at the Yahoo. It was a lot of these, I thought okay, well I'll put my money in the pot and promptly then January came around and the bubble burst and for the next year, it went up from about 90-ish dollars to about 118. And then over the course of the next year, it went down to about $10. So...
Phil Newton: Ouch.
Sean Donahoe: And I just kept riding that one, because buy and hold. I had no idea what I was doing at the time. So, learned that lesson the hard way. Anyway, so today's Bullshit of the Week-
Phil Newton: On the bright side, thought, just trying to think of the positive out of it, it sounded like you had actual shares, you had a cash transaction.
Sean Donahoe: That's correct.
Phil Newton: As opposed to a margin transaction.
Sean Donahoe: Correct.
Phil Newton: Where you only put a deposit down. Because you could've ended up owing more than you'd actually bought.
Sean Donahoe: Indeed, and that woulda been, yeah-
Phil Newton: But on the bright side, that could've been really painful.
Sean Donahoe: That could've been. That could've been. But no, I was smart enough to only put in money that I had, not leverage. So yeah, I was very grateful for that, believe me.
Phil Newton: There's a lesson there as well, on the sidebar.
Sean Donahoe: Abso-damn-lutely.
Phil Newton: You wanna invest money you can't afford to lose.
Sean Donahoe: Absolutely. So anyway. It's with-
Phil Newton: Anyway. Yahoo.
Sean Donahoe: It's with an interesting sidebar for that that I lead into this: so Yahoo has basically, let's just call it the remains of Yahoo. It's been bought out's lots of buyers looking at this over time, but it's currently held by a holding company, because one of the things I was saying when Yahoo was being looked at as a sold off and everything else, and it's just- let's face it. It's dead. It was a dead company, and it was a mess. But one of the things it did have was a lot of assets, a lot of patents, a lot of different elements that if the corporate raters came in and broke them off-
Phil Newton: A lot of groundbreaking technology and developments and, to use the phrase again, back in the day. You've still got some now.
Sean Donahoe: Yeah. So here's the interesting thing. The SEC, and this is where the BS is. The remains of Yahoo just got hit with a $35 million fine, because it didn't tell investors about Russian hacking. Now, again, there's a lot of political BS surrounding this story. But here's what Yahoo did: in 2014, Yahoo was hacked, and they say it was a state-sponsored actor identified as Russian. Let's just say a hacking group that is literally having ties to Russia, in some form, was compromised and they lost 500 million user account credentials were stolen allegedly. Okay?
Now, investors didn't learn about this until 2016. So the US Securities and Exchange Commissions find Altaba, which is the holding company that owns the remains of Yahoo, to settle accusations that the company did not properly consider whether to inform investors at the time. Now, again, they should have and everything else.
Phil Newton: Seems like a little bit of a low blow, if you ask me.
Sean Donahoe: To me, it's a kicking a dog when it's down. You know?
Phil Newton: I mean, I suppose like the Facebook thing. Yeah, I mean perhaps people should have been told about it sooner, but they did something about it straight away. Hey, you know, what happens, happens. They can't change it, but they took lengths to prevent it from happening again.
Sean Donahoe: Yeah. I-
Phil Newton: And I think Yahoo did the same thing, as I recall.
Sean Donahoe: Yes, they did. And you know, at the end of the day, once it came out, they did all sorts of other stuff, but not telling investors. You know, okay, yeah that's a big no-no. And especially in the age of data breaches now, this is one of the biggest data breaches back in the day. But you know, that's a different scenario now. Anytime there's a data breach, you know about it almost immediately, and all you should do, and most companies are doing it. I'm sure there's a few that aren't, but at the end of the day, yeah, this is seriously kicking a dog when it's down.
But yeah, Altaba has basically settled for $35 million for not telling investors. And again, that's the SEC stepping in, kicking a dog when it's down, but at the end of the day they also realize that this company now has a lot of assets that it's processing and as a holding company of what remains. And I mean, Yahoo still exists. We call it the remains of Yahoo, but Yahoo still exists. Yahoo's site's still up and everything else, but yeah. They're just giving them a swift kick in the gonads.
Phil Newton: It's almost in the internet equivalent of Davy Jones' locker.
Sean Donahoe: Yeah, pretty much. I mean, it is a pretty weird situation, and yeah. I mean, the fact that Yahoo still exists, to me, is a miracle in itself. But hey, what can you do.
But there you go. That's it. That is the BS of the week, and-
Phil Newton: Better late than never, SEC.
Sean Donahoe: Yeah, well, kind of a few years late and a dollar short. But there you go. But yeah, kicking a dog when it's down.
Phil Newton: That would be like Blockbuster trying to collect on the fines after it's gone bankrupt.
Sean Donahoe: What kind of-
Phil Newton: On a video late fee.
Sean Donahoe: And you know what? Truth be told, I still have a Blockbuster movie in one of my drawers.
Phil Newton: They're coming after you.
Sean Donahoe: That's it. I actually, no, it's such funny I came across it the other day-
Phil Newton: You're gonna get a letter. Didn't they close the very last store of Blockbuster the other week?
Sean Donahoe: They may well have done that, didn't even know there was anything left.
Phil Newton: No I didn't, I only saw it in the newsfeed. But the last official Blockbuster branded store has closed, but before they do, you're gonna now get a letter for late fines.
Sean Donahoe: That's it. Well this one is from like, god, it must be eight years ago. I found it in an old box of my DVDs, because I was looking for a backup of an archive of something I did ages ago for a client.
Phil Newton: And you found an old yellow VHS box.
Sean Donahoe: No, I found an old Blockbuster cover and I opened the box, and I'm like oh shoot. I should have returned that one.
Phil Newton: So it's all your fault. It's all your fault why they've gone busted.
Sean Donahoe: That's exactly it. That's exactly it. Now, I could tell you a funny sidebar story. I was talking about when I was in Nantucket. I actually met the CEO of Blockbuster at that time, and we were talking about his business model and everything else. And we were talking about his business, and I said it's not gonna be too long... and this is way, way like I'm talking '99. Said well it's not gonna be too long until bandwidth and technology catches up that you'll actually be able to download your movies and, again, looking at the bandwidth and the doubling of internet speeds. I mean, right at that time we were on dial up.
Phil Newton: Because they were just starting with postal, because DVDs were quite popular at that point, as we made the full transition from VHS. But so it was an affordable way of actually doing postal services, and they never really picked up on that either.
Sean Donahoe: No. No.
Phil Newton: Netflix ran with it, because you know that was their business model originally.
Sean Donahoe: Yeah, exactly.
Phil Newton: And like you said, the bandwidth side of it, eventually took off just a few short years later.
Sean Donahoe: Yeah and then the Blockbuster CEO laughed and said, "I'll never happen."
Phil Newton: It never catched, honestly. Yeah.
Sean Donahoe: I love quoting that story, because all these years later, look what happened to Blockbuster and look at the streaming industry. Massive. But I remember that conversation and I quote that conversation every now and then. It's like never say it's never gonna happen. Always look to the future, and if you're not adaptable, you're gonna disappear. And sure enough that's exactly what happened.
Phil Newton: Even James Bond knew. Never say never.
Sean Donahoe: Indeed. Indeed. Bloody good. And Sean Connery's little comeback he made for that. Love that movie.
Anyway, with that being said. Ladies and gentlemen, that is it for this week's show. I do hope you enjoyed it and learned something from this. Thank you for listening, and please remember that this show isn't free. We say it every week, because we wanna make sure that you drop us a 5-star review. Just go to, where you can subscribe and review us on your favorite way to hear the show. This helps us get this message and everything we talk about out to investors and traders just like you.
Phil Newton: Sorry, my parrot's just doing the falling sound.
You can also connect with us on Facebook and the Twitter machine at the same link. You can go to I think we've also got an address, if you're worried about all the data breaches. You can send us a postcard.
Sean Donahoe: That's it.
Phil Newton: What was it you used to say? Answers on a postcard.
Sean Donahoe: Answers on a postcard.
Phil Newton: Blue Peter style.
Sean Donahoe: Dear me. British Popular references, if you missed it yes.
Phil Newton: Yes. Anyway, and what have we got coming up next week's show, Sean?
Sean Donahoe: Well, we're gonna be talking about baskets, and getting a bigger basket.
Phil Newton: You baskets. You baskets.
Sean Donahoe: You absolute basket. We're going to hell in a hand basket, that's what it is. But we're gonna be talking about baskets. We're gonna be talking about portfolios and we're gonna talk about that from different angles and what-
Phil Newton: Do the Jaws line. We're gonna need a bigger boat.
Sean Donahoe: We're gonna need a bigger boat, yes indeed.
Phil Newton: Get a bigger portfolio, dude.
Sean Donahoe: Absolutely. So we're gonna be talking about portfolios. Rather than individual trades and looking into those trades, we're gonna be looking at the basket. So with that being said, we'll rock on. See you next time.
Phil Newton: You baskets.
Sean Donahoe: Absolutely. You absolute basket, take care.
Phil Newton: Bye for now.
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[00:06] Show Introduction

[01:13] Sean: Today, we are talking about the one thing most traders absolutely hate talking about.

[04:02] Phil: The elephant in the room, the thing that people don’t want to talk about.

[04:18] Phil: It’s just like every business out there. Some days are going to be good, some days are going to be bad. On average, just like every other business, that’s what we’re aiming for.

[04:30] Sean: What is the elephant in the room? It is losses!

[04:35] Sean: Losses are a big part of trading. For a lot of people love talking about their wins.

[04:55] Sean: There’s also a psychological element to it where it actually physically pains us. There have been many studies in regards to not only the physical loss, but also the mental, even if you’re losing on paper. When you lose money in the markets it’s just numbers.

[05:43] Phil: I’ve seen multimillionaires break down over a $50 loss. In proportion to their existing wealth, it’s not a great deal but the psychological trauma of yet another loss.

[06:20] Phil: How do you overcome that element, is reframe the way that view a losing trade. For me, it’s nothing to do with the monetary loss. If I’ve done everything that I set out to do from my trading plans view points, I know that losses part of it.

[07:00] Sean: The emotional toll of a loss physically pains us. That then leads us away from the thing that causes pain. It’s very important that you understand, if you do everything wrong but it still wins it’s still a loss. We have inherent fear of loss.

[08:15] Phil: It’s an emotional reaction, it’s engrained to our DNA.

[08:29] Sean: We inherently walk away from things that cause us pain, even if it’s the right thing to do. If you have a positive expectation strategy that is around 7/10 of your trades that means 3/10 are going to be losers but that’s okay.

[09:08] Phil: Let’s reframe it to help people understand. They’re not losers, they are monetary losses.

[09:23] Sean: If you then take some of those 3/10 monetary losses, are you going to deviate from your strategy because you don’t want to feel that pain again? Unfortunately most people do.

[09:48] Sean: One of the things I’m very much an advocate of is the divestment of emotion so you can take that dispassionate view of it’s just numbers.

[10:27] Sean: There was a study by a French team, they had a group of about fifty people they were running this experiment with. They were all testing traders, if they have a positive expectancy they would take the risk and most people were doing it. However, they brought in the element of loss, what happened was most people became hesitant and it really warped their approach to the test.

[12:40] Phil: If you apply your strategy every trade’s a winner.

[13:54] Sean: It’s the warping of the strategy that creates the most liability in a trader’s portfolio. It’s a habit you can unlearn but you’ve also got to have a strategy that has a positive expectancy.

[14:20] Phil: We always compare it to having a real world business, by not putting the trade on because you’re fearful it would be like standing outside your business and not letting any customers in. You just wouldn’t do it in the real world, yet traders do it all the time.

[16:15] Sean: How do you handle the emotional rollercoaster of the loss? Put more on.

[16:24] Phil: It’s counterintuitive, but it really does work.

[17:12] Sean: My intent is to put my trades on in the morning, come back in the evenings, how did I do for the day?

[19:38] Phil: It’s usually around once a week I’ll hit 100% return on capital, that’s what I would consider not necessarily a big stock move but from the options point of view that’s like a home run.

[20:30] Phil: We expect to win money on average. This is how you get past it, that cycle of fear or not putting the trade on, or having yet another monetary loss. Reduce our position size, increase the frequency, on the assumption you’ve got a positive expectancy strategy.

[22:05] Phil: I‘ve got a strategy that 95% of the time it loses money. But it produces absolutely phenomenal profits when you catch it, produced about 75% of my year’s profits. Most people can’t trade that for the fear of losing.

[25:04] Sean: If you do make a mistake, if there is a monetary loss, you’re not getting your positive expectancy, it’s time to re-examine your strategy.

[25:20] Phil: Is it a one-off?

[26:10] Sean: Some strategies require certain conditions, certain marketing styles.

[27:36] Sean: If you’ve had a big draw down, don’t be afraid to take a break. Work within your psycological limits.

[28:48] Phil: Okay, so damage limitations. Start a recovery plan.

[30:50] Sean: Use your losses as inspiration. If you’ve made a mistake, it’s a lesson.

[31:13] Phil: When you experience something you don’t want to experience again, what rule can you put in place to prevent that from happening again.

[32:55] Rebel Trader Tip of the Week

[33:00] Sean: You need to keep everything in perspective. You need to treat it as business.

[35:08] Phil: Some people treat it like a hobby. They don’t transition, the reality is it is an expensive hobby.

[37:08] Phil: A lot of people do make that progression of the fastest way to success is to find some kind of mentor or coach. Learning how to day trade is not great if you don’t have the time to day trade.

[38:36] Quickfire Round

[39:23] Sean: Is it still worth trading Forex?

[40:10] Phil: Broadly speaking, yes, it is but as a trader I’ve got to figure out where is my best use of time and resources. The vitality isn’t there there any more.

[43:16] Phil: If you could start from scratch, where would you start as a trader?

[43:24] Sean: Knowing what I know now, I would be options. I started off as an investor, with a long-term buy and hold mentality. I had a few very painful lessons at the start of the dotcom bubble, took a big hit and that was a big loss for me. If I could go back in time and change one thing, I would be catching the sorter term positions.

[49:36] Sean: Are the traders who make money in stock market smarter than us?

[49:55] Phil: I firmly believe that academic intelligence is no indication of success in life.

[50:03] Sean: I would agree with that 100%

[52:20] Sean: If you’re not growing your capital greater than inflation then you’re money is becoming less and less valuable as time goes on so you need your money out there earning.

[55:00] Bulls**t of the Week

[55:30] Sean: We’re talking about the dotcom bubble. My first foray into investments was Yahoo literally before the bubble burst.

[58:24] Sean: Yahoo has been bought out by lots of buyers over time, currently held by a holding company. The remains of Yahoo just got hit by a $35million fine because it didn’t tell investors about Russian hacking. In 2014, Yahoo was hacked, a hacking group that has ties to Russia in some form was compromised and they lost 500million user accounts credentials were stolen.

[1:00:12] Phil: Like, the Facebook thing, people should have been told about it sooner. They took lengths to prevent it happening again.

[1:04:20] Sean: Always look to the future and if you’re not adaptable you’re gonna disappear.

[1:04:36] Sean: Okay, thats it for the week. Thank you for listening to the show! Remember, that this show isn’t free. Drop us a five-star review, go to where you can subscribe and review us. This helps us reach more traders and investors just like you.

[1:05:08] Phil - you can also connect with us on Facebook and the Twitter machine at the same link.

[1:05:32] Phil: What have got coming up next week’s show Sean?

[1:05:35] Sean: Next week we’re talking about baskets and getting a bigger basket. We’re going to be talking about portfolios and from different angles.

[1:06:06] Sean: That being said, see you all next time.

[1:06:14] Phil: Bye for now.

Resources & Links Mentioned in This Week's Show

3 Key Takeaways From This Show

  • Losses are a part of trading same as with any business
  • Keep perspective on your goals, and what you want out of trading
  • Even if you have a monetary loss, if you did everything right in your positive expectancy strategy, it’s a winning trade.

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