Rebel Traders 055 : Wrangling Your Portfolio

No portfolio is perfect but fixing and wrangling an out of control portfolio is critically important if you want consistent and solid returns…

Many people focus on their individual trades… However, often times the point of weakness in their trading is not in the individual trades but in actually managing the full basket of stocks in their portfolio. So, we’re going to dive in to what you can do to not only wrangle your portfolio back under control but how you can actually fix a broken portfolio…

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Sean Donahoe: Get rollin', rollin', rollin', keep those trains a rollin', rawhide! Okay that's enough of that. Let's do it.
Automated: Rebel Traders takes you inside the world of two underground monster traders. We 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. I have no idea where the hell I was going with that, but, I was thinking it would be a good idea-
Phil Newton: Not a long and successful singing career by the sound of it.
Sean Donahoe: Yes, yes. I can carry a tune as long as it's in a bucket. That's it. That's as far as it goes. But I couldn't resist because we are wrangling portfolios today. And I am joined as ever by my partner in podcasting, Mr. Phil Newton. How you doing sir?
Phil Newton: Pretty good today. Pretty good. It's a nice sunny day in the UK. I think it's going to warrant ice creams and lolly ices at some point later today.
Sean Donahoe: Or a Flake 99 or a Coronetto if you're in the UK but there you can't if they still even do those. We are actually recording this on the morning of fourth of July, so the markets are closed. It is Independence Day or ungrateful, for the British, the ungrateful colonist day. But hey, you know what, bygones are bygones. It's all good in the hood.
Phil Newton: It's all history.
Sean Donahoe: Abso-damn-lutely. And again, markets are closed, so it's a lazy day for us. Yes, it's a lazy day for Phil every day as we know. But it's also-
Phil Newton: Even more of a lazy day.
Sean Donahoe: Yeah, there you go. I'm putting my feet up as well for the day. But we decided we would record the podcast and have a little bit of fun here. Here's the thing. Many people focus on their individual trades and getting their trades, and we talk about that a lot. However, often times the point of actual weakness in their trading is not the individual trades, but in the actual managing of the full basket of stocks in their portfolio. So what we're going to do today, ladies and gentleman, is dive into what you can do to not only wrangle your portfolio back under control, but how you can actually fix a broken portfolio, starting now.
Phil Newton: And also later after that we've got the Rebel Trader mailbag, your trading questions are answered. We've got the continued favorite section of everyone, the bullshit of the week. I think it's just still because I get an early swear word in the show.
Sean Donahoe: There you go.
Phil Newton: That's my favorite. We call out the hype, the hyperbole, the shenanigans, the nonsense, and there's always, somewhere in amongst all of our own shenanigans we'll answer the core question, or we'll certainly ask the question and we'll maybe even answer it for you as well.
Sean Donahoe: Maybe a change yes.
Phil Newton: Yes, where's the trade?
Sean Donahoe: It's all good. So where are we going to start today? I guess the first thing when you're looking at your portfolio and you're getting more professional about your trading and everything else, is that you start realizing that it's not just about the trade, the strategy itself, and everything else, it's what you do with your entire portfolio. Because like what we do, to use really good grammar there.
Phil Newton: Phillism.
Sean Donahoe: Phillism, yes. Like what we do. We, as we trade baskets of stock, we are managers of the multiple departments in our business that is trading and the portfolio really controls everything that we per se do. It's not only what we've got running for profit at the moment. It's the capital management, it's protecting our downside risk, monitoring our exposure, and many other aspects. But a lot of this comes down to defining the purpose of why and what your goal is as a trader. Because purpose defines focus.
Phil Newton: I think it's the difference between, it's the long term and short term difference. Like any business you want to be in business for the long term. Whereas most traders are just solely focused on the next trade-
Sean Donahoe: Profit. Yeah, the next profit-
Phil Newton: -next trade. And I always used to think about this as anyone can get lucky with a trade, but I'd rather, you know, and they're all trying to be short term lucky. I'd rather be long term successful than short term lucky.
Sean Donahoe: Indeed.
Phil Newton: That's really what we are trying to get to here.
Sean Donahoe: The one analogy I have for this, this is one thing that I was explaining the other day to a student, was short term goals for trading is like playing Russian Roulette. Short term, first click, you might get lucky.
Phil Newton: Anyone can get lucky.
Sean Donahoe: Exactly. In the long run, there's only six shots in that chamber. It's not going to end well. We always look for the long term, because ultimately it's what your goal is. Are you looking to boost your retirement? Grow your capital that you have available? Or just so that you can, you know, live the, and I put it in quotes, "lifestyle". I don't want to sound like that guy. But you know, at the end of the day, a lot of people trade just because they want the rest of the day to themselves? Ergo, Mr. Phil Newton, because-
Phil Newton: Yeah, a guy can pretty much do whatever he wants. It didn't happen over night, surprisingly, but it is possible. I think that's what it comes down to. I mean for most people it's something else that they do but it's not an all consuming, or it doesn't have to be an all consuming time intensive activity. Which is really my purpose for mentioning that it doesn't actually take very lot of time and I do have more of a lifestyle around what I do. Because I don't want to do the 12 hour days anymore. But you know, if you want to do other things with your day, sure, why not? You can do the act of trading.
I mean, thinking about it, another thing that kind of trips people up is that they think looking at the charts, flicking through charts after charts after charts, looking for some type of trading opportunity is actually trading, but it's just filler. It's completely unnecessary. But like if we had that kind of business office type of environment, it would be like watching that guy walk around the office with a sheet of paper in his hand trying to look busy. That's the trading equivalent of looking busy.
Sean Donahoe: And I can't think of a more boring waste of time than doing that. I would rather have something, again, this is the process that we go through a lot is we, literally filter out most, 99% of the noise, only focus on the ones that are worth looking at, and again, we've got some training on that if you go to demand. We actually bread down our entire process there. But it is a huge waste of time, flicking through chart after chart and doing that entire monkeyball process as I call it. Because at the end of the day, time is our most valuable resource. Why spend hours and hours flicking through chart after chart, hoping to find some nugget of information, if that's not part of an efficient way to trade?
Phil Newton: I mean, it sounds cliché, but it's cliché for a reason. We've all got the same amount of time. It's just making sure that if you are going to trade as it were, again, it comes back to you don't have to be spending hours doing it. Just be, and again this ties in with your first point as well, is if you've got a defined purpose of how you want to go about trading and not just to have your long term what you're trying to achieve from it as well. If you've got a very clear purpose, you can be very efficient with the act of what you're trying to achieve.
Sean Donahoe: Absolutely. One other thing that I'd like to kind of bring into this because we're laying the foundation of okay, where are we at right now? And it's a process that I do with a lot of students. Where are you at right now? Where do you want to be? And how are we going to connect those two to get you there?
So, one of the things I ask a lot of students right off the bat is, how many active trades do you have right now? Now, there's no right answer. There's not, oh I've got too many, or, oh, I've got too few, because it's going to depend on the strategy and your approach to trading, but you need to have an awareness of, okay, how much is in my basket, and based on my purpose and my goals for being a trader, is that a good amount, or is there a lot of wasted potential trades in there? Are there ones that you've just put on and then you're not managing or forgetting about and they're losing you money? Or overall you've got some great trades in there but you've got other ones that are kind of eating away at your capital because you're not managing them correctly and you've got too many of this waste in your portfolio. Phil, what do you think about that?
Phil Newton: Initial thoughts on having ... You've got too much exposure, that's essentially what we're kind of talking about. But I suppose if you've got, is it good exposure? Is it bad exposure? How do you quantify that? And again I suppose ultimately, how you determine whether you've got a bad mix of trades is determined by your strategy. I mean, to be fair Sean, right now I've got a bad mix of positions in my portfolio, but that is completely market dependent and it's based on the type of strategy that I have. Again there's no real reason to call them good or bad, only from the point of view of are they making or losing money. My thoughts around this is I think the first thing we should always do is reframe what we consider a good basket or a bad basket or a good position or a bad position, by reframing what we define as a good position or a bad position.
Sean Donahoe: Absolutely, because again, like you say, strategy determines if it was a well executed trade based on a positive expectancy strategy, then it's not a bad trade, it's just maybe producing negative returns right at this moment. But a lot of people have a scatter shot approach.
Phil Newton: And as the saying goes, it ain't over until the fat lady sings.
Sean Donahoe: Well indeed.
Phil Newton: There's nothing against fat ladies, by the way, it's just one of those little phrases. But to the point, it's what do we qualify as a bad trade? Just because you're losing money doesn't necessarily mean it's a bad position. So I like to reframe the position and say, okay, if I followed this strategy to the letter, and I would, because you don't know what the result's going to be after you've clicked send on the ordering screen. So you truly don't know what the outcome's going to be. We've got an average expectation, but we literally do not know what is going to happen next. No one can predict the future. However, if we've put that trade on, and we've followed our plan to the letter, then for me that's a successful trade. So, unless I deviate from that plan, then that's when I would call the trade unsuccessful. That's the difference that most people start to panic over, because they'll have maybe three, four positions, and I don't think that's enough for a start with the portfolio-
Sean Donahoe: No.
Phil Newton: -mentality that we are always advocating. You've got three or four positions and then what most people tend to do is manage those positions and see what the outcome will be and then they'll put the next half dozen positions on. And for most people that's what they consider a basket of positions. Now if that's what your strategy dictates then sure, that's fine, but if those positions under perform from a monetary viewpoint, is that really a losing strategy? Is it really a losing position?
We addressed this, when was it last week? No it was the week before, wasn't it? In a previous show where we need to reevaluate what that losing position is and define what that means to you. Just because you're losing money doesn't necessarily mean that it's going to be a bad position. Reframe the evaluation of winning position or losing position is, and as we are always harping on about, increase your frequency of trades to get more of a basket so you've got more of this average experience and you don't have to be so reliant on those two or three positions that maybe aren't performing as you might expect.
Sean Donahoe: That's a very good point and one thing that I always recommend is something I do myself because it really helps me stay organized, is because I might be running multiple strategies at the same time. I mean we talk about trading plans and trading logs where you execute your certain strategies.
Phil Newton: Technically our strategy and what we kind of advocate, it is technically multiple strategies within a strategy.
Sean Donahoe: Yes.
Phil Newton: But the way that we present it, it's just one big strategy. Cause we've got this kind of like, tree framework that kind of guides you to the one strategy that you're gonna trade today. But also it does multiple potential choices for us. So, and for a lot of people that can be confusing when they're trying to, as you said, organize their strategy. But I think the first stage of that organization is to reframe whether it's-- is it you, the strategy, is it the market conditions. Just because you're losing money doesn't mean that it's a bad situation to be in. It's just the situation that we're in right now.
It's like the market conditions as we're recording this. They're pretty stagnant, from a trending strategy point of view. It's not great. It's up a day, down a day, markets are up a day, down a day, the yo-yo and back and forth between what is basically uncertainty. But that doesn't mean that my strategy, because it's currently underperforming, and again, I'm not ashamed to admit it, it's just the way it is. Market conditions. So I know that over many many years, that situation's gonna change. Is that gonna affect the way that I structure and organize my trading choices? No. It's really not. And I think that for most people is one of the most difficult things when they're organizing when they, or if they, put the next trade on.
Sean Donahoe: Very much so. And one thing that we do, or that I do in my portfolio, is I actually organize all of my stocks by the strategy that's actually applied to them. So if I'm long, one particular strategy, I have a series of trades that are listed in the long side of that portfolio. If I have short positions, then I have that. And then what happens is it allows me to then at a glance, see exactly how each section of my strategy, like the tree that Phil just mentioned, each one of them is broken down and I have allocations to each strategy that allow me then to see, 'Okay, this group is performing okay, this group is performing ...'
That way they're not all mixed up and you're having to look at each one. 'Crap, which one did I apply to this? I've now gotta find it on my trading log. Oh yeah, this one was a short position with strategy X, and it was meant to be doing this.' By having it right organized in your portfolio that way, it allows you to quickly at a glance see, 'Okay, this group that all has this one strategy, they're doing X.' But it also allows as market conditions change, for example we've gone from the trending, the main markets have gone from trending up to a little bit range bound, to consolidation, to all over the bloody place in the last few months. There's no one way that you would categorize--
Phil Newton: There's no wind in the sails.
Sean Donahoe: Exactly. That's actually the perfect phrase.
Phil Newton: There's no wind in the sails, yeah.
Sean Donahoe: But when you have your portfolio, this is one thing that I do a lot. It helps me know the winds of change, so to speak, is when I see a category shift I notice it right away in particular groups in my portfolio because they all change. You notice the wind changing from one to another. It kind of tells you that hey, there is a shift. But if you have it all mixed together and you've got the positive and the negative all affecting and you've just got this one bottom line summary of where your capital is, it's hard to then tell.
Phil Newton: It's difficult. Think of them like, choose the business example. Think of them like departments. You opened the show with saying it's like a department. That's what strategies are like. They're your department heads, if you like.
Sean Donahoe: Yes.
Phil Newton: But that's a great way of thinking about it, because, I just want to kind of ask a question then answer it. Cause it's going to be how do you do that? I think with the way certainly that we do things, and that we advocate, you don't have to consciously do it. The way that the market's set up and the way that the logic chain for selecting a strategy unfolds, is trending the strategies are not going to set up with great frequency, but ranging strategies will. And that's just because we've got this kind of, I wouldn't say it's a Frankenstein, but it's a hodgepodge of strategies within--
Sean Donahoe: It's a hybrid.
Phil Newton: --a larger strategy. Yes. But what you'll find, is if you've got a more robust strategy that can weather lots of different market conditions like what we have. And there's a reference to this, there's a reason we say things like that. But there we go. If you've got that logic, what you're gonna find is that the markets will dictate what sets up and when things set up, so trending strategies will set up more frequently when there is trending market conditions. Now they will still set up as we're seeing right now when the markets are pretty stagnant, but there's gonna be less of them, if that makes sense.
So what you'll start to see, the tides of change come back, the question of how do you spot this. You don't have to consciously do it, anything consciously, because the strategies will set them up. So what you'll notice is more trending strategies are setting up. So one scan that we have will find more opportunities compared to another scan when we're doing that initial, 'What are we gonna trade today?' assessments. And you're gonna get more of those in the uptrend type setups when markets favor the trending conditions and by comparison to when the markets are ranging, you're gonna see less ranging conditions. I'm not sure if I'm explaining that point too well.
Sean Donahoe: I think you did.
Phil Newton: It all ties in with that organization and, cause I'm just trying to preempt the question, cause I know we're gonna get an e-mail about it saying well how do we do this? How do we implement the organization and selecting the right strategies in the right market conditions? What I'm suggesting is if you've got three or four different market strategies for market conditions, you don't have to worry about it so much. That logic chain will take you through ' Oh, the conditions are right for a trending set up, or the conditions are right for a ranging setup,' and just by that natural selection, you will have the right strategy without having to stress too much about that evaluation of the landscape, as to whether what should I be treading today, and more specifically what strategy should I be treading today.
Sean Donahoe: Yeah, very much so. And one thing that we also need to mention at this point, because we're talking about how the markets are going and everything else, is to actually measure each stock against the main markets. Beta weighting against the S&P 500 is a prime example. Which is kind of the good, average measure of how the overall markets are performing. Measure it against the progress of the S&P 500. So we tend to do that.
Phil Newton: Again, just to come about why do it. Is if the markets are up five points, and your portfolio, because you've beta weighted are up 10 points, then your portfolio is outperforming the markets. It just gives you a benchmark against what the indexes are doing. So right now my portfolio, compared to the market, because the market's stagnant, when we say the market, like the S&P 500, because that's going nowhere and hasn't been for coming up to three months now. You know, if my portfolio is profitable on the day then I'm outperforming the market. And last month I outperformed the market, as we've just rolled on to a new month. Because hey, it was a profitable month. And effectively the market's been, it's effectively no change from the other month. So I can quite literally say, on closed positions, not just open positions, I outperform the markets. And that's what it allows you to do.
Sean Donahoe: Very much so. Now, the other thing that I want to kind of switch to here, is we are all about systemization. About efficient use of time and everything else. And one of the things that we advocate, bang a drum, I would say bongo time, but I don't want him to go rummaging around under the desk to find his bongos--
Phil Newton: I need to get them ready, so whatever--
Sean Donahoe: One of the things we talk about is the management routine. And it's, okay, what is the process? And this'll be part of your training plan, is how you approach your trading day, so to speak. And the first thing, one of the first things we do is, first of all, mine is I want to go look at the general markets, I want to see what's happening in the main indices. I also check international markets before the market, I want to see if there's anything that's likely to have a ripple. But I also check volatility index, certain commodities ...
Phil Newton: I seem to be in a 'how' mood today, Sean, how do you do that? All you do is go look at the overnight futures, Globe X, mini S&P futures, mini Dow futures, mini NASDAQ, you've got the ... that's all we're talking about. Maybe oils being affected overnight. Cause you know, I seem to be in a bit of a 'how' mood today Sean, I don't know why. How can we do that? Lots of implementation techniques.
So all we're doing is looking at the overnight markets, and see what, if anything, has impacted the overnight futures. Cause sometimes, what we can see, and we've had this discussion at length in the past, is sometimes what you'll see is there's increased overnight volume on S&P futures. And maybe there's been an overnight movement which will cause the cash markets to gap open when the official opening bell happens. And you'll have all that information to hand, you'll have a kind of a finger on the pulse of what to expect for the day. And I always found it was a good indication that was gonna be potentially interesting for the day, simply by looking at what is described as the overnight futures, and that's what you're talking about there, isn't it Sean?
Sean Donahoe: Yeah, absolutely.
Phil Newton: It just gives you a little bit of a preemptive, not really of too interest, it's probably gonna be a bit of a dull day, but there's been some movement overnight, and there can be some really huge movements overnight, and you'll see that translated on the charts and you'll be, 'Oh hey, maybe it's gonna be an interesting day.' And there's no surprises then.
Sean Donahoe: Yeah. And then from there, just looking at the general markets, I go look at my portfolio. And that is part of my management routine, is do I have anything I have to manage, any profits I need to take. Before I even put my trades on for the day my first thing is I also go look at the portfolio. And the way to, this is actually something I apply in my other businesses as well, is before I start my phone calls, usually about 5-6 AM what have you, because I'm dealing with the international end of day in different parts of the world, all of my business managers and my project managers file a report overnight, so it's the same as me looking at my portfolio, I get my reports and I look through them all to see, 'Okay, is there anything I have to do and address before I even start the rest of my day?'
So it's the same process with the markets. I look at the futures markets for certain areas, and everything else, see what's going on, okay, those are kind of like one report. Then I go look at my portfolio, I want to see where all my groups are and everything else, is there any individual position that I need to adjust for or set up for a close, take some profits, and what have you. And I'll look at all of those before I put my trades on for the day, because again, it's kind of like that hierarchy. Looking at the broad, looking at the more specific, and then getting down to the granular level, and that way you've got the wider picture coming down to a narrow focus, so that when you actually attack the markets or attack the day, you've got everything in your head as one big picture. And that really helps me a lot. I mean Phil, what do you say about that?
Phil Newton: Well I was just gonna add on to your thing, that while you list all those things as an itinerary, it's not time intensive, is it?
Sean Donahoe: No, it's very very quick.
Phil Newton: It's like quick glance at the market as the market opens, has my portfolio jumped in one direction or the other, it's, from a time point of view, five-ten minutes do you reckon?
Sean Donahoe: Yeah, about that.
Phil Newton: To do all that at a glance.
Sean Donahoe: About 10 minutes. 10-15 minutes total.
Phil Newton: That's all I want to try to point out there, Sean. Because it's one of those things I say, it takes longer to explain what to do than to actually do it. If you were to describe how to safely cross the road. Well firstly we're going to come up to the curb, in the UK we can cross anywhere on the road.
Sean Donahoe: Yeah, we don't jaywalk in the UK.
Phil Newton: But you're gonna look left, you're gonna look right, you're gonna make sure the road's clear, and then, if it is clear, you're gonna step across the road, you know. The point I'm trying to get to is it takes longer to describe to see if the road's clear than to just, left, right, okay, it's clear, step out into the road and cross the road. It's one of those things it takes longer to explain. And that's all I wanted to try to point out, so, you know, just for our listeners. It sounds like, 'Oh, I couldn't do that every day.' It's really really quick. It's really efficient. That's what we're trying to get to. Cause again, we're products of our own system, we practice what we preach, and that's exactly what we do.
Sean Donahoe: Yeah, exactly. Just to talk about the general markets. What I do is I have one work space in my trade station that has 12 charts on it, they're all cascaded, so they're all next to each other, so you can just glance from one to the other, I could look at the metals markets, I could look at the main indexes, I can look at all that, and it literally takes me 5-10 seconds, I can look at them all. If there's anything that catches my attention, then sure. But very quickly you get that pattern recognition process where you can see something has dramatically shifted because you're already familiar with it from yesterday and the day before. So you already have the trend, so to speak, or what you're expecting.
Phil Newton: It's like the index files just being updated, you don't even really need to update, if you're looking at the inter-day charts, that little snapshot from yesterday to today, which is not that much. I've gotta admit, Sean, I don't look at the charts anymore at the moment, I just look at the index and the number of points we've gone down and as a percentage we're down, I look at the percentage of movements so I can see literally everything in a very short table without looking at the charts.
Sean Donahoe: Very very similar process, but it's just different ways to do the same thing.
Phil Newton: Yeah it's the same thing because I can see at a glance, and because twenty years later I can build that mental image in my head. And that's just something that comes with experience. And you know, it just depends on whether you do it I guess. The thing about management though, routine, where we do differ, is I, and this always freaks people out, I do not manage losing positions.
Sean Donahoe: No, no, that's exactly it, because it's built in, it's baked into the strategy, the specific strategies that you do. I've got some that are not in that vein, so it's only those that I might look at.
Phil Newton: I appreciate that. So I do not manage losing positions. I want to emphasize that because the decision I made a long time ago, and one of the questions that we frequently get in one form or another, is when do you close a losing position? So the first thing I want to point out is I advocate using stock options as an alternative to trading stocks or CFDS or Forex. So the risk on the position is baked in on the entrance and the exit.
So the price of the option, like a deposit, is fixed. That is the price that I will pay should it not go right. And I will only pay that price on the day of expiration. Cause if it's wrong it's gonna expire worthless. So, I've got to say it's 45 days. I buy an option with 45 days worth of time and it costs me $2 per share. So. I've got 45 days to be right. So between now and then happening, I'm not going to do anything. I'm going to give it as much time as possible. So think about that. It's like being stopped out. It will be closed for me, if I'm wrong, on the day of expiration.
Sean Donahoe: Yeah.
Phil Newton: That's a very different way of trading compared to the traditional way where you buy 100 shares, for example, and if you're wrong, you'll be stopped out. I'm holding my fingers up and doing the air fingers thing. 'Stopped out.' And your position will be closed if you're wrong. Now I don't have to worry about that, because what you and I both know, Sean, is how many times have we been stopped out in the past when we've traded that way, only to then see our original trade idea turn around, and then be profitable.
Sean Donahoe: Everyone has their horror story in regard to that.
Phil Newton: Everyone ... It happens all the time. So this is where you've gotta think about usually, reentries. And maybe you have two or three bites out the trade idea before you give up on it. And then, surprise surprise, it turns around and does what you thought it was gonna do in the first place. So if you eliminate that experience, the management, the closing out if you're wrong, I don't have to. I've done that on the entry just by the sheer fact of trading with stock option and giving myself a time limit. If I'm wrong in that 45 day period, then something's not right. I want to be, I should be making money, on average, in about 20 days. Ideally, the shorter the better, but that's what I'm looking at. So from a time point of view it's going to time out. Don't worry about it.
So that's what I mean by I do not manage losing positions. I don't need to physically close the position early for a loss, and that's what I mean by that.
Sean Donahoe: I wanna flip that around on you real quick as well, because we also may take profits off the table early. That's another management thing, is where you think a position is, I'm about 75%, I'm just using this as a broad stroke, like a half-ass rule, but you're looking at an individual position, you're about 75%, but you're thinking something, the winds of change, looking at that position you think, 'Hmmm.' Things are slowing down, or I'm expecting this, or that's looking like it's not going to go that much further. Rather than risk it going down on you, take the money off the table right now rather than hoping it's going to go that little bit higher. Again, that's another management process. Part of that morning routine.
Phil Newton: Exactly. That's what I do. So the point of me explaining all that previously, was that's what I don't do, which is what most people normally start with. What do I need to manage. So my spreadsheet, one I've updated and put my positions on, very similar to what you described, I've got my positions separated by strategy, and I can see what exposure I've got where with what strategy and when the expiration dates are. I've got all that segregated. And we give that away to our students as part of the how they manage their own positions.
But ultimately, it auto-updates with the price. All I've got to do is update the option. But when the stock's not moving favorably, then I don't need to update my position cause it's not worth checking. So there may be two or three positions every day that I just, 'This isn't a profit, I need to update that position, is it worth closing.' And that's the evaluation. Is it most of the way there. 75-80% of the way towards my expected targets. A good example with the ... we've got a shortened trading week, I'm most of the way there, let's take some profit. Which is what I did on Monday with one or two positions. I'm almost there, it's gonna be a shortened trading week, low volumes, is it worth waiting to see if we get the extra little nuggets of profits. No, let's just close it now.
So that's really the only management decision that I'm doing outside of, is it at target, yes or no, take profit. If it's almost there, I'm evaluating the situation. 'Hey, something's weird with the markets, maybe I'll close a few positions.' And again, the reality is, it's not time intensive. I've got to admit, on a day to day basis, that's my management routine. Everything else is taken care of with the flow of how I put the trade on in the first place.
Sean Donahoe: That's very much it. One thing you'll notice here, guys, is--
Phil Newton: A very lazy way of trading. I'm not going to deny it. It's intentionally that way because it means that when I've done that, I can close it off, and I can go and do something else.
Sean Donahoe: Yeah, but here's the thing. A lot of risk tolerance is built in to what we're doing, because we have that clear focus on our goals and what we're trying to do. A lot of people unfortunately, shoot from the hip with their trading and just hope for the best and wonder why their counts evaporate. But you'll notice that we're very much protecting not only our downside, we're conscious of our risk tolerance across the board.
Phil Newton: I suppose to be able to do that, do everything that we've done so far, just tying in to your risk tolerance comments, to be able to do all of that and trade more frequently, which is what we're talking about. So we've knocked of those half dozen small basket of stocks. Emotional exposure. Because really that's the only reason why people kind of jump ship as it were, cause they've got that emotional reaction, they've got position sizes too big, they've not got enough positions on. So how do we do that? Part of the risk tolerance and shooting from the hip, means that they'll get to three, four, five positions and the risk is too big and the tolerance is too low. Or the per trade risk is too big, rather, and then they start making mistakes and that's that shooting from the hip you were describing.
How do we get past that? Again, I'm still in this how mode, Sean. Reduce your position size, increase the frequency and that allows you to trade something every single day and have this almost carefree attitude towards the portfolio. And as long as you've got this systematic approach, manage stocks, as we've just described, reduce your position size, increase your frequency, then your risk tolerance will grow. Again, not just from a practical point of view. And then it's also from the emotional standpoint, the emotional point of view.
I always think that there's two types of risk. There's the physical, practical risk, and then there's your emotional risk. If you think about them like a bank balance. You've got your physical bank balance, which is, say you've got $100,000 in your accounts and you want to risk X percent of your portfolio, your overall capital on your individual trades, that's your practical bank balance and risk tolerance. But then you've also got separate to that your emotional bank balance and risk tolerance, and that's the thing that makes people make the mistakes, the shooting from the hip experience, the only putting two or three positions on because their per trade risk, while practically might be okay according to what the textbooks suggest, but the emotional risk, the emotional bank balance, is not there yet. A
And most new traders start off, regardless of your net worth, with that same low emotional bank balance. So that's what we're trying to manage. And again, it sounds a little woo woo rah rah, bead shaking type of experience, but if you put that aside for one moment, the long term success of any business is all about the mind, the psychology, and the ability to get out of bed in the morning and go and open up the shoe shop on the main streets. I have to get it in there, Sean, we've said it every week so far.
But that's it. If you're stressed out, you're going to stay in bed. And you're not going to open up the shop, are you? If you had a physical shop. And we're doing the financial trading equivalent of being able to get out of bed in the morning, and not be stressed, and go and open up and turn up and show up and wait for the customers to come through the front door.
Sean Donahoe: Absolutely. Now one thing we've kind of touched on but I need to kind of shine a light on is understanding why did you put that specific trade on. So if you're looking at your trades, did you adhere to a strategy, did you hear a recommendation from a friend from a friend or a pundit ranting, do you have trades that you've put on that you don't really understand? In other words, are they a valid part of your portfolio, or are you again, introducing a single point of failure or a risk profile into your overall portfolio that you don't understand. And this is really very very critical. We see this a lot of times being the undoing of a lot of traders. Because they're doing things they have no real understanding of, because hey, they saw it on say, CNBC or Jim Kramer, or some pundit saying I think this one's going to go up so that's why I put a trade on it, but their goals don't match your goals. Their intent.
Phil Newton: Action without knowledge, is another way of perhaps saying the same thing. If you don't understand what you're doing then you shouldn't be doing it.
Sean Donahoe: Now again, that can introduce risk to your portfolio and by doing so, doesn't matter how much great work you've done in all the rest of your trades and your portfolio with your strategy, and trading plan, and everything else. Again, you could be basically, it's like standing on a beautiful beautiful yacht and then putting a grenade in the middle of it.
Phil Newton: Well let me give you a practical example of the one time I actually did this, Sean. And I'd just like to say it's a fine line. There's nothing wrong with, and again, we always phrase it being aware of an opportunity from someone else.
Sean Donahoe: Yes.
Phil Newton: And what we always said, there's nothing wrong ... cause again, we provide alert services, and there's nothing wrong with it. What we always suggest is if you don't agree with it, then don't trade it.
Sean Donahoe: Wait for the next one.
Phil Newton: Exactly. Cause we always outline, hey, this is what we're doing, this is why we're doing it, and if you don't like it, that's cool. We're fine with that. Because everyone views things slightly differently. Whether it's our service, whether it's someone else's, look for, just a little bit of a sidebar, advice here, Sean, look for those ones that actually tell you why they're doing something cause this is what we're getting at.
Sean Donahoe: That's a big factor right there.
Phil Newton: If it's just buy here, sell there, it's almost a closed off black box system, then you're completely dependent like, I was going to say, oh bollocks to it, like a drug addict. You're completely dependent on them for the decision, so what we do is before the trade, here's what we're gonna do, when we're gonna do it, why we're gonna do it, here's the reason, here's the target, here's the projection, here's everything. Here's all the information that we know. Now, if you agree with that, then go for it. And that's what you're looking for in any service. Whether it's ours or someone else's, we're trying to be agnostic here, that's what you are looking for.
Now, why do we do this? Because if we go back, wind the hands of time back, Sean, to many years ago when I started trading, this is around 2001? A friend of mine came in with an easy get
Sean Donahoe: Another company you mean, yeah.
Phil Newton: which is in America.
Sean Donahoe: Southwest, it's kind of like Southwest.
Phil Newton: But he came in with this tip. 'I got this great tip for you Phil.' Because he was working for the company and he had seen some confidential files, blah blah. He gave me a story, Sean, is what it came up to. But he gave me the story, and it was I've seen confidential files and blah blah this and blah blah that and he literally, and I just nodded--
Sean Donahoe: Inside information, yes.
Phil Newton: Inside information. And he really sold that. And I was really resistant, cause I have my rules. No no no. But eventually he just spun such a good ... yeah, okay, let's do it. So he gave me a couple hundred quid and then I put my money in the line as well, and for some stupid reason my position size was ridiculously too big. There was no risk parameters in place, he's just saying buy as much as you can, Phil. It's a takeover bid for sure, blah blah blah. It's gonna go through the roof. It's gonna take off. But you see where I'm going here, Sean, can't you?
Sean Donahoe: Yes.
Phil Newton: So I'd loaded up the boats, I'd filled me boots, I'd bought into his yarn, guess what happened? As soon as I clicked send on that order, Sean, guess what happened?
Sean Donahoe: I'm assuming it went in the opposite direction.
Phil Newton: It went the opposite way. But you know what, I got a saving grace. For three painful days, and then a margin call later, cause it went the opposite way very quickly, I got a phone call in the morning saying, 'Mr. Newton, if you'd like to hold this position open' back in the days when you 'Mr. Newton, we're going to need some more money off you if you'd like to keep this position open.' So I had physical shares at the time. Okay, I'll make arrangements. But I'm phoning him up saying, 'What shall I do, what shall I do, what shall I do?' Cause he's given me the tip, he's given me the idea, and cause I've got no analysis, I've got none of this inside information. He's given me ... I'm completely reliant on him to make the decision. I had a bone thrown at me. And I couldn't even make the decision when the bone was thrown.
What happened was a very brief rally, and now we're making ... I'd pretty much leveraged my accounts up to the eyeballs, we had quite a sizable position, but I'd got back to what was effectively break even, it was a little above break even, after commissions we'd have made about 500 quid. Not a big amount by any measure given the position size and the risk. And we were many several thousands under water that morning. And it was like, it's 500 quid, what should ... And I'm phoning him, asking what should we do. It should have been an automatic no-brainer. We're back to scratch, let's take our money. And count your lucky stars. No, I have to phone him and he's absolutely ecstatic! All the money we've made. And I'm like, Richard ... Having palpitations, sweating buckets, sweating bullets, I'm like I'm shook, heavy breathing, what's going on here, I'm having palpitations. My blood pressure's through the roof. You get the experience here, Sean.
Sean Donahoe: Yes.
Phil Newton: That's what it's like when you are completely dependent on someone else without any risk tolerance, without any managements, without any organizations, without any purpose or strategy and completely dependent on the other person. I didn't know why I put the trade on, I certainly didn't know why I was getting out the position, and I'm completely hooked on the other person for information. And that's what you will experience when you ... This is why we're explaining it to you, because we've been through this. I've certainly been through the ringer many times.
Sean Donahoe: Yes.
Phil Newton: That's experience of what happens when you don't follow these things into place. This is why we have this process. This is why we do seemingly trivial things, because I don't want that experience ever again. And to be fair, it cost me a friendship. Shortly afterwards. Surprisingly, you don't mix business with pleasure. You know? I did lose a friendship over it.
Sean Donahoe: Yeah.
Phil Newton: Because he just didn't see my, surprisingly, he didn't see my side of it.
Sean Donahoe: And at the end of the day, that's really it. This is business. At the end of the day, if you don't have that fundamental understanding, then again, you are shooting blind. And I don't like doing that in any business let alone trading when my money is on the line and I'm in ...
Phil Newton: It's heart attack sports. For sure, it's a heart attack sports.
Sean Donahoe: Yeah. So we avoid that like the plague. But the other thing is, do you know when to stop trading and let your basket of trades actually do their thing? This is one thing that we also see a lot of students talk about.
Phil Newton: You and me differ on this.
Sean Donahoe: Well slightly. Slightly. Here's the thing. I'm very strict about my capital allocation. I want to make sure that if I have a certain amount of capital in the markets at any one time, I will not exceed those thresholds.
Phil Newton: Agreed.
Sean Donahoe: If I've got a lot of trades in the market, even if I see a really great opportunity, I'm really strict about, 'Okay, but that's going to take me above my capital allocation and I want some other trades to come home first.' And we'll see if that opportunity is still there. So I'm actually very strict about that. I mean, there are borderline cases where if I'm really really confident about a trade, I might go slightly over, but that will be the one exception.
Phil Newton: You'll throttle up, it's a situational thing. I agree with you there, I agree with you there.
Sean Donahoe: So that's, at some stage, my thing is, I will stop placing any new trades in my basket even though I'm trading small and I'm trading a lot of different diverse positions. But from a capital allocation standpoint, I don't want to have too much capital in the markets because what that's doing is increasing my risk. If there was a black swan event and everything ... I wanna be able to trade tomorrow, next month, next year. Tomorrow which is exactly right, we're looking for the long term so again, it doesn't matter if I've got all my perfectly executed trades, based on our trading strategy, or whatever strategies I'm trading, if they're all in the markets, my portfolio is tickety fricking loo. Okay. And I'm editing myself from a Billy Connelly line there, which substitute the F word for whatever you like. However.
Phil Newton: Flip flops.
Sean Donahoe: Flip flops, yeah yeah. So the one thing there is, if I've got too much money, too much of my capital in the markets, that is exponentially increasing my risk portfolio. And my risk profile, to correct myself there. Cause if I lost all of that tomorrow, then I've only got a certain amount of allocation left for capital to be stopped. So, again--
Phil Newton: I'm glad you went down this road, Sean, I like the direction. You've got a circuit breaker in place for risk exposure, is what I heard. And I like that. Because I've got to admit, I thought we were going to dance around a slightly difference where we were going to lock horns, which is what most people describe as stopping trading for the sake of not trading because they're fearful, the usual trap that new traders fall down. Cause this is the bollocks and the bullshit that is touted by many alleged experts, that if you hit a losing streak, stop ... cause I really don't believe if you have three losing trades in a row, stop trading. Well why? Why stopping? Truly, why are you stopping? J
Just because you have three ... Again, think about what we said earlier. Monetary losses. Was it a losing trade? No. I did everything I said I was going to do. Why are you stopping trading? Cause I certainly, in my experience, when I was day trading, and it was the feedback was very ... In fact, I followed those rules. Three losing trades in a row, stop trading. Guess which one was the winner, Sean?
Sean Donahoe: Yes indeed! Don't ever do that. Exactly.
Phil Newton: Guess which one? And then it was like, I'll change it to four losing trades in a row. Four losing trades in a row, and guess--
Sean Donahoe: Guess which one's the winner!
Phil Newton: --Guess which one's the winner!
Sean Donahoe: Yes, we agree on that. Get a lap on the horse. That's a phrase I've used there.
Phil Newton: I think that the difficult thing to do, to build on something, you said Sean, have a circuit breaker in place to minimize exposure. So when you've got a certain amount of cancel ... Again, a general rule of thumb is 50% of your accounts at most should be exposed to the markets. Why? Because if everything blows up this month, you're in business next month. It's your cash reserve, it's the bullions in the mattress type of experience. Whatever you want to do. But what you shouldn't do is just because you've had a monetary loss, does not mean that that's a losing trade.
This goes back to what we've said. It's a reframing the position. Because inevitably the next position that you should have put on, would have been the winner. That's what's called Sod's law or Murphy's law, and I've been on the receiving end of that too many times to count. So. Another reason why we reduce our position size. Because it allows me to trade frequently and more specifically, capital when, when your strategy has a bad period, because it will. We're not gonna sugarcoat it. It will have a bad period. Like any other business in the world, they have bad days, bad weeks, bad months. Some of them have bad years, don't they, Sean?
Sean Donahoe: Mmmhmm.
Phil Newton: What the focus is, is you need to trade through those bad periods, and that's why we reduce our position size, we say consistency with our frequency, and should the market conditions be absolutely awful and you're still applying everything as you would have planned on doing, it's a successfully executed position, it just happens to be experiencing a monetary loss, and I need to trade through that period, because I do not know when the next winning phase will be. I do know, that on average, around 65% of the time, I will make money, but that means that 35% of the time I won't. What if I have that 35% of the time back to back?
Sean Donahoe: Yeah.
Phil Newton: It's an anomaly, but guess what, it can happen.
Sean Donahoe: Mmmhmm. It's all about the law of averages, and the law of big numbers, over a long period of time.
Phil Newton: Mr. Ranty Pants entered the room there, Sean, as you can probably gather, this is a very big bone of contention. Stop trading for the sake of stopping trading because you've had a monetary loss is the stupidest thing you can do.
Sean Donahoe: Well I absolutely agree with you, but yeah. Allocating a certain amount of capital and sticking to that budget will reduce your risk exposure. That's a different area. That would be a time to stop temporarily trading, is to let your basket of stocks come home. At least free up some more of your capital so you can now again, keep trading and going ahead.
Phil Newton: Unless Mr. Ranty Pants, a practical way of stopping trading, if you reevaluate the way that you counter a winning trade or a losing trade, nothing to the monetary outcome. Did you follow your plan? No. That's what you should be asking before, during, and after business. Did I do everything I said I was gonna do when I put this trade on? No. That's a losing trade.
Sean Donahoe: Yeah. Even if it wins! Even if you make money with it.
Phil Newton: Exactly.
Sean Donahoe: And that's a very, very important fact.
Phil Newton: Yes. When you have that no, I didn't, it's not supposed to be on the books. That's when you stop trading, that's when you shut the computer off, that's when you walk away, that's when you get your collective brown smelly stuff together, and figure out why ... It's true.
Sean Donahoe: It's true. Very true.
Phil Newton: That's the only time you stop trading. When you do something that you said you wouldn't do, but did it anyway. You went, 'Ah, you know what, fuck it, put it on.' That's when you stop trading, and that's when you get your act together. That's when you close it down for a day, a week, a month, as long as necessary to get your ... Cause there's a reason why you've done that. That's when you walk away and physically stop trading. For everything else, there's MasterCard. No. For everything else, you trade through.
Sean Donahoe: Absolutely. Now, one last point to go over before we rock on, is there is a thin line between diversification and spreading too thin.
Phil Newton: This is often misconstrued with bullshit, as well. That word, ooh, go on, I'll let you go, because I know I'm gonna be on the soapbox here.
Sean Donahoe: No, I'm going to let Mr. Ranty Pants stand forward here. Go ahead. Take your point.
Phil Newton: I don't believe ... Firstly, I don't believe in diversification the way that it was presented in books.
Sean Donahoe: Generally, yes.
Phil Newton: The way that it's generally ... I think you can achieve diversification in the number of occurrences, and just by having, let's have some goals, let's have some in stocks, let's have some in bonds, I think it's nonsense. Absolute nonsense.
Sean Donahoe: Agreed.
Phil Newton: And I never got it. Truly never understood. It's a flight to safety trade. What on earth does that mean? Whose idea was that? It might have been true in the fifties, Sean, it might have been briefly, up to that point, but the market, I just don't believe that they behave that way. Diversification means that if something shitty happens in the world or the markets, and it means that the impact on your portfolio is minimized. That's, as I understand, what diversification allows. When something happens, let's just say it's a black swan event, which is just a fancy way of saying the ass falls off the markets, if that situation was the happen ... Think 2008, Sean. When that sort of scenario happens, am I diverse enough? Do I have my exposure in enough different varieties of trades or positions or strategies--
Sean Donahoe: Or instruments.
Phil Newton: --And notice the wording there. Because technically, most people would think they're overexposed in the stock market. Yes, that might be true traditionally. But I've got a large number of occurrences, some are gonna be bullish, some are gonna be bearish, I'm just gonna be neutral. Some things are going to be impacted positively in black swan events. Some are going to be impacted negatively. Most of them, in fairness, in black swan events. But. What if I'm bearish on those stocks that are impacted dramatically? You see where I'm going here?
Sean Donahoe: Yeah.
Phil Newton: I've got diversification by the number of occurrences, by the number of strategies in play, by the way and having my risk fixed despite the black swan event because of the way that we trade with the instruments of choice which in this case is stock options--
Sean Donahoe: It's built in. It's built in to what we do.
Phil Newton: Exactly. No if I still want to trade bonds, futures, I can do that with ETFs these days. I can get exposure, and technically they're a stock, Sean. They behave like a stock that is listed on the stock market. But technically it's an ETF that is representative of, say, currencies.
Sean Donahoe: Mmmhmm.
Phil Newton: So I get that diversification. Now I'm only gonna put those trades on, surprisingly Sean, if it sets up with my regular every day strategy. I truly believe that you can get diversification without leaving the stock market in today's world.
Sean Donahoe: Absolutely. Agree with you 100%. One area of diversification I would caution on though, that I think is sector diversification. In other words, unless you've got something absolutely insane going on with your strategy and it determines this, say for example you had all of your trades in the biotech industry and that's where all of your exposure is, and you've got maybe long and shorts, and everything else, and then if you've got a balanced exposure within that sector, then you've got diversification within that sector. But say for example, all long biotech but that doesn't pan out, all of your risk exposure is in one kind of biased decision making process in one sector, then you're gonna take a big hit.
So diversification, spreading across multiple sectors, that can be diversification in itself. So you're not only exposed to one sector in one direction.
Phil Newton: I suppose that issue though, comes back to part of the management of risk tolerance. And this is what you were also saying, that things will set up, and if you've got your kind of his or mine positions, cause I've noticed this within oil movements, if oil is behaving crazy as it is, I'll see a lot of an airline stock start to presents, and drilling stocks, and those types of stocks start to set up more frequently. So maybe I've got exposure in those oil and the ancillary types of sectors that are gonna be impacted by crude movements. Oil movements, that is. So I've had that experience.
Sean Donahoe: Not Phil's other crude movements, that's when he starts twerking.
Phil Newton: Yes. But you'll only know that with the management element that we were talking about. Part of your segregation of how you organize the trades and for your purposes. If you get that set up, you'll spot that quite quickly. So maybe you can say, 'You know what. I'm putting a trade' ... and this is the only time you can put trades on outside of a strategy, as part of, and in fairness it doesn't happen that often, but there are times where I'm looking ... I've got half a dozen stocks on in that sector already, maybe I don't put the next one that sets up on, or I do put it on, but I start to balance that little core of my portfolio by buying some protection.
Now I don't do it often, but I'll by some protection. Now the routine that I take to prevent that overexposure is okay, I've got three positions in airlines, alright, I should have spotted it before. I'm not going to put the next one that sets up in the airline sector. Or the oil sector. Or the goldmining sector. Whatever it is that's kind of hot and moving. I just don't put that next trade on. Go and look for something else. That's the only time I don't follow the plan, just to prevent that type of situation from happening.
Sean Donahoe: And that makes a lot of sense, and again, that is a smarter type of diversification rather than what a lot of people say. 'Oh, have this allocation into bonds, or metals, or this and that.' And you've got basically a whole load of instruments you may not understand. What we do is a lot simpler, because it allows us to do that diversification with different levels of exposure in different sectors. And again, we're taking on opportunities that doesn't matter what's happening in any one sector, any one market, we've got exposure, we've got a slightly biased or balanced portfolio versus the market or what have you, we're measuring how our exposure versus the S&P 500 as an example. We can see where we're going and we get that diversification without having to do all sorts of different gymnastics and then have a whole load of complications added to our portfolio that we don't need.
Phil Newton: I've got to admit, just for the reasons I mentioned earlier, that scenario for me doesn't happen that often, because of this sort of process tree that we go through to select the trade in the first place.
Sean Donahoe: Yeah. I would say I was surprised you even mentioned it to be honest, because it's that rare occurrence.
Phil Newton: Yeah, it doesn't happen that often. Two or three times a year for me if I notice it. What I was gonna follow along with is arguably, you probably don't need to worry about it because sometimes, the counter argument would be, that's your strategy saying load up on this sector.
Sean Donahoe: Mmmhmm.
Phil Newton: And so there's nothing wrong with having that type of exposure, as long as you're aware of it.
Sean Donahoe: Absolutely.
Phil Newton: And I would, and this comes down to trading, kind of that trading through experience. I'm always in two minds because I'm doing a manual override, and one thing I have noticed is sometimes it works in your favor, sometimes it doesn't. If you just traded through ... One of the golden rules I have, which I go to great lengths to try and follow, and again, this situation where it kind of falls down is the one we've just described. Also, my golden aim is not to question the strategy. Trade sets up, trade goes on. And if you follow that logic, 99% of the time, it's going to work out in your favor.
Sean Donahoe: Yeah. Absolutely.
Phil Newton: As humans, when we start to interfere and say 'I'm overexposed in a sector' that's where things start to mess up. From an emotional point of view, it keeps my emotions calm. And practically, it might not work out in your favor. But emotionally, it makes me feel better.
Sean Donahoe: Absolutely. So, ladies and gentleman, I was gonna say, just that, that's the smarter way to manage your portfolio. Now 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 just got way easier. Trade Canyon. Smarter traders live here.
Sean Donahoe: So, Rebel Trader tip of the week. Okay, now sit down, take a step back, take a sip of your coffee.
Phil Newton: Is it Jack and Ori time?
Sean Donahoe: It kind of is. So imagine this. There's a bank account that credits your account each morning with $86,400. Now, there's a very specific reason I'm going to go for that number. And it carries over no balance from day to day. Every evening, the bank, or your trading account, deletes whatever part of the balance you fail to use during the day. What would you do? Well obviously you'd draw out every cent, of course, cause each of us has such a bank. It's name is time. Every morning, it credits you with 86,400 seconds. Every night it writes off as long whatever you failed to invest to a good purpose through the day. Now this is a little bit kind of, taking a step back and going a little bit kind of thoughtful process here, but it carries over no balance. It allows us no overdraft. Each day it opens a new account for you, each night it burns the remaining of the day. And if you fail to use that day's deposit, the loss is yours. There is no drawing against tomorrow. You must live in the present on today's deposit. Invest it, so as to get from it the most health, happiness, and success. The clock is running, make most of today.
Now the reason I say that. I read that a couple of days ago and I though that's really poignant, especially because it's finance related so it always appeals to me. But the bottom line of this is, and I'm gonna have to bastardize the Nike phrase, is get off your ass and do it. Because again, days are burning, time's a wasting. Like I always say, time is the most precious resource we have. So if you want to improve your trading, get better at trading, be more successful and efficient with your trading, you only have so much time in any given day. Make the absolute bloody most of it. Step up, optimize, improve what you're doing, make the most of it, and hey, if you're applying it in the stock market as well as every other area of your life, that is an efficient use of this valuable asset and resource we have that is time. Phil, what say you, sir?
Phil Newton: Yeah, get stuff done. We're always talking about being efficient with your use of time when it comes to markets, but what we're talking about here is being efficient with your use of time in your life. And if you're gonna sit on your ass and do nothing all day, if that's your choice, that's your choice. But don't complain about it if your life's not the way you want it to be.
Sean Donahoe: Abso-bloody-lutely. Pretty short and sweet, but something to think about. Little thought of the day there, if you will. Poignant. That's a very nice word.
Phil Newton: I like that.
Sean Donahoe: Okay. Rock on.
Automated: If you've got questions, they've got answers. Sean and Phil dive into the virtual mailbag for this week's Rebel Traders quickfire round.
Sean Donahoe: Okay. Rebel Trader mailbag. Okay. I'm gonna fire the first one at you here, Phil. I want to get some options on X company. I removed the name of the company for this purpose, cause it was irrelevant to the question. But there's very little options interest, and the bid ask spreads are very wide. What do you suggest?
Phil Newton: If you're not sure, don't do it. End of story.
Sean Donahoe: You know, I knew you were going to say exactly that. And that's it. If there's not a lot of options interests, bid ask spreads are wide, and you're not really sure, move the hell on.
Phil Newton: Move on.
Sean Donahoe: There's plenty of more opportunities in the sea.
Phil Newton: The universe of stocks that we have is intentionally selected to avoid that scenario.
Sean Donahoe: Exactly.
Phil Newton: I appreciate the situations where volumes aren't great. It just helps us to ensure that we're trading liquid tradable, we can get the price that we want most of the time stocks. So, you know, if you can't get a decent price or there's no volume, go and look at something else. There's plenty of stocks in the universe.
Sean Donahoe: Absolutely. And if you want to grab our universe of stocks that Phil just mentioned, Keep it simple. You can have a look and it's got, I think the last update we had 475 stocks that we look at every day as part of our trading and that will, like Phil said, help you avoid that very scenario right there.
Okay. What else is in the mailbag, Phil?
Phil Newton: Something that's not my cup of tea, Sean, so I'm going to throw it out to you. Last week we were talking about the trade wars, if you remember, wanted to get some action on a swift recovery. Where would you look to maximize that opportunity?
Sean Donahoe: The simple answer is look at the companies that have all the areas that have had the most impact from the fear of the trade wars. Dow Jones industrial average, there's a few ETFs that deal with international stocks, some currencies, there are some options there, but look at the individual companies that have been, even maybe though, individual companies that make up the Dow 30, look at the ones that have been impacted most and maybe wait until trade sets up right there, and look for that. But again, you've got to have those positive signs of recovery. I would look for a little confirmation and those would be the first steps there. But again, look for what's had the most fear over the trade wars and these trade tariffs and everything else, and then look accordingly for that recovery signals, those recovery actions and then boom, I think you'll be good.
Again, however, when this podcast is released, it will be after July 6th, is when these tariffs are meant to be, or the next round of tariffs will be implemented, so we do, as we said in the happening now report, we did expect a lot of volatility there. Again, we're recording this before that date so I can't say what has happened after the fact because we're recording in advance, but I would look, again, what's happening outside of that and where the volatility is there. And again, that might highlight some of the ones that in a recovery, if we get a recovery, those are the ones that are gonna be the ones that pop the most.
Any comments on that Phil?
Phil Newton: I've got zero comments on it, Sean, if I'm gonna be truthful.
Sean Donahoe: Okay. Well in that case, you might have a comment on this one. And you've mentioned this twice today, funnily enough, so I think this one's a good one for you. Is it usual for there to be a slowdown in volume over the summer months?
Phil Newton: Yes, and here's why. If you think about, trading is an office environment. Although the most of it is computers these days. But it is essentially an office environment. People are going away for holidays in an office environment. The summer holidays, they're taking breaks, so volumes are gonna slow down.
Sean Donahoe: Kids are off school, and things, people ...
Phil Newton: Maybe they're thinking about just taking some time off. You've also got some, right now when we're recording this it's July 4th, shortened trading weeks, people don't want to mess around--
Sean Donahoe: And they're taking extended time off and everything else.
Phil Newton: Yeah, they're taking breaks, all the rest of it. This year, it's the middle of the week. So there's gonna be virtually nothing is done this week. You might as well write it off. But that's the experience. So if you think about those times where volumes are gonna be low, then that's the reason why. As far as I'm concerned.
Sean Donahoe: Yeah, it's pretty simple. Again, I've noticed, because I was actually talking about this with someone else recently, because a lot more computers are doing the high frequency trading and we're doing a lot more algo training, it's becoming less and less impactful than it was say 10 years ago. But, it is still of note that there is lesser volume--
Phil Newton: Volume's been reduced, but it's still a tradable market. I think is what it comes down to.
Sean Donahoe: There's still a liquidity in there. You're still gonna get a fill and everything else.
Phil Newton: I trade through, personally. I don't worry about it.
Sean Donahoe: Me too. I was gonna say, I don't worry about it in general. Obviously, there's an expectation that volume's gonna be low so volatility and movement might be slower, but again, those trades still go on if the opportunity sets up. So, all good.
Okay, so! Rock on.
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 that smell? It's time to call out the Wall Street shenanigans, mainstream confusion, and outright hijinks and hocum of so-called experts. Yep, it's time for Bullshit of the week.
Sean Donahoe: So, this week's bullshit of the week is a super short and simple one. It's the NSA launching an Amazon-backed cloud computing service for sharing top secret information. Now think about this for a moment, ladies and gentleman. Four years after handing Amazon a 600 million contract, you develop a cloud storage for the US intelligence community that can store information across a full range of data classifications, including unclassified, sensitive secret, and top secret information.
The NSA announced on Thursday that it has moved most of its 'mission data' and I put that in quotes to the front-end cloud computing system developed by the agency that's supported by, you guessed it, Amazon and its CEO Jeff Bezos. Now again, we've got the link to this in the show notes. But, yeah. Think about this for just a moment. I mean, this is ... obviously they're gonna have the encryption there, obviously this is going to be governmentally controlled, and they've got everything in there. But they are actually going to use this as a backbone, potentially, for multiple agencies to have all access to this information. But hey, do you want ... Think about it. This is one area where you've got a lot, a public company, that is on the backbone. Not something privately developed, as you would expect or hope it would be, but a public company that is facilitating the foundation, formation, and creation of this data ... this highly sensitive data. So, to me, that reeks a little bit of BS and I don't know about you.
But anyway. So that's it for this week, thank you for listening to the show and please remember this show is not free. It will cost you a five star review on whichever platform you listen to it. You just go to, where you can subscribe and review us on your favorite way to hear the show. You'll also find links to some of the training that we've mentioned here today, but this, by reviewing us and giving us a rating helps us reach more traders and investors just like you.
Phil Newton: And you can also connect with us on Facebook and the Twitter machine at the same link at tradecanyon/rebeltraders. But what's really pressing on my mind, Sean, is what we've got coming up next week.
Sean Donahoe: So, in next week's show, we're gonna do the five things that you should not do with your trading. And these are five common mistakes that we see with a lot of traders and it's course correction. So we're gonna do that next week. Til next time, take care.
Automated: For more cutting edge trading advice and a free trader workshop to help you build a personalized trading plan, and make smarter trading decisions, go to now.
Automated: Futures, options on futures, stock and stock options trading involves a substantial degree of risk. It may not be suitable for all investors. Past performance is not necessarily indicative of future results. Trade Canyon, Inc. provides only training and educational information. If you actually understood and listened to this, then that means you are awesome. Congratulations, and well done. Notice: this product may contain nuts.

(Click the time stamp to jump directly to that point in the episode.)

[00:08] Show Introduction

[00:01:20] Sean: We’re recording this on the morning of Fourth of July so the markets are closed for Independence Day. What we’re going to dive into is what you can do to wrangle your portfolio back under your control but also how you can actually fix a broken portfolio starting now.

[00:02:55] Sean: The first thing when you’re looking at your portfolio, you start realizing it’s not just about the trade, the strategy itself, it’s what you do with your entire portfolio. We actually trade baskets of stock.

[00:04:00] Phil: I think it’s the long-term and short-term difference. Like any business, you want to be in business in the long-term.

[00:5:58] Phil: Another thing that trips people up is that they think looking at the charts looking for some kind of trading opportunity is actually trading, it’s just filler.

[00:07:49] Sean: One other thing I’d like to bring into this, we’re laying the foundation of where are we at right now, where do you want to be, how are we going to get you there? You need to have an awareness of how much is in my basket, and based on my purpose for being a trader, is that a good amount or is there a lot of wasted potential trades in there?

[00:09:11] Phil: Is it good exposure, is it bad exposure, how do you quantify that? Ultimately, how you determine whether you’ve got a bad mix of trades is determined by your strategy.

[00:14:03] Sean: One thing I do in my portfolio is I actually organize all of my stocks by the strategy that’s actually applied to them. By having it organized in your portfolio that way, it allows you, at a glance, to notice change.

[00:17:00] Phil: If you’ve got a more robust strategy that can weather lots of different market conditions, like what we have, what you’re going to find is the markets will dictate what sets up and when things set up. So trending strategies will set up more frequently when there is trending marketing conditions.

[00:20:15] Sean: The other thing that I want to switch to here, we are all about systemization - what is the process? One of the first things we do, mine is I want to look at the general markets, international markets, volatile index, certain commodities.

[00:21:34] Phil: All we’re doing is looking at the overnight markets.

[00:22:39] Sean: From there, looking just at the general markets, I go look at my portfolio.

[00:25:50] Sean: It takes me five, ten seconds. Very quickly you get that pattern recognition where you can see if something has dramatically shifted because you’re already familiar with it from yesterday and the day before.

[00:26:38] Phil: I can see at a glance, twenty years later, I can build that mental image in my head, that’s something that comes with experience. The thing about management though, where we do differ, I do not manage losing positions.

[00:27:13] Sean: No, because it’s baked into the strategies that you do.

[00:32:12] Phil: The reality is, it’s not time-intensive and I’ve got to admit on a day-to-day basis, that’s my management routine. Everything else is taken care of by the flow of how I put the trade on.

[00:32:44] Sean: A lot of risk tolerance is built into what we’re doing because we have that clear focus on our goals and what we’re trying to do.

[00:33:12] Phil: To be able to do all that and trade more frequently - reduce your position size, increase the frequency and that allows you trade something every single day and have this almost care-free attitude towards your portfolio.

[00:36:00] Sean: One thing I need to shine a light on, is understanding why did you put that specific trade on. Do you have trades you have put on that you don’t really understand? Are a valid part of your portfolio or are you introducing a risk profile into your verbal portfolio?

[00:38:40] Phil: What we do, is before the trade, here’s what we’re going to do, when we’re going to do it, why we’re going to do it, here’s the reasons, the targets, projections, here’s everything.

[00:45:16] Sean: We’re looking for the long-term so it doesn’t matter if I’ve got all my perfectly executed trades based on our trading strategy, if my portfolio is tickety-boo, however, I’ve got too much of my capital in the markets, that is exponentially increasing my risk.

[00:47:38] Phil: The difficult thing to do, have a circuit breaker to minimize exposure. A general rule of thumb, fifty percent should be exposed to the markets because if everything blows up this month, you’re in business next month.

[00:49:30] Sean: It’s all about the law of averages over a long period of time.

[00:57:43] Sean: What we do is a lot simpler. We’re taking on opportunity that it doesn’t matter what’s happening in any one sector, any one market, we’ve got exposure, we’ve got a slightly biased or balanced portfolio against the market.

[01:00:15] Rebel Trader Tip of the Week

[01:01:12] Sean: Each of us has a bank, it’s name is time. Every morning it credits you with 86,400 seconds. If you fail to use that day’s deposits, the loss is yours. Bottom line of this is get off your ass and do it! If you want to improve your trading, get better at trading, be more successful and efficient in your trading, you only have so much time in any given day.

[01:0] Phil: If you’re going to sit on your ass and do nothing all day, then that’s your choice but don’t complain about it if your life’s not the way you want it to be.

[01:03:35] Quickfire Round

[01:03:47] Sean: I want to get some options on X company but there is very little options interest and the bid-ask spreads are very wide. What do you suggest?

[01:04:00] Phil: If you’re not sure, don’t do it.

[01:04:14] Sean: Move the hell on…

[01:05:05] Phil: Last week you were talking aboutTrade Wars. If I wanted to get some action on a swift recovery where would you look tomaximizethat opportunity?

[01:05:15] Sean: The simple answer is look at the companies or areas that have had the most impact from the fear of the Trade Wars. There are some options there but look at the individual companies. I would look for a little positive confirmation, look accordingly for the recovery signals.

[01:7:04] Sean: Is it usual for there to be a slow down in volume during the summer?

[01:07:10] Phil: Yes, and here’s why…if you think about it, trading is essentially an office environment. People are going away for their holidays so volumes are going to slow down. Right now, people are taking shortened weeks. But that’s the experience.

[01:08:09] Sean: Again, I’ve noticed it’s becoming less and less impactful than ten years ago.

[01:09:04] Bulls**t of the Week

[01:09:37] Sean: This week’s is the NSA Launching an Amazon-Backed Cloud-Computing Service for sharing ‘top secret’ info. Four years after handing Amazon a $600 million contract to develop a cloud-storage service for the US intelligence community that can store information across the full range of data classifications - including Unclassified, Sensitive, Secret, and Top Secret - the NSA announced on Thursday that it has moved most of its ‘mission data’ to a front-end cloud computing system developed by the agency that's supported by - you guessed it - Amazon and its CEO, Jeff Bezos.

[01:10:48] Sean: Think about it, this is one area where you’ve got a public company facilitating the formation and creation of this highly-sensitive data.

[01:11:10] Sean: Okay, that's it for this week’s show. Thank you for listening to the show!Please remember that this show is not free.It will cost you a five-star review, just go to you can get access to previous and future shows, subscribe, and review us on your favorite way to hear the show.

[01:11:30] Phil: You can also connect with us on Facebook and on the Twitter also

[01:11:41] Phil: What have we got coming up in next week’s show Sean?

[01:11:44] Sean: In next week’s show we’re going to do the five things that you should not do with your trading.

Resources & Links Mentioned in This Week's Show

3 Key Takeaways From This Show

  • Trading is a Business, An organized portfolio is your business ledger
  • Break down your trades by strategy and see the exact performance of each approach
  • Rather than diversify investment or trade vehicles go for diversification of sectors

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