Rebel Traders 056 : The Most Common Mistakes Traders Make

There is a huge difference between the average trader and the supremely successful trader and it’s not what they do that makes a difference but what they DON’T do...

In this week’s show Sean and Phil are going to tackle the biggest mistakes that most traders make and how to actually overcome them. There are many fundamental pitfalls that can catch the unwary and its these critical mistakes that can cripple a trader before they start.

While mistakes are often part of the learning process and forge the fires of experience, the Rebel Traders are going to help you fast-track through the most common mistakes and discover how to identify them before they happen and avoid them altogether…

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Sean Donahoe: Mistakes could forge the fires of experience. Let's navigate the most common ones. 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 are rocking and rolling, having a blast. And as always, I am joined by my compatriot in podcasting, Mr. Phil Newton. How are you doing, sir?
Phil Newton: I'm having a very jovial day. The sun, once again, is shining in the UK. Guinness Book of Records or someone needs to be notified of the state of the weather in the UK.
Sean Donahoe: Knocking that off.
Phil Newton: Multiple weeks I've been having multiple ice creams. It's been fabulous. So yeah, I'm doing all right.
Sean Donahoe: Well if that's what it takes. It's the ice cream report, ladies and gentleman.
Phil Newton: The ice cream ... Well done.
Sean Donahoe: Very good.
Phil Newton: Yeah. Yeah, why not?
Sean Donahoe: Absolutely. So, yeah, what we're gonna do today ladies and gents is we're going to be talking about the most common mistakes that a lot of people make in trading. There's a huge difference between the average trader and the supremely successful trader, and it's not what they do that makes a difference. It's what they don't do.
So in this week's show we're gonna tackle these mistakes and how to actually overcome them. There are many fundamental pitfalls that can catch the unwary and it's these critical mistakes that can cripple a trader before they start.
Phil Newton: You know what else we've got, Sean? Did you know that we've got a Rebel Trader mail bag?
Sean Donahoe: You know what? I was not aware of that. What are we going to do?
Phil Newton: Yeah. Well, you know what? Well, in fairness, you can send your questions in, because we'll answer those questions. So if you've got a question, send it right in, because later on we're going to be answering those said questions.
Sean Donahoe: Wow!
Phil Newton: Shortly, followed by that, we're going to find the biggest, steaming, smelliest pile of bullshit that we can find and we're gonna tell you all about it. Really, it's just an excuse for us to go ape shit, if you'll pardon the pun, and rant on about the nonsense and shenanigans of the industry. Somewhere amongst of all our own nonsense and shenanigans, we're going to try and answer the core question of where is the truth.
Sean Donahoe: Perfect. Okay! So diving right into not the big steaming pile over there, but into to core content.
Phil Newton: Yes, it's that steaming pile of poop.
Sean Donahoe: We are going to be diving right into the main thrust of today's show. What were you gonna say there?
Phil Newton: Well, you put me in mind up. Remember the Bugs ... Was it Bugs Bunny, Yosemite Sam, with their giant diving boards into the small ... It's like one of those feature length Bugs Bunny cartoons you put me when we're going to take a swan dive off the diving board.
Sean Donahoe: Well I guess I am the rootin'-tootin' varmin-killin' ... So Yosemite Sam, yeah.
Phil Newton: It's a trick shot into a small pile of ...
Sean Donahoe: Forgive me.
Phil Newton: Oh! I don't know. You just painted the picture for me, Sean. I'm sorry.
Sean Donahoe: Well, that's one of those pictures that we'll be going up and sell for millions. But let's just glide on past that very quickly.
Phil Newton: Let's move on. Let's move on.
Sean Donahoe: So, okay. The first mistake I want to talk about here that will hit a lot of traders is ... I guess the one thing that I see so many people make, it's over-leveraging and trading too large.
Now, again, this is bungo banging territory here. It really is something we've talked about a lot in different shows. But, again, I just want to also bring in the over-leveraging aspect to this as well.
Phil Newton: I think it's a huge leverage generally.
Sean Donahoe: Oh, yeah.
Phil Newton: This could be chewed around in a few different directions, a few different angles to be honest. Because depending on what you're trading as an instrument. To be fair, there's more legislation coming into effect to prevent this, and that's using leverage.
So I think the first thing, to separate it from position size just for a moment, Sean. But leverage. What is leverage? Leverage is essentially something that your broker gives you and you're allowed to use money that you don't necessarily have.
Another way of describing is that instead of putting all the money down. If you're buying shares, for example. You can buy them on margin and you’d get leverage because of that. So what that means is if you're buying stock, just to keep it simple, you don't need to ... If you're buying a hundred shares of a $1 stock, it's going to cost you $100. But you don't have to use all the money if you have a margin account. So you’d typically only have to maybe put 20 or 50% down as your margin requirement to hold the position open.
Your broker will basically carry the rest for you as like a favor, essentially. That's the arrangement for a margin account. Now what that gives you is leverage. So you can use less money to hold the same position. This is also why we use stock options. We can have less money used to hold a position open. So with a stock option, somewhere, it's usually around 10% of the notional value. So it allows us to trade with leverage.
Now, in currency trading, you can have 200 times leverage on some of your accounts. So what people do, and the mistake I'm coming to is that they treat the leverage that they have rather than what we suggest, which is, "Well, you got a discount on the money required to hold the position open." That's good. We don't need all the money that you could need to hold the position open.
What people do is they then mistake that for thinking that they've got more money than they actually have. If you're trading stock, usually you get four to one leverage, somewhere around there. But then what they do then is they multiply their actual cash amounts, their cash accounts by four and they trade with more money than they have or bigger position size than they have so that they're leveraging their money and they're trading with money that they don't have.
I'm not sure if I'm explaining that too well. Does that make sense?
Sean Donahoe: No. Absolutely. No. It's the exact nail on the head so to speak. Yeah, if you have, say, a $10,000 account or a $100,000 account ...
Phil Newton: So we advocate. We get a discount on the position. But the mistake is that they then trade with the multiple of their account as if they've got that amount of cash. So if they got 25,000, it's a multiple of four, they get four to one leverage, they pretend and work their position size out if it was $100,000, which is four times.
Sean Donahoe: Exactly.
Phil Newton: Yeah. Now, I'm exasperated. That's the problem.
Sean Donahoe: The problem is ... Yeah, it is. It is a big problem. I mean, just think about ... Basically, if you're using the 1% general rule of thumb that we like to talk about, if you are trading with a 1% position, that's $250 on a 25k account per position, but that's okay. But if you're four times leveraged and you're trading as if it was a 100k account. Well, that's a thousand dollars of position, which means you are now trading actually 4% of your main money. That means you can only have 25 positions at that size, but that's a large risk profile. Here's the thing, it's money that you don't have, which means ...
Phil Newton: You don't have it. Yeah, you're working your position size based off the leveraged accounts rather than treating it like ... Again, I just want to emphasize. Treat it like a discount as supposed to you've got an overdraft.
Sean Donahoe: Yeah. That is ... Again, it's a very dangerous thing. We see, again, margin calls, and if you don't have that money, you can get yourself in some very deep water very quickly.
Phil Newton: If the market tips one way very quickly, then you can be in trouble equally very, very quickly. It doesn't take large movements, because then what happens is it's like a domino effect. All the other things that we're going to talk about will come into effect. You can avoid so much pain, so much heartache but not over-leveraging. As a byproduct, you're automatically trading too much position size, which is … It can be a separate issue to over-leveraging yourselves.
But that first one is, “Hey, I’ve got ...” I used to say in the current situating world, because you could quite literally get 200 times your cash accounts as a leverage. Great! You've got pennies to play with on the margin requirements, but you don't have the cash.
So what people do is they would multiple their account by 200 times and trade as if they have that money. Surprisingly, Sean, you can see where it goes with that sort of leverage. It creates a problem very quickly with a very small movement.
Sean Donahoe: Yeah, exactly. You now what? We've all had those nightmare stories. Again, it's a very novice mistake, but I'm surprised by how many experienced traders end up in that over-leveraged position very quickly. They don't have the discipline.
Phil Newton: Yeah, they still do. I mean, this is why people were taking swan dives out of tall buildings in the 1929 crash. The reason why people were jumping out of buildings, because they were trading on margin with leveraged accounts. This was what we've just described. That's why people were literally throwing themselves out of buildings. That was the problem.
The most recent crisis in 2008, people were ... From the housing market's point of view, they were buying houses they couldn't afford, "Do you have a pulse?" "Oh, yeah! Here you go." Here's a quarter of a million dollars to buy a house that you can't afford in the first place. So when the market is corrected and everything came into bunk, people were going into receivership, because they had houses and mortgages that they literally could not afford. It's that same thing, this over-leveraging and we see it in a variety of different places.
Just buying something that you can't afford to repay is ridiculous. Leveling up because you've got the temporary means and ability or you've been offered essentially money that you can't ... I just can't get my head around it, Sean. I'm quite exasperated trying to explain it to be fair. But it's that we see in lots of different areas in the world and not just trading.
Again, that 2008 crisis was the biggest, the most recent illustration of the same experience of using money you can't afford to repay is essentially the short version of it. We see it very regularly because margin accounts, they're very easy ... I wouldn't say easy to get, but they're essentially easy to get.
Sean Donahoe: They are bloody easy to get over here. This is the problem, is because it's a big trap.
Phil Newton: Exactly, yeah. There's nothing wrong with a margin account. Don't get me wrong. It's like an overdraft. Most people get an overdraft, but it's whether you're on the limits of your overdraft every time, and using the overdraft on a consistent regular basis, it's a bad thing. Something's going wrong with your finances. It should be treated as an emergency. It's there if you need it, but you shouldn't factor it into your day-to-day workings, and that's the issue that we're trying to really emphasize here, because this is one of the roots to all evils. This is probably one of the bigger reasons why people literally bugger up their trading very quickly, very early on and they're turning red, because they're given margin. They're given this ... Again, I'm going to use a comparison. They're given a very deep overdraft and they don't know how to trade in the first place so that they automatically go into the overdraft very quickly.
But that overdraft is ... It's margin very, very quickly.
Sean Donahoe: Yeah. It is a very big potential trap for the unwary. That's for sure. But let's talk about the trading sides, the actual position sides. One thing we talk about a lot is, again, it's like over-leveraging your actual portfolio into what any single position, and we see people who ... We use a baseball analogy here, looking for the home run with every big position rather than singles and doubles. But at the end of the day, for those who are not baseball people like us, we have no idea. We're probably using completely the wrong references.
Phil Newton: No. But I think It's one of those examples that even if you're not familiar with the sport itself, you get the intention behind what we're saying.
Sean Donahoe: Exactly. Yeah. I mean, one thing we see a lot is people who are trading a larger percentage of their portfolio or their capital per position, and then watching every tick hoping that that big position comes home and then, again, they're frozen in their trading. They're frozen in their emotions and they're unable to do anything else other than watch that position go up or down and it's just not a good way to trade. We've all done it. We've all been there. Everyone has had that monster trade, but gives them nightmares and makes them not be able to sleep for months at a time.
But trade small. That's one of the most ...
Phil Newton: I think if we think about why people do that ... Just for a moment, Sean.
Sean Donahoe: Yeah.
Phil Newton: Is the novice trader … Just to remind everyone. It’s not novice and professionals in the context of people who've been doing it for a long period of time successfully making money doing it, versus the novice trader who's brand new, inexperienced, making mistakes. That's different. So we're not talking in the traditional concept. The pro trade is usually someone who's working in the industry.
Sean Donahoe: We're not talking about ... Yeah, finances. Yeah.
Phil Newton: Yeah. Anyway, the novice trader, the newbie if you like. They're focused solely on how much money they can make and then that causes them to trade, "Well, how much position size can I trade with it?" Because they think it might ... If this trade gets to where I think it's going to go or if it goes up $1, $5, 10, whatever imaginary target they've instilled on themselves. Then they're thinking, "How much money do I have in my accounts?" Maybe they're using some of that leverage, or if they're smart, they're not leveraging and working their position size off the cash they actually have.
They're then trying to think, "Well, how much money could I make?" Maybe they're trading 2, 3, 4% of their available funds on the position because they're focused on, "Well, if it does this, then I'll make this much money. I'll make the 5,000, the 10,000. I'll make $20,000 on this," and that's what they're focused on. How much money can I make if I'm right?
Whereas the professional trader, the person who's consistently treating it like a business. Essentially, they've got consistence and repeatable, recurring decisions being made that have a consistent, repeatable, recurring outcome on average, just like every other business.
They're focused on how little they can lose. They're not looking at how big a position size they can make. They're often looking at, "Well, if I'm wrong," rather than, "if I'm right." The novice trader is looking at, "If I'm right. Look at how much money I'll make." Whereas the professional trader is looking at, “How little can I lose?” They’re managing the risk, "If I'm wrong, I'm still in business tomorrow." That's what every successful business has done. It's that risk mitigation, to steal your phrase, Sean.
That comes with trading small position size. What that does is it allows you to trade what we suggest, which is to trade more frequently. So instead of trying to go for one big trade and hope that it works out and all the emotional baggage that comes along with that, trade as small as possible. But trade multiple occurrences, because, hey, there's plenty of opportunity in the stock market. There is slink trade literally every single day and you can build a portfolio.
That simple act of small position size, more occurrences with a consistent methodical strategy gives you a portfolio and it frees your mind. It means that you have this ability to not be stressed, and some of the things that you mentioned, Sean, is you've got that emotional baggage of the sleepless nights, the restlessness. The watching every price fluctuation in the markets. That all goes away. It's quite contrary to what you might think when you trade more frequently with less position size.
But then think about all your experiences when you've got one position with this bigger position size as possible and all the stress, and heartache, and anxiety that comes along with that. It's just such a night and day experience.
Sean Donahoe: It really is. One of the things that we talk about is being too emotional with your positions. The problem is that the larger the position size, the more emotion is attached to it. When you're trading really small and you have a basket and you're very dispassionate towards anyone ...
Phil Newton: It's quite liberating.
Sean Donahoe: It is. It's very freeing.
Phil Newton: Until you've actually done it … Because you think it's only one position. You're completely 100% invested in one position and it working out, it being right, because if you're wrong, you're probably going to lose a big chunk of your capital on one trade. That is ... That's a real emotional punch in the gut when it happens. Not if. When it happens, because let's face it, Sean, you and I have both experienced it multiple times.
Sean Donahoe: It's not a punch in the gut. It's a kick in the balls.
Phil Newton: It really is. I mean, I've had a few occurrences where the stop loss, when I was using them, hasn't been triggered and it jumped past that. I've been on the wrong side of bad decisions and bad market conditions and I've literally crawl back into bed and pulled duvet over my head and just laid there in shock for what seemed like weeks. It's probably just about 20 minutes.
It's just such an emotional ... I can't think of words to describe it. Literally, like you said, it's that kick in the nuts. If you've ever had even a glancing blow to the nuts, it's that. It really is a very sick feeling right in the bottom of your stomach. That's the experience when that stop loss is hit or if ... Even if it's not hit and the position is not going your way and it's flirting with that get out level. With the big position size, it makes you nauseous. But then going the other way, less position, significantly less position size, but more occurrences. You're now looking at about one position. You're thinking about managing the portfolio.
You're, again, like the captain of the ship. You're navigating the sees as supposed to thinking about shoveling coal in the engine room. You're not worried about the backache and the hard work that's involved in the engine room. You're just now looking over the horizon and telling the ... I'm losing the analogy here, Sean, but you get what I'm saying. The crew. That's the word I was looking for. You're organizing the crew of the ship to do the sails, to hoist the mainframe, all the rest of it.
You're not worried about the individual components of making the ship sail in the direction you want, because you're navigating. You're the captain of the ship. You're giving instructions and you're not so worried about the one guy, the one position who's maybe not working right today for you. Maybe it will come back tomorrow, but you don't need to worry about the micromanaging is another way that we described in a business context.
You're not worried about something over that employee's shoulder and making sure that his job is being done. It's very liberating and freeing experience when you're not micromanaging every up and down movements and hoping that one trade is going to work out for you.
Sean Donahoe: Here's the one that … I'm going to make Phil probably laugh at this one.
Phil Newton: I mix so many metaphors there. I don't know what was going on there, Sean.
Sean Donahoe: No. But the general message was coming across. But here's one for you guys as well. Think about this, a lot of people have been in this position, but it is one of another reasons why you don't want to trade too large. I've seen people do this. I've done this myself. I'm sure Phil has as well. Is when you have a big position and you're right on the direction, you're right, and it should be a profitable trade.
However, you keep messing with the trade because you keep seeing every movement and you're like, "Oh! Actually, you know what? I might be wrong in this one. Oh, I'll change it. Oh, I'll do this, or I'll close it and I'll redo it." What happens is you keep messing with the trade so much ...
Phil Newton: Deviate from the plan, yeah.
Sean Donahoe: You deviate from the plan, but you also deviate from what's actually happening because of your self-doubt or what have you. You keep messing with it. What you're doing is you're giving the money away back to the market and your brokers in fees and everything else because you keep messing with the trade on what should have been a profitable trade and you were right. But because you are so uncertain and you are so nervous about what's going on and you keep ...
Phil Newton: You're moving a stop plus maybe.
Sean Donahoe: Yeah.
Phil Newton: Yeah.
Sean Donahoe: And it ends up eating away at any potential profits you had and you end up either breaking even or even losing money on what should have been a profitable trade. You walk away. It's like, "Well, why the hell did I do that?" I mean, I'm sure you've been that down that road a few times.
Phil Newton: Yeah. But then following that chain of thought is because you're tinkering and you're looking at the money because the big position size and you're looking at, "Oh, yeah. I'm making 3,000, 4,000, $5,000, or 10,000, 20,000 a day.” You can be making an obscene amount of money because you've got too much position size, but what if the position is only, say, 20% of the way towards where you think it will get? But you're so clouded by the money and then you take that ... It's only done, say, 15 or 20% of the move that you expect and you've, "Yeah! I've made $10,000," blah-blah-blah and you tune yourself. It's only done 20% of the move.
Then you watch it move the rest of the way and you've missed out on the home run. You've missed out in the big-money move because your emotions interfered, because you were happy with the 10,000 and you missed on the hundred thousand move.
Sean Donahoe: We've been there as well.
Phil Newton: But you've made money, and to be fair, you've chickened out and you've ... But it's that big position size. It doesn't allow you to get what you expected from the move.
Sean Donahoe: Very much so.
Phil Newton: So as you were saying, the profitable position can sometimes be equally as worse as being stopped out, because you're looking at the money. You're not looking at the money you've lost. You're looking at the money you have made and then you're now looking at the money that you could've made as supposed to money that ... Well, I suppose, technically the lost money, if you just followed the plan, surprisingly, Sean. Which brings on to a very interesting point, is you need a plan.
Sean Donahoe: Yes, absolutely. That's a huge mistake. Trading without a plan and without a journal. Now we're talking about this ...
Phil Newton: Always assume that you've got a plan. We make that as a given. We assume that most people have some ... At least a very loose interpretation of a trading plan. My first one was very simple, trade the first. Pullback after moving the average crossover. For many, many years, that did me just fine. There's a bit more to it than that, but that was the 10,000 foot view of it.
But the point is, is it doesn't have to be 20 paged documents, war and peace, outlining everything that you need to do, and when the sun, moon and stars are in alignments. Just have an outline, a plan of, "When this happens, I'm going to do that." That can be as simple.
Sean Donahoe: I mean, that's the foundation of a good strategy right there, but the trading plan can also be ... And the analogy I use is standard operating procedure. It's your SOP document. It's basically ... It can even cover down to what you're doing at the start of the day. Your procedure for doing this. Your procedure for doing that, and it just becomes basically ... The way I use this as an analogy, is I can give this document to anyone who has the authority and the knowledge of trading and break it down into such bite size chunks that anyone could trade that wave on my account if they had to.
So it literally breaks down every single aspect. It doesn't have to be war and peace. It can be as simple as Phil just laid out. But at the end of the day, it is your foundation.
Phil Newton: As long as it’s descriptive enough for you to do that with that SOP type of experience. When this happens, do this, and it's broken down to those very finite steps and descriptive enough to someone who's a novice to go, "Oh! I understand what needs to be done," and then they can then do it. To be fair, that's the granular detail that you want.
I always describe it, just to still your thunder a little bit, Sean, is I want to know what, when, why and how I'm going to do something. That's what I want. If I can't answer those questions, then I don't know what I'm doing. Again, why have it in the first place? Because it creates certainty where most people are uncertain and then you've got that shooting from the hip experience. You start doing all the emotionally charged decisions that we don't want.
Because, to be fair, I want ... Be quite mechanical. I want that production line experience in my trading. I don't want to, "Well, if the sun and the moon line up, maybe I'll stand on my left foot and use my ..." Some crazy reason for putting the trade on. I don't want to make it up every time. I want a production line, when this happens, do this. That's what you want.
Sean Donahoe: Yeah, absolutely. Mercury , Mars is in Uranus and the whole things are going wrong.
Phil Newton: Yeah. Don't just stand on your head with daffodils coming out you. I don't know. Anyway ...
Sean Donahoe: Yeah. Unfortunately, we all know traders who are like that.
Phil Newton: But some people do that. Yeah, some people do that, and that's fine. That's fine. If they want to do that and it works ... But I think the thing is ... We'll get into the points of the thing that we always like to talk about, is do it again tomorrow. Replicate it.
Some people are really good at discretionary trading, and I have and can trade discretionally. I can shoot from the hip, but that comes from experience. But I don't want to spend hours trying to figure out and wait for that shoot from the hip moment. When is the right time to pull the trigger on that type of trade? All I want is production line. When this happens, do that.
That creates ... Again, it's more the longevity of being in business, because I want to be able to repeat the same thing tomorrow, next week, next month, next year and be in business. Because every successful business, as you just said, has a standard operating procedure for operating that business, and that's what I want. Every successful business that lasts for any measure of time has these procedures.
The discretionary trader is completely reliant on those trading decisions and evaluations every single time, and that is emotionally exhausting. This is why a lot of pit traders used to burnout. You'd maybe up three to five years as a pit trader. Maybe you'd have three to five years as the institutional professional level trader. Some of them last a long time, but most of them burnout in a very short space of time. They're on Wall Street a couple of years later, but burnt out.
It's typically because they've not got that production line experience, and the once that do have a long lasting career were either very emotionally stable or they've got this SOP, this production line strategy that they can deploy every day, next week, next month, next year, 20 years down the line. They're still stamping out the trades. That's what you want. That's why we're doing it. It's to be in business tomorrow and the longevity of it.
Sean Donahoe: Yeah, absolutely. I mean, we really should highlight that being too emotional is a mistake. One thing that I talk about a lot is the divestment of emotional towards money, and a lot of this is ... A lot of the emotion that's around trading is the fear of loss. But there's also the positive emotions, which is the , which can give you a false sense of security, which can increase your risk profile.
Phil Newton: The euphoria of, "Look how great I am." I mean, that is equally as dangerous.
Sean Donahoe: Absolutely. This is one thing that I focus a lot myself, because that's something I've had to deal with in my past again. Just realizing I bring a certain level of discipline to not only what I do with my money in trading world, but also what I do in my businesses and everything else, because my fingers are in a lot of different pies. So I learn very quickly.
Phil Newton: Almost got to be aloof, haven't you, Shawn?
Sean Donahoe: Almost, yeah.
Phil Newton: You got to have that carefree type of attitude. The things that we're talking about, the reduce your position size, the have a trading plan, the ... Don't be glued to the screens every day. Learn some patience and all the rest of it.
The reason why we're talking about it, it allows you to be aloof. It allows you to be in difference to the outcome, because it's a very difficult thing for most people to do. Some people just naturally have that built in mindset, and that's fine. But the majority of people don't have that ability. Just being in difference to that outcome means that you can put the next trade on.
It sounds such a simple thing. Well, of course. You just put the next trade on. When you're in a live money accounts and you go to put the trade on, you tell me that you're not influenced by your emotions in such a way that it prevents you from putting another trade on or you've got an emotional reaction to the current positions that you do have and you start making crazy decisions, "I'll just do this and see what happens."
While we talk about the mindset quite a lot, Sean, I'm not talking about it in the concept of the shaking and rattling and sense yourself and find your inner peace and stick a daffodil up your ass and all the rest of it. I'm not into that.
Sean Donahoe: I'm glad! I'm glad! Doesn’t walk into the office with daffodils in his butt. We're okay.
Phil Newton: No. But some people have that viewpoint in life. That's great. If they find centered peace from that, that's great. But at the same time, I'm very conscious that the mindset, the emotional reaction to our experiences. You can't deny that there's too much evidence. No matter how you view the emotional mindset, whether it's at the end or it's the very logical appreciation, which is where I would say I have.
I have a logical appreciation for my emotional influences on the things that I do or don't do. They aren't determined by emotional reactions and responses. That's psychology. That's basic ... I'm reluctant to, whether it's Maslow or whatever psychological viewpoint that you want. It's a fact. It's a known fact.
Sean Donahoe: You're talking about Maslow's Hierarchy of Needs.
Phil Newton: Yeah. It's like the ... Yeah, but I suppose I'm trying to dance around it without actually saying that, and I'm failing to be fair, Sean. But no matter where you are on the spectrum of your viewpoint, your belief of the emotional experience of the human psyche, it does influence your decision making. End of story.
I'm not pro daffodils up the ass or logical decision making. You have influence. It doesn't matter where you are in the spectrum. It's going to influence you. The things that we're talking about, they're to help you manage the emotional reaction so that you don't have a knee-jerk reaction to the situation that you find yourself in on any particular trading day. So that it allows you to apply this SOP. Have the production line and put the next trade on. Because if you can't put the next trade on, then there's no ... Something's going wrong somewhere is all I'm trying to get to, Sean.
Sean Donahoe: Yes, absolutely, and I cannot get this image of Phil with daffodils now out of my head. Thank you. I appreciate that. He's going to go need to speak to a psychiatrist now for a therapy.
So anyway, another mistake that we often see, and this is one that is a should be obvious, but it'd be surprising how often it isn't, is ignoring the trend. But at the end of the day, yeah, the ignoring the trend.
Okay. If you've got a stock that is trending clearly upwards and it isn't ... There's no real signal that it's changing cost or anything else. Maybe it's going into a little bit of a dip or correction or what have you or it's in ...
Phil Newton: Was it Newton's third law? Was it? Not me. But the brainy Newton.
Sean Donahoe: The brainy Newton.
Phil Newton: Newton's third law of body in motion stays in motion until an external force is exerted on it. It's the same principles are applied in ... Is it hydrodynamics or anything to do with that? It's the body in motion stays in motion until something moves it along a different . But why buck the trend? These are all cliché phrases. They're cliché for a god damn reason, man!
Sean Donahoe: I like that. Okay, someone take his soapbox away.
Phil Newton: Take the pills. Maybe I should see that trend, Sean. .
Sean Donahoe: You need some of those dried frog pills. That's what it is.
Phil Newton: Yeah. I mean, maybe we should do the daffodil treatments after all. Who knows?
Sean Donahoe: Dear me. But yeah ...
Phil Newton: No. But I'm completely with you on this, Sean. It's why buck the trend? Now, in fairness, unless your strategy is the counter trend trade, then just understand the landscape that you're trading in. I think the overarching comment that I'm hearing you say though, Sean. If it's going up, then yeah, it's in an uptrend.
If your strategy is to trade counter-trends, then knowing that trend is important. Equally, if the trend is going up and it's undeniably in the last 12 to 18 months being going up and you're a trend trader. Maybe you should buy the dip. There's only eight things that you can do in the market.
Sean Donahoe: BTFD. Yep, BTFD.
Phil Newton: Yeah, we always joke about it. But it's just acknowledge the landscape. Not necessarily the trend. If it's ranging, it's ranging. There are certain ways to trade a range. But just acknowledge the landscape that the markets are in or the individual instruments and trading opportunity that you're evaluating is in to determine what you should be doing. Because if it's in an uptrend, maybe you should not be using a ranging or oscillating indicator or ... Pick the right tool for the right job I think is what we're harping on about here.
Sean Donahoe: Absolutely. At the end of the day, while I am in some ways ... We've talked about it in a couple of few shows ago. I do do count the trend trades.
Phil Newton: You're a bit more counting trend trader than I am. Yeah.
Sean Donahoe: Yeah, in certain instances for a short term.
Phil Newton: I've done it before. I've got nothing wrong with it. I just ... Hey, there's plenty of opportunities without doing that. I just prefer not to, because it means that I can spend less time. Counter trend trades to me, Sean, I think you need to keep a little bit more of an eye on them because they are counter trend. It doesn't mean that you need to sit in front of the computer all day, but it just means that I ... It makes me ...
Sean Donahoe: A little more awareness.
Phil Newton: Exactly. I means that I can take that eye of ... I can take less of an eye off the markets because I'm not trading counter trends. Like more from a laziness point of view from my perspective.
Sean Donahoe: Yeah. While I occasionally do a counter trend trading, here's the thing, I need to know that it was a trend in the first place.
Phil Newton: Which is the whole point. Yeah.
Sean Donahoe: Which is the whole point.
Phil Newton: If you're going to do it, be aware of what's going on.
Sean Donahoe: But I do it for only very, very short terms, because I will sell the rally so to speak in certain areas, because I'll ... Whatever. I've got some counter trade straights.
Phil Newton: another way sometimes. You're fading the break out or you're fading the trend or whatever, all these fancy terms. Again, we'll categorize that in the daffodil segments.
Sean Donahoe: Dear me. But, yeah. I mean, even in those situations, you have to be aware of what the trend is. I see so many people just shooting from the hip blindly. Not looking left is one thing that we talk about a lot, is to see what has happened historically and is that likely to continue using Newton's third law of daffodils? That's going to be an ongoing theme throughout the show, I know.
Anyway, moving on. I think another one which is very much in line with the trading too large, but also I think is unrealistic expectations of what the market will do. The market owes you one that there's so many different ways that we can approach this. But, listen. Trading is and can be brutal. It's unforgiving. It's unemotional. It doesn't care about you or your trades or anything. You are insignificant. If you have some expectation about what you are going to do in the markets that you're going to be the next Bobby-Axelrod or Warren Buffett or ...
Phil Newton: Maybe we should just pick random examples for illustration. Bitcoin, $200,000 was one I saw this week.
Sean Donahoe: Yes. Now, you now what? Hey ...
Phil Newton: I think buy in the year 2020.
Sean Donahoe: Yeah.
Phil Newton: You know what? To be fair, I can't say no. It might happen. That's the best anyone can say. But you know what, realistically? Probably not.
Sean Donahoe: I keep seeing people say, "Oh! It's going to be 50,000 by the end of this year." I'm like, "Do you know how much it has to skyrocket from this point to get there?" What do you think the probability in range of movement, daily range of movement would be to have that second wave? I mean, it'd be insane. Obviously, as the days tick by, the probability is that it could happen.
Phil Newton: Again, it could happen, but it probably ... No one can say no. No one can say for definite what will happen. We do not know what's going to happen. You know what? It's the lower probabilities, as you were just saying there, Sean. It might happen. But you know what? Realistically, from a probability view point, it probably won't. It probably won't.
Sean Donahoe: Yeah. We've got five months left to this year.
Phil Newton: It'll probably hit $2,000 before it hits 20,000. Retest the recent highs. It’ll get to two before it gets to 20.
Sean Donahoe: Yeah, exactly. I mean, there're lots of different things. I hear people make insane predictions and you've just , "Well, what is the probability? What would have to happen for that to happen?" It's like, "Okay. Then what's the likelihood of those extreme events happening?"
I mean, it's very much like pointing to the outfield like Babe Ruth and thinking, "Okay. I'm going to swing for that fence, and that's my expectation. That's my prediction." Then you completely swing and miss, and swing and miss, and swing and miss. But you've got that believe of that ... That bias, so to speak. We'll talk about biases more in a second. But you think that, again, you have that unrealistic expectation that every hit is going to be a home run.
Phil Newton: What was that statistic you mentioned the other week actually? I thought it was quite interesting actually. To be a hall of famer? Again not ...
Sean Donahoe: I was literally just about to say that.
Phil Newton: I find it quite interesting, because we do talk about like hitting the home run and going for first and second base. From a probability viewpoints, it's easier to get the first or second base on a consistent daily and regular basis. But hitting for that home run, it's an unrealistic expectation.
Sure, you can do it, but do it again on the next swing, do it again on the next swing, do it again on the next swing. There's lack of consistency. I think this ties in nicely with that statistic. Just to be considered one of the all-time greats of that particular sport. What was the ...
Sean Donahoe: 3 out of 10. 3 out of 10.
Phil Newton: 3 out of 10.
Sean Donahoe: If you hit 3 out of 10 pitches, you are a hall of famer.
Phil Newton: You're considered exceptional, the cream of the crop, the best of the best. Let's put this back into a trading context for a moment. It's referred to as a strike rate for that reason. So you'll strike rates in baseball, it's referred to in the same way in trade. Your success rates. If your success rate was 30%, so 30% at a time … Every hundred trades, 30 of them make money. Most people would probably cry if they have that experience, because ... Oh! Just looking purely at the numbers, only 30% of my trades ... That means 70% of the time, you're losing money.
It's not necessarily you're losing trades, because … Talking about the reframing last week. You're just losing money. Does that mean that that strategy is unsuccessful? Because if you have that experience in a different area, you're considered one of the best in the world. Whereas in the trading world, the novice trader would look at that strategy and say, "I'm only making money at a time." But if your strategy is making money overall, I would argue that's a great strategy.
Sean Donahoe: Absolutely. No. I mean, that's it at the end of the day. It's also how much money are you losing versus how much money you're making.
Phil Newton: You're in the business of making money.
Sean Donahoe: If your 30% of trades are making significantly more money than the 70% that are losing a little bit, then obviously you're doing good. That's it.
Phil Newton: You're doing great. Yeah. I mean, it's all about, I suppose, perception, that this perception of reality, this unrealistic expectation can be expanded not just for individual trade, but your whole trading experience. I mean, flip it on its head. You can be winning 70% of the time, but if overall your strategy is losing money, then it doesn't matter how many times that you make money, because 30% of the time you're losing more money than you're making.
Sean Donahoe: It's one thing, you're out every time.
Phil Newton: But it's ludicrous. It is the point. But people think that, "Hey, I'm making 70% of the time. Therefore, it must be a good strategy." Clearly, we've just proven that it's not the case.
Sean Donahoe: Exactly.
Phil Newton: I've got a strategy that 95% loses ... 95% of the time losses money, Sean. It's not applied every time we need certain conditions or you need extreme volatility. Sort of financial crash type experience. We need major range of movements for it to work. It's not something that's applied every day, but when the conditions are right, once or twice a year, it's worth rolling out. In 2008, it produced about 63% of my year's profits in four months, but it lost money 95% of the time. Go figure.
Sean Donahoe: Yeah, exactly. It's all about the overall numbers. That's really what it is.
Phil Newton: Exactly. I'm only mentioning it more to illustrate that one of the success rate, the strike rate is in isolation in trading is not typically a good measure on its own as to whether you should or should not deploy that. I think this falls nicely and neatly under that realistic expectations. We're just trying to open your viewpoint, your mind, your horizons to what a realistic expectation looks like.
If you're losing money 70% of the time, overall your strategy is making money. For me, that's a good strategy. Whether you want to continue with that, because the experience of trading is that the ... Like a roller coaster. If it's not a smooth experience, then you might want to reevaluate the strategy. But if you've got a nice steady curve. The loses are small, but the gains are big, then maybe you want to trade that strategy. That's a good strategy. If you're making money, it's a good strategy. Any strategy that makes money is a good strategy.
If it was a business on the high street, if you're making more money than your overheads and expenses and the cost of running business, that's a good strategy. You're in business is the phrase. Just reevaluate what that expectation is.
Sean Donahoe: Absolutely. This leads nicely into the next one, is having a bullish or bearish bias at every step. Now, here's the thing. You can have an expectation of direction. You can have, I would say, a predetermined outlook, but one phrase that Phil uses all the time that really comes into play here is always be prepared to change your mind. Because having that bias even if the evidence is saying differently can keep you in a trade that is basically now going against you when, again, you're looking at things and you're like, "Okay. The conditions have changed,” or what have you, but having that bias can keep you ... Or can create a false outlook that you're trading or throwing your money against, thus risking it.
What would you say there, Phil? Because this is a gray area, because there are some that if your strategy says, "Stay in. Stay in," obviously.
Phil Newton: I think having that bias ... If you don't have enough of a time horizon. I'm conflicted, Sean, if I'm going to be honest, because I actually advocate looking for a bullish or a bearish bias with a condition. You've got to look at enough of the time horizon to form that bias.
So if you're most people, and this is the trap. Most people look at, say, the last week. Let's say you're on the daily charts. This could be a whole bullshit segment on its own, this particular part, because in the news, surprisingly, Sean, in the main stream news, this week I saw charts and it was a nice steady uptrend and then there was one giant candle that looked like the markets had crashed.
It's only when you start to look at the detail and then look at the scale of the charts then look at the timeframe that's being shown by this mainstream news. Just to highlight the bullshit and the manipulation of the viewpoints of the headline that they're trying to sell. They put a one minute chart on talking about the trade deal. It was a reaction to some news on the trade had gone through all day. There had been a retaliation shots from the Trump administration. That had caused a reaction in the markets.
On a one minute chart, it look like the ass had fell out the markets, but they don't hide. This is a one minute chart and it recovered quite quickly and it only lasted for a few minutes. Then you look at the scale down of the move, and the move actually wasn't that big. It's just by comparison for the last 30 minutes. That was a huge move.
Again, just think about what we’re talking about. In the last 30 minutes, that was a huge move, because there was very little movements in the previous 30 minutes. But that was being suggested that this was a monumental movement. It was suggesting the markets had crashed. There's a listing panic. But it's only the people with half a brain that are just pausing that are doing the, "Okay. What timeframe is this on? What market is it? What's the scale?" "Oh! It's nothing to worry about." Surprise, surprise, Sean. It was a bullshit piece of news that was just trying to sensationalize something that wasn't really news.
Yeah, there was a reaction in the markets, but it wasn't as exaggerating and pronounced as what the mainstream media was trying to suggest to guess what ... It's almost like clickbaits as far as I'm concerned in the financial markets.
So having that type of short term, narrow-focused, under the microscope analysis of bias, bullish or bearish bias, that's dangerous, because it's going to cause mistakes. However, I do firmly agree that if you've got enough data to appraise and formulate a sensible bias, it's going to help you make sensible decisions. It's going to prevent you from panic, because if I was seeing that piece of news ...
Sean Donahoe: I want to change the wording here, because this is one thing that I think is where the gray area comes in. It's a bullish or bearish opinion, but not a bias. I think, right now, the firm opinion is that this is in an uptrend or this is in a downtrend. It's an opinion. It's an evaluation and it's a very specific ...
Again, I'm actually going to tell this on, Phil, because we're always going back and forth about the precision of the wording. It's an expectation and an evaluation of the evidence that's there right now. A bias is when it's changed, but you still have that upward ... You still have a bias, which means you are almost now in a belief. It's like almost it's becoming a belief rather than what the evidence is actually showing you. There a specific wording.
Phil Newton: Yeah. Yes, I agree. If you have enough ... We only say 12 to 18 months. Is it? Well, 12 is a minimum. I typically look up at 18 months on daily charts to evaluate my bias. Now, it's going up on an uptrend that it's probably going to continue to go up. That's the best I can say with that bias. I'm not saying it will go up. I'd say it'll probably is going to go ... It might not necessarily go right now.
I think this is the don't be set at ... What you were just saying there, Sean, is have a viewpoint, have an opinion, but don't have it set in stone. Right now, the market is bullish. Great. But it doesn't mean that it's going to continue to go up at this moment. Because right now, the broad market is going up. As we're doing this, the market are going up. But the last three months, coming into four months, the market’s been range funds. So we've got a short term range and a long term uptrend.
So we can have a different viewpoint is all I was trying to say depending on the time horizon that we were looking at, and I think that's the danger. That's the trap. So you can have multiple viewpoints, but be aware of them and don't be caught in by the headlines that we were just saying. Because on a one minute chart, the market ... I use the term loosely, because this was the phrasing that they used. The market is crashing. On a one minute chart, really? Is the market crashing? It's only moving more and strongly in one direction compared to the last 30 minutes.
Yeah, that move looks very violent by comparison. But if I saw that and didn't look at the timeframe, didn't look at the scale, then I might be making poor judgments for my own portfolio, because I was believing the mainstream news. I'm getting off on a tangent here. I'll come back in a second.
I've got this overall bias, "Well, the market is going up. In the last 12 months, in the last 18 months, the markets are going up." That knee-jerk reaction to the news is nothing to worry about it. It helps you to put it into perspective by having this bullish viewpoints as supposed to having a hard line ... But dancing around the wording here again, Sean, bias viewpoints. I would categorize them as the same type of wording, but I wouldn't definitely say I am going to be only a buyer in a bullish market. Because there are times when you'll be a seller, but it's maybe not the right time.
Because I think there's a timing element to all of these as well. If you do have a bullish bias or a bullish viewpoints, it doesn't mean that you're going to automatically get in a position and you're only going to be a buyer when the market is going up. You probably will be a buyer, but maybe not today. You've got to wait for the right time to deploy the right trade in the context of an uptrend, because it might be, from your perspective, a great time to be a seller in an uptrend because of the bullish bias because you're a counter trend trader. But you've got to wait for the right time to do that.
Sean Donahoe: Yeah. I'm going to have to pull a Bill Clinton here. It's the definition of the word is. The bias ...
Phil Newton: I think we're dancing very much around ideas and concepts and we're looking at the vernacular of how we're saying these things. Yeah, it's a tricky one for sure, Sean.
Sean Donahoe: Yeah. The viewpoint is evidence-based. I would say that the bias is belief-based. The thing is that beliefs are very hard to change once you're locked into them. I guess that's ... Again, I'm coming at it from a very semantic opinion.
Phil Newton: I see your point now. Yeah. No, I see your point.
Sean Donahoe: Yeah.
Phil Newton: Having just heard you say that, this is something that I take for granted. I try not to have that viewpoints, the opinion, but be locked into it, which is what you were worrying about.
Sean Donahoe: Which is why I'm saying about to always be prepared to change your mind based on the evidence presented and don't get
Phil Newton: See, I don't think that way anymore, Sean. That's why I supposed I was struggling to come up with a negative way of ... Or the downside. Because in don't think like that anymore, and I haven't thought about that for nearly two decades. It's like ... Because I'm so ...
Sean Donahoe: It is something we take for granted, because we have got that.
Phil Newton: I mean, I've just been doing it for so long. So I didn't quite get the point until you rephrased in the last moment there, Sean. Yeah, always be prepared to change your mind. It's with new information. I will evaluate the same chart multiple times. I'm looking at it with fresh eyes today. I looked at it yesterday, for example. But today, with new information, what do I see?
Sean Donahoe: Exactly.
Phil Newton: I think that was the point you were trying to get to. Always be prepared to change your mind. We got to the same page essentially, Sean. I was a little bit behind. I have to speed read a chapter up to to get to the page you are on.
Sean Donahoe: There you. It's all good. The last one we want to talk about here today is no portfolio management of money management at all. Now, this is one thing we actually covered extensively in the last podcast. We were talking about wrangling portfolios that are out of control. But it is a very important aspect of trading that we touched on earlier on briefly, but I want to shine a light on it, is we treat our portfolios like the departments in our business and ... Again, we treat trading very much like ...
Phil Newton: In Phil’s fancy shoe shop business.
Sean Donahoe: Indeed. We'll go back to his fetish shoes.
Phil Newton: I'm going to get to know every episode, haven't I?
Sean Donahoe: Absolutely. Along with daffodil now. I'm never stepping forth in that bloody store, I'll tell you.
Phil Newton: .
Sean Donahoe: Indeed. But if you think about a portfolio being the basket of these positions that you have continuously working, managing your money, managing your portfolio is a very important aspect. It is literally the overall business and the employees doing their thing within your business, making you money, doing what they should be doing.
Again, rather than getting micromanaging each and every single trade with your strategy already be in play and in place, you're looking at your entire basket and saying, "Okay. Well, this is where the money is actually made, is the management of those overall positions and your entire portfolio. What say you, Phil?
Phil Newton: Absolutely. Yeah. I mean, we've spent actually a few whole episodes talking about these ideas and these concepts. I suppose the way we described them is evolving over the months and, now years, as we're doing this podcast. Using the business analogy is very apt. Your strategies are like your department heads, because we've got technically one big strategy inside of that if we imagine like a hierarchy of business. We got department heads. We got multiple strategies inside the overall business. Then inside of each strategy are the individuals trades.
Again, if you imagine this a little, kind of like a hierarchy of people in departments. Inside of each departments, the individuals strategies, you've got the individual trades, which are like your employees. So if you've got 10 employees or positions inside of a one type of strategy that's you’re trading and you've got and the others, then you might be heavily biased towards that one risk exposure to one type of market condition.
So if you could spread it over multiple strategies, multiple departments if we think about this department store. If you have maybe a little bit of exposure in each of those strategies and market conditions so that you've got a little finger in each pie so that you're not so worried about, "Well, hold on. Department A, strategy A isn't underperforming." Well, that's okay, because strategy B, strategy C, strategy ... The other department heads, they're pulling their weights. They're carrying the can if you like.
For the most part, we don't have to worry about that type of micromanagement. We don't have to do it, because the workflow that we have that selects the strategies, most of the time doesn't always work. That's just a fact of nature of how it works. Most time, it's going to select the right strategy for the right market conditions and we can filter through and put the right employee and the right departments when the market conditions are right. Everything bounces out quite nicely. It just means that you've got this nice organizational chart for your trading business if you think about it in that context.
I quite like that idea. I mean, it's evolved over the years, but this business hierarchy and thinking about your portfolio with your strategies and department heads and employees, you don't have to worry about what each individual employee is doing. You can just look at the department head and say, "Okay. Well, this strategy is performing well or it's not performing," and then you can look at the overall business and say, "Well, yeah. The overall business is producing profits. Are there any areas to worry about?" Then you'd go and talk to your department heads.
But you don't need to worry about the individual employees on a day by day basis. I mean, sure, you're going to keep an eye on them as you're updating your spreadsheet and the overall stages reports, but you don't need to micromanage that employee on a day by day basis. That's a great way to think about it, because we're very businesses-minded when we talk about our trading, and I just like that organizational chart analogy.
Sean Donahoe: Yeah. It really does help a lot. It's something that I've done and it's come to naturally, because it's what I do with all of my other businesses. Like I said, when I treat trading like a business, it's very much this is the analogy that we bring into it.
Phil Newton: Yeah. You would have your daily meeting. Granted that daily meeting analogy, is you're just updating your spreadsheets. We've spoken about before. I mean, you don't have to intentionally go and do this the way that we trade. You're naturally filtering employees. It's like your employee coming to you, "What department do you want me to work in today?" "Well, I need you, Bob. I need you in the trend trading strategy today. I need you on the bullish trend trade strategy today, Bob." "John, I need you in the counter trend trade basket today, because we've got a counter trend trade that's set up." "Frank, we need you on the range trading strategy today."
You're finding jobs for your employees and they naturally filter themselves off with the way that we select our strategies. It works out quite nicely. I quite like ... Again, the more I think about this, the more I talk about this hierarchal type thinking and organizing the trades, the more and more I'm actually really liking the idea. We should trade more.
Sean Donahoe: There you go. Absolutely. Absolutely. Absolutely. So with that being said, those are the main mistakes of people make in trading and how to overcome them. Let's rock 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. Here's the thing, you're going to make mistakes, and this is going to be ... This tip is very much in line with the main thrust of today's show, but you're going to make mistakes. We all have and we're going to make more. That's what it is. That's the nature of the beast.
Here's the thing though, if we actually recognize those mistakes and let them develop our experience, then every mistake made is a valuable lesson.
Phil Newton: It's a lesson learned. Yeah.
Sean Donahoe: It really is. But if you can be aware of those mistakes before they happen and develop the discipline to make strategic and technical decisions as needed, then those mistakes can be bypassed altogether and you can fast track your learning.
See, learning from those that came before you and gaining the sum of their experience can save many years of many painful lessons that you can avoid. Walking forward with your eyes open and your brain open as well will help you along the way.
What say you, Phil?
Phil Newton: As you were saying, I was thinking about, I think some of it can also be thought about from not just the practical side as you were describing, but also the mindset and the way that you view the mistakes that you've made.
We spoke about this last week actually as well. Reframe the way that you view success. As you were saying that, I was thinking about ... I think was it Nick Faldo in the late 80s, early 90s, was semi-famous for a quote. It was, "I've never missed a shot." Everyone thought he was an arrogant asshole for saying it, but ...
Sean Donahoe: Very powerful mindset .
Phil Newton: Those who know better, and I didn't appreciate it until years later. But for those who know better, they ... In his mind, he's not missed a shot. He's got a 100% success rate in his application of what he's good at, hitting a ball across a field. But at the same time, he's not missed a shot in his life, because in his mind ... He's got to think about a way to perform at the highest level. You've got to think that way.
I think that is a valuable lesson. So just review and reframe the way that you view success just to tack that on to, yes, you're going to make mistakes. But don't think of them as a mistake. Think of them as a learning opportunity.
Sean Donahoe: Mistakes are essential.
Phil Newton: Exactly. Yeah. You're going to learn so much more from the mistakes that either you make or that other people have made so that you don't have to experience them yourselves. As you were saying, following the footsteps of other people who are already doing and are already are where you want to be.
I've learned everything I learned the hard way. I didn't have anyone. I made all the mistakes. I didn't know that it was people that you could reach out to say, "You know what? Can you just speed up my learning curve and show me what needs to be done?" I need to figure it out on my own just because I didn't know any better. Literally, did not know any better.
But that has given me a very important viewpoints of the way that I view my own business, my own activities, my own trading and lots of other things in life, because sadly I learned the hard way. But it took me 20 years to do that. But you don't have to do that. You can go and following someone else's footprints. And if you do make mistakes, review and reframe the way that you're doing them. You're not making a mistake. You just learned a lesson.
I think if you have that mindset when you approach things, you're going to ... It's okay for you to make a mistake, because you will learn so much more from that than you will by avoiding it completely.
Sean Donahoe: Absolutely. I couldn't agree more. So without being said, rock on.
Automated: If you've got questions, they've got answers. Sean and Phil dive into the virtual mail bag for this week's Rebel Trader's quick fire round.
Sean Donahoe: Okay. So rummaging around in the Rebel Trader mail bag here. I got an unusual one here for you, and this could spoil an entire show.
Phil Newton: I've heard that about you, Sean.
Sean Donahoe: Yes, indeed.
Phil Newton: for that.
Sean Donahoe: I'm not the one with daffodils, all right? I'm not the one with daffodils.
Phil Newton: But you're the one talking about baskets.
Sean Donahoe: Well, indeed.
Phil Newton: I thought they were flower baskets, not portfolio baskets.
Sean Donahoe: Yeah! Dear me. Anyway.
Phil Newton: Anyway, questions.
Sean Donahoe: Moving swiftly the hell on. Do Fibonacci levels really work on the charts when you're doing technical analysis? Now, I'm going to leave this one to you.
Phil Newton: It all works, Sean.
Sean Donahoe: Yeah.
Phil Newton: Here's the condition. Everything works some of the time, and nothing works all of the time. That's certainly what I have learned. To be fair, I only knew it, but I didn't not think that everything worked 100% of the time. To be fair, if everything worked 100% of the time, the markets wouldn't exist. We wouldn't have markets the way that we were. Everyone would be in this utopic society and everyone would be equal and it would be like a scene of an animal farm.
You know where I'm going with this, Sean. You can extrapolate that, do insert thing really work. Fibonacci works. Yes. There's an argument as to whether it's a self-fulfilling prophecy, because so many people use it to identify potential trading opportunities. Then before it was used, there wasn't a number of people that used it. But it still worked.
So chicken and the egg. Which came first? I think at some points, on occasion, it's self-fulfilling prophecy because so many do use it. But at the same time, we could say that with any indicator, any tool, any methodology, any framework for evaluating a trading opportunity. It all works. It's just weather it works today.
I think, again, to take our advice on what we've said with the trader's tip, is use it not as it's set in stone. Use these tools, use these indicators, use these methodologies as a framework to evaluate what might be going on. Is the chart in an uptrend? Yes. Is it retracing? Yes. Maybe we take the Fibonacci levels from point A to point B, the start of the trend, the end of the trend. If prices retrace sufficiently enough, well, one of those levels would be considered sufficiently enough. That's how you evaluate, by the dip in an uptrend when prices at a Fibonacci level.
That's what's going to help you to do it. You could do that with a Bollinger band. You can do it with a moving average. You can do it with any tool of your choice. It's a framework to help you evaluate what you consider. In this hypothetical example, what buying the dip in an uptrend means to you? Buying a dip in the uptrend for me means when prices in an uptrend and it's at the lower end of the Bollinger band. You could take the Bollinger bands out and use Fibonacci. You could take them out and use a moving average. You can take them out and use an oscillator. It's just in the context of how you view the market and what you're evaluating.
So, yes. They all work. Everything works some of the time. It's like a tool. It's what you do with that that really matters. Not the tool itself.
Sean Donahoe: There's also the self-fulfilling prophecy aspect here as well, which we all do need to come in. Because you've got the Fibonacci traders who tend to hit things at certain levels and then suddenly everyone ... It's bouncing off a certain level that Fibonacci traders like. Then it's like, "Okay. Well, that's okay, because all the Fibonacci traders are acting right now on this particular one, because it's hitting those levels." It's the same we could talk about the death crosses and ... Yeah ...
Phil Newton: Pick any . It's the same thing. Yeah.
Sean Donahoe: Yeah. So there is a self-fulfilling prophecy aspect to a lot of these as well. Look at the 200 day moving average.
Phil Newton: I think if you're in line with the overall ... This is why we focus on the trend. Which way is the ? If the overall money flow is going up, a.k.a, an uptrend, then buy in the dip. Whether it'd be with Bollinger, with Fibonacci, with moving averages. It's a good thing to do. It's just the framework context. It's like adding salt to food. You already got a good meal in front of you. You're going to flavor it with whatever, peppers and spices that you'd like to enhance the flavor, and that's what these tools do. It allows you to help pick the timing of the trade, which is dictated by your view, your philosophy of the markets. Your view on philosophy of the markets is through the lens of Fibonacci, through Bollinger bands, through stochastic, through insert, indicate a name of your choice.
For me, having used all of them at some points, and there's lots of them out there. The tool doesn't matter. It really doesn't. It helps you determine a framework, a viewpoint, looking through the lens of lots of ways of saying it, but they all work.
Sean Donahoe: Yeah.
Phil Newton: Pick your poison. It truly doesn't matter which one. Just pick one. If you like Fibonacci, then use it.
Sean Donahoe: We've proven that time and time again ourselves, but also with years of experience. Anyone of them will help you raise an awareness or a fine tune or a little bit of spice like you said. I actually like that. That's a good analogy.
What else is in the mail bag?
Phil Newton: So another question, Sean. Someone said, and let's be fair. I've said it a few times as well. But someone said, this last rally was the market's last hurrah before the big crash. What do you think?
Sean Donahoe: Dude! I'm going to do a Phil flip an answer.
Phil Newton: I've been saying this for nine years.
Sean Donahoe: Yes, you see. I think it's bullshit. Right now ... I mean, I think this is referring to ... I think the guy's name is Scott Menard from Guggenheim that was saying, "Hey, the market is going to lolled into a false sense of security with the latest rally." I mean, we were talking about this last week with the trade tariffs coming into effect on Friday, the 9th, and that this rally is kind of a false sense of security based on job numbers that came out, based on a lot of other things that this is the last hurrah. Yeah, we've said that with almost every rally. We've been expecting, like Phil said, the healthy band market for a long time.
Until it happens, until it changes, no. I mean, we're still … Technically, if you look on the monthly's and the weekly's, there still is an uptrend. I mean, more recently again, this is the … Without the biases, this is opinion based on viewpoint, based on evidence. The last few months, we've kind of been range bound. Is this a tip over point? Not yet from what my opinion would be. I'm saying it's my opinion. But I don't think this is the last hurrah. I think this is just another movement. That's it. Is it going to continue? We'll see.
Phil Newton: Maybe.
Sean Donahoe: But right now, it's not a point where I would say that this is a tip over point until a tip over point emerges, and then I'll start considering it.
Phil Newton: I think ... Well, you just hit the point that a crash is a crash because you don't know it's going to happen and everyone panics. However, the question is about the impending bear market we're always talking about. Is it the last hurrah? Is this the last rally before the bear market's dance? It's not going to be ... If the bear market was going to happen, it's not going to happen overnight, which would be a crash. In which case, you can't predict it. That's the whole point of a crash.
Sean Donahoe: Exactly.
Phil Newton: A bear market. You will know that it's happening well all in advance. It crashes like a speedboat turning around in a canal. You can flip it over and speed away near the direction very quickly. However, a bear market, a bull market to a bear market, it's like turning an ocean liner around in the same canal. You need multiple point turns. It's not going to turnaround quickly. You can't just do a little handbrake turn and skid off near the direction. It's going to be a multiple point turn to turn that steam liner around in the same canal. It's a slow progress.
Sean Donahoe: Absolutely. I mean, if you take back ... I mean, I'm looking at, say, the S&B 500 over the last two years. Even though we've been mostly range bound, you could look at that and still say that that is very clearly still in an uptrend regardless ...
Phil Newton: What we're seeing right now even most this year, despite the big selloff at the beginning of the year. For most this year, it's been bias upwards. But it's neutral. Where is it?
Sean Donahoe: Here's the thing. It's consistent ... While the peaks have been pretty much at the same level they're at now about 2,700-ish. It's being consistently higher lows and it's the consolidation.
Phil Newton: To put a name on it, which I'm not fond of, but just so it paints the picture in your mind. It's like an ascending triangle. I'm not a fan of things, but just so it helps paint the picture, because we've not go the visuals for everyone to see right now.
Sean Donahoe: Exactly. I don't think we're at that point yet. I think there's another great news headline to get your attention on something, getting some ads. But other than that ...
Phil Newton: Surprise. Surprise. Is it mainstream news, mainstream media bullshit again?
Sean Donahoe: Oh! Don't even get me started. But, yes. I really think this is ... Again, it's more noise and I think it's just an irrelevant ... Relevance, again. When is this one thing? But don't listen to the financial news later. It can raise awareness, but always trust but verify. Just look at the markets. See what it's doing yourself. Form your own opinion, not a bias based on someone else's bias, which is in their case, getting you on the odds.
Phil Newton: To finish off the flipping answer, the market's last hurrah. What do we think? Well, who says it's the last hurrah? The market ... We'll be able to tell looking back after it's happened.
Sean Donahoe: Yeah, absolutely.
Phil Newton: Because no one can tell you. It's just opinion. It's . We'll tell you when it's happened or after it's happened. That's when we'll be able to say, "Yeah. Well, okay. That was the last hurrah." No one knows is the honest answer. We do not generally know what's going to happen tomorrow. So everything up to this point is opinion. We've got an average expectation based on history, but I'll tell you after it's happened.
Sean Donahoe: Absolutely. There you go. So, okay. Looking back in the mail bag here, I've got one more for you. Why is Tesla so popular with short sellers? I mean, we can both go into this one.
Phil Newton: Well, to be fair, Sean. I'm looking at the chart. Who says it's popular with short sellers? I'm looking at the chart right now and it's being range bound since April. We didn't know it was range bound in April last year, 2017, but we're now in ... As we do this July, 2018, it's being sideways for well over a year. Who says it's popular with short sellers?
Sean Donahoe: Oh! There has been a lot of news over here about short sellers attacking this and how they have no minimal cash on hand. How the business is being run. There's a lot of press over here. Maybe it hasn’t made over there.
Phil Newton: Now that you're said that, Sean. I'm going to rephrase the question.
Sean Donahoe: Fair enough.
Phil Newton: Mainstream media says it's popular with short sellers. That must be fair to say. It's popular with short sellers. Not it's worth short selling.
Sean Donahoe: That would be a more accurate, I guess, question here if it was reformed. There has been a lot of press, a lot of short sellers who've come out and publicly said they're shorting it for these reasons. Yeah, I think it's more of ... It's a target of opportunity and there's been a lot of public spats with Elon Musk and the short sellers who are on earning schools really confronting him, and he's basically flipped them off.
There was actually ... Actually ...
Phil Newton: Just to interrupt you there, Sean. I'm looking at the chart right now. As we've already said, about a year and 18 months or so, it's being sideways. I would argue that the money is on the sidelines with Tesla awaiting for ... Like with the broad market in the last three months. The money is on the sidelines with Tesla. Those who are invested are invested. But the bear market, the bear side of the equation is not necessarily showing or raising its head. It's attempted to move down back in April when we had a broad market selloff, but the reality is it's essentially in neutral phrase. There's no clear indication. It's tried moving lower. Actually, it's broken, it's attempted to break out but broken back into its consolidation, which I see is a very bullish movement personally.
Sean Donahoe: Very much so.
Phil Newton: To answer the question, why is it popular? It's a very volatile stock. It's a $300 stock. So on a short term basis, maybe even intraday, it is probably popular, because I've got no numbers to back it up. So I can only say probably. It's probably very popular with short sellers because the moves are very volatile. Equally, it's probably very popular with day traders as supposed to short sellers in general.
I wouldn't say that the bear market, the short sellers are loading up the boats, because if the people can move and influence the markets, were moving an influence in the market, we would see that react in the price behavior. As it is right now, it's drifting sideways. So maybe short term, price fluctuations over, day trading to two or three days. Maybe it is quite popular with short sellers, but it's because it's a very large dollar stock. It's got wonderful intraday movements.
If I was looking to day trader, I would be on both sides of this, which would therefore make it popular on the short side from my perspective. It's a good move in stock. I personally think it's one of those blown out of all proportion headlines, again, by the signs of it. It's not necessarily ... Again, to use that word. It's not a bullish biased stock. It's not a bear.
I would say that it's in a neutral phase at the moment. There's no clear winner between the bulls or the bears. So I would argue that it's not necessarily popular with short sellers, because it's in a bearish trend. It might just be popular because it's a volatile stock and, hey, it behaves quite nicely.
Sean Donahoe: Yeah. Like you said, there's a lot of hype over here and a lot of short sellers who are big, and I'm putting in quotes, "big short sellers" and ...
Phil Newton: Air fingers?
Sean Donahoe: Yes, indeed. They like to talk the stock down and sensationalize . Funnily enough, Musk came out the other and he posted a video. I think it's from the 50s or 60s. It's a song over here, Who Wear Short Shorts? He's mocking the short sellers, because, again, Tesla met some of its production targets and has rallied in recent weeks.
Phil Newton: .
Sean Donahoe: Yeah. Now, funnily enough, the markets didn't react well to that, because they were still ...
Phil Newton: Question marks, again. Yeah.
Sean Donahoe: Question marks. But they’re hitting production. I've got to give him credit where credit is due. I think I said this thing that's happening now. He's not going to ever park.
Phil Newton: The money is on the sidelines personally. Just looking at price behavior. I mean, I don't read the fundamentals. So you'll fill in the blanks there for me personally. Just look at the way price … I mean, it's all on the charts. No one one way or the other and hasn't been for 18 months. Prices are just going to oscillate and jostle back and forth until there's a very clear ... And it would a news-driven movement.
But, clearly, Tesla is shaking off most and the majority of negative news, which just, to me, highlights positive expectations for the future and confidence in Elon Musk and Tesla in the long term from an investment point of view. I can get all of that from the charts, Sean, just by putting or trying to paint a picture of what is going on with the charts as per the price behavior.
You don't necessarily need to know the headlines. So this is my ... What we're talking about now. This is my whole argument for not looking at the fundamentals, because it's in price. The way that price behaves is determined by long term by the fundamentals. moment is on the sidelines waiting perhaps for some positive news, shrugging off the negative news. It's all there for me.
I'm just trying to think about the roundup, the first one and the supplemental . I'm just analyzing the way that I said things. Did you notice ... Again, just catching the way that we spoke about this in some of the wording. We spoke about objectives to try and answer the question with why is it popular with short sellers. Long term, it's not. It's more neutral. Short term, you could see the argument for it being popular with short sellers because in the short term it's a volatile stock. Maybe day trading, swing trading over a few days. We put on objective to try and answer the question.
I don't know if you picked up on that, Sean, because you did that as well unknowingly and I just caught myself doing it as you've given your piece. Again, I'm just maybe pointing out the obvious here, Sean. But I'm just picking up the way that we view things as it helps to, perhaps, put some more meat on the bones for our loving listeners as to how we view things. I think that's more important, the natural answering of the question, is it's not how you view the market. It’s very different how most novice traders do.
We're thinking about, "Okay. What would be the objective with short sellers?" Long term, no one's got an objective. Medium term, no one's got an objective. Well, the only people who would have an objective for short selling would be the very short term time horizon traders. By all accounts, they would be quite popular because of these volatile swings.
So we're just thinking about objectives all the time. What is your ... This is something that we've talked about a lot, is what's your objective when trading? That's going to determine what you do. Long term and medium term, I don't see any reason for short sellers to be that interested.
Sean Donahoe: Yeah. That's pretty much it. I'm currently long finally enough on Tesla in the short term.
Phil Newton: It's funny you mentioned that, Sean. I've got a little dabble on. Guess what? It's set up on the strategy, Sean. It's in a range. It's in the lower end of the range, around $300. Just a few days ago, it just popped higher. It's going nicely.
Sean Donahoe: Yeah. I was going to say ...
Phil Newton: Guess what? It's that production line experience again. I didn't know that you'd put one on. I put mine on just two days ago to be honest. But I just find it interesting that it's that same logic, that same criteria. The production line experience. The trade sets up, the trade goes on. End of story. I don't honestly care about the fact that we're trading Tesla. It's just ... It met the criteria to put the trade on.
Sean Donahoe: Exactly. It's exactly that.
Phil Newton: It just happens to be Tesla. I don't care one way or the other.
Sean Donahoe: It's so ironic that we both have that same trade. That's really ...
Phil Newton: I know. It's just a jolly coincidence.
Sean Donahoe: Indeed. So there you go. Okay, with that being said. Let's rock on.
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Uh-oh! What's that smell? It's time to call out the Wall Street shenanigans and mainstream confusion and outright high jinx and hokum of so called experts. Yup! It's time for bullshit of the week.
Sean Donahoe: Okay. So bullshit of the week. Here's the thing, do you remember, Mr. Newton, a few months ago we did a show with Andrew in the Happening Now or the future's report as it was called then talking about cobalt. We were talking about this, the demand for cobalt for electric cars and all the rest of it.
Phil Newton: Yes, I do actually. I think it was one of those ... The extended happening now. He was telling us all about. I sat .
Sean Donahoe: As long as I don't have to do anything with it, yes.
Phil Newton: As long as I don't have to do the research myself. It sounds awful. I've got a lot of time for the fundamental. I understand and appreciate the importance. I just don't want to do the work for it. In that regard, I am quite lazy. It doesn't impact the way that I trade. Anyway, we digress.
Sean Donahoe: Absolutely.
Phil Newton: We had Andrew to explain it to the poor farm boy.
Sean Donahoe: There you go. There you go. So we were talking about this, like I said, December last year right before it rallied into March. So were like way ahead of the curve, and in all fairness, it had been in an uptrend, here's that word again, since like the beginning of 2016. The reason being is it's used in electric vehicles and a lot of the new battery tech. There's a lot of demand for it, and everything else.
Now, it's been on the decline since March. Again, we were talking about it in March and saying, "Hey, are there supply issues and everything else, and it's actually causing a problem?" bum-bum-bum. Those are a couple of things we talked about.
Phil Newton: that supply and demand is affecting the price of cobalt.
Sean Donahoe: My God! How about that?
Phil Newton: that such a basic concept would influence the way that priced moved.
Sean Donahoe: I know. But here's the thing. Now, after all of that, after almost several months of us talking about it, it's now making the news cycles where when we say the public is the last to know. We mean it. CNBC were talking about automakers and tech firms are scrabbling for cobalt. Well, no shit Sherlock.
Phil Newton: six months ago, yeah. Six months ago we made you aware of it.
Sean Donahoe: So like I said, this is really highlights, what Phil talks about all the time, we talk about all the time.
Phil Newton: Constantly, constantly talks about. You can almost understand why I turned the news off. Not just like financial media, but just broadly speaking most media. Firstly, I find it negative and depressing, but this really highlights just the mainstream media nonsense of statement to the fact. Everything is in price. You don't need to know what the headline is. You could probably figure it out through doing a little bit of a Sherlock Holmes and just the process of elimination.
Prices going down. It probably means that something has happened. But the specifics doesn't necessarily matter. We'll find out in six months’ time what happened when the mainstream media tells us about it. Which by then, it's too late.
Sean Donahoe: Yeah. So in a declining market, they're telling us about the demand that had happened or that is happening right now. But, again, we were talking about it months ago. It just shows you, first of all, and I hate to blow our own trumpet, we're ahead of the curve. We have a raised awareness, but it really highlights more of the fact that the public is the last to know anything that's going on. So, there you go.
Phil Newton: highlights, but on positive notes rather than just being bitching and moaning, "What could we do with this information?" We've spoken about this at length many times. Yes, it's a great example of bullshit, but what do we do with it as the more informed trader?
We know that this is bullshit. We know that the consumer, the general public are the last to know anything. This, for me, this is an indicator of sentiments.
We spoke just moments ago about the steam, the ocean liner trying to do a turnaround in a canal. This is an indication of it starting to do the u-turn, if you like, the multipoint turn in a canal. So these types of headlines from the mainstream media is saying, "Statements of the obvious, or now is the time to do X, Y, Z."
A good example would have been ...
Sean Donahoe: Or Z if you're in America.
Phil Newton: Okay. I was just thinking about the ... I'm trying to remember, Time Magazine. That was it. In 2007, Time Magazine was talking about now is the time to invest in the housing market. Just think about the dates and think about the magazine, Time Magazine. Time Magazine. An alleged publication does not normally talk about anything to do with investments or finance or all that stuff. Saying that now is the time to invest in housing. If you're going to buy a house, now is the time to do it, in 2007.
Guess what happened? But you see ... So that's a very extreme illustration of sentiment. So when the mainstream media is saying one thing, my default reaction is the opposite. So this is an example of what ... So they're scrambling for it. That means that they're not ... That means that they've done it. They've already managed their requirements and sorted out their personal situation.
Maybe the opposite is about them. So when you're starting multiple news items and they're all talking about this situation, because we know what happened many, many months ago. Maybe the opposite is now through the institutional, the people with money, the people who are knowledgeable about such things. They've turned the ship around and are going to start now doing the opposite.
Because I'll tell you what the retail traders are doing, they're shorting. What we want to do is institutional. We want to be doing the opposites, because they're not scrambling for it anymore. They've already done that six months ago. I'm just trying to illustrate. This is a sentiment. This is what it means. This is how we can use it as smart informed traders and investors.
So if you were going to do something with it or look for stocks related to this particular sector and industry, then maybe it's bank opportunity. Maybe there's a buy the dip in an uptrend that's now triggered by news. Instead of being the short seller, you can look for those opportunities to buy the dip, because the sentiment is perhaps now changing.
Maybe you'll use the technical analysis that were constantly talking about to time the entry, but now the news for me, this is how I would use it. The news for me, a piece of bullshit news has made me aware, I'm going to be looking at this sector and these types of stocks to see if there's an opportunity for maybe a more longer ...
Sean Donahoe: To do the opposite.
Phil Newton: Exactly. Maybe for me it's going to be a more longer term play. I'm not going to worry about trying to get in today, but maybe over the next several days, I investigate this and maybe think about a longer term strategy for these types of trades and investments.
We even managed the get quite in depth view of where's the trade. I quite like this one. So bullshit turned into where is the trade. That's how I use this type of bullshit.
Sean Donahoe: So with that being said, ladies and gentlemen, that's it for this week's show. Please remember, it isn't free. It will cost you a five star review. Just go to is where you can subscribe and review us on your favorite to hear the show. This helps us reach more traders and investors just like you.
Phil Newton: If you'd also like to connect us. We're very approachable people, aren't we, Sean?
Sean Donahoe: Absolutely.
Phil Newton: I know people do like to approach you. Maybe me, not so much, because I'm never at the desk.
Sean Donahoe: If they approach you with daffodils, run the other way.
Phil Newton: Yeah. If I see someone coming up with daffodils, I know where they've heard it from. But if you want to connect with us on social medias, you can get to us on Facebook and Twitter at the same link, I'm sure everyone is waiting with bated breath, Sean. But what have we got coming up in next week's show, Sean?
Sean Donahoe: Well, we're going to have a little bit of fun. I'm going to examine what are popularly considered the 10 greatest trades of all time and the lessons that they can teach. So this is going to be ... We're going back way, way, way back in history. I have a little bit fun with this. I was actually talking about this with someone the other day and we were going over some of these. So I thought, "Hey! This would be a damn good thing to do a show on."
So, with that being said, I think we're even bringing in Jessie Livermore into this one. Yeah, Jessie. I know that if you follow us, we're ...
Phil Newton: One of my favorites from a story point of view is . Ooh! A little bit of a teaser.
Sean Donahoe: Ooh! Tease! Ooh! You're such a tease.
Phil Newton: Tease. Tease. Tease.
Sean Donahoe: You're such a tease.
Phil Newton: teasing. Clue. Clue.
Sean Donahoe: Indeed. There you go. Anyway, with that being said, rock the hell on. We'll see you next time. Take care.
Phil Newton: Bye for now.
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[00:07] Show Introduction

[00:01:13] Sean: what we’re going to today ladies and gents, is we’re going to be talking about the most common mistakes that a lot of people make in trading. There’s a huge difference between the average trader and the supremely successful trader and it’s not what they do that makes a difference but what they don’t do.

[00:03:30] Sean: The one thing I see so many people over-leveraging and trading too large.

[00:03:50] Phil: I think just using leverage generally. Depending on what you’re trading as an instrument - to be fair - there’s more legislation coming into effect to prevent this. What is leverage, separate it from position size, is essentially something that your broker gives you and you’re allowed to use money that you don’t necessarily have.

[00:04:39] Phil: If you’re buying stock, a hundred shares of one dollar stock it’s going to cost you $100, but you don’t have to use all the money if you have a margin account. Your broker will carry the rest for you as a kind of favor, you can use less money to hold the position open. It allows us to trade with leverage.

[00:05:36] Phil: The mistake I’m coming to, rather than what we suggest which is discount on the money required to hold the position open, that’s good. What people do is they then mistake that thinking they’ve got more money than they actually have.

[00:08:00] Sean: If you don’t have that money you can get yourself in very deep water.

[00:10:42] Phil: Using money you can’t afford to repay is essentially the short version of it.

[00:12:05] Sean: Yeah, it is a very big, potential trap for the unwary, that’s for sure. Let’s talk about the trading size, the actual position size. It’s like over-leveraging your actual portfolio into what any single position.

[00:14:02] Phil: The novice trader, they’re focused solely on how much money they can make and then that causes to trade, ‘well how much position and size can I trade with?’, because they’re thinking if this trade gets to where I think it’s going to go, how much money do I have and how much money could I make.

[00:16:45] Sean: One of the things we talk about is being too emotional with your positions. The problem is the larger the position size, the more emotion is attached to it.

[00:17:10] Phil: If you’re wrong you’re probably going to lose a huge chunk of your capital and it’s a real, emotional punch in the gut when it happens.

[00:20:09] Sean: I’ve seen people do this, I’ve done this myself, when you have a big position and you’re right on the direction and it should be a profitable trade, however, you keep messing with the trade because you keep seeing every movement.

[00:20:35] Phil: You deviate from the plan.

[00:22:54] Sean: Trading without a plan and without a journal, we talk about this a lot.

[00:23:50] Sean: It can even cover down to what you’re doing at the start of the day, your procedure for doing this and that and it becomes basic. I can give this document to anyone who has the authority and the knowledge of trading and break it down into a such bite-sized chunks that anyone could trade that way on my account.

[00:26:40] Phil: Every successful business that lasts for any measure of time has these procedures.

[00:30:12] Phil: I’m very conscious that the mindset, the emotional reaction to our experiences, you can’t deny it, there’s too much evidence. No matter how much you view it…it does influence your decision making.

[00:36:05] Sean: I see so many people just shooting from the hip. Another one, is unrealistic expectations of what the market will do.

[00:40:05] Phil: If your success rate was thirty per cent of the time out of every hundred trades, most people would probably cry. If you had that experience in a different context, you’re considered one of the best in the world. The novice trader would look at that strategy and see losing money if your strategy is making money overall, that’s a great strategy.

[00:41:15] Phil: It’s all about perception. You can be winning seventy per cent of the time but if overall your strategy is losing money then it doesn’t matter how many times you are making money.

[00:51:10] Sean: It’s the decision of the word ‘is’. The viewpoint is evidence-based and I would say the bias is belief based. Beliefs are very hard to change once they’re locked in.

[00:54:09] Sean: Rather than micromanaging every single trade, you’re looking at your entire basket and is where the money is actually made, the management of those trades and your overall portfolio.

[00:54:55] Phil: We’ve got one big strategy and inside that if you imagine a hierarchy, we’ve got multiple strategies, and inside those, we’ve got multiple trades.

[00:58:34] Sean: Absolutely, those are the main mistakes people make in trading and how to overcome them.

[00:58:40] Rebel Trader Tip of the Week

[00:59:00] Sean: You’regoing to make mistakes, we all have, we’re going to make more. If we actually recognize those mistakes and let them develop our experience then every mistakemade is a valuable lesson but if you can be aware of the mistakes before they happen and develop the discipline to make strategic and tacticaldecisions as needed then those mistakescan be bypassed altogether and you can fast-track your learning.Learning from thosethat came before you and gaining the sum of their experience can save many years and many painful lessons youcan avoid. Walking forward with your eyes open and your brain open will help you as well.

[00:59:56] Phil: The way you view the mistakes you’ve made, reframe the way you view success. Yes, you’re going to make mistakes but think of them as a learning opportunity. You can follow in someone else’s footsteps.

[01:02:36] Quickfire Round

[01:03:17] Sean: Do fibonacci levels really work on the charts?

[01:03:23] Phil: Everything works some of the time and nothing works all of the time. Fibomacci works yes, there’s an argument whether it’s a self-fulfilling prophecy because so many people use it to identify potential trading opportunities. Chicken and the egg which came first?

[01:07:20] Phil: The tool doesn’t matter, it helps you determine a viewpoint.

[01:07:53] Phil: Someone said this last RALLY was the market’s lash Hurrah before a big crash…What do you think?

[01:08:10] Sean: I think it’s bulls**t. I don’t think this is a last hurrah, I think is just another movement. Is it going to continue, we’ll see.

[01:09:38] Phil: A crash is a crash because you don’t know it’s going to happen and people panic.

[01:12:03] Sean: Awareness is one thing but don’t listen to the financial news networks. It can raise awareness but always try to get it verified.

[01:13:04] Sean: Why is Tesla so popular with short sellers?

[01:13:14] Phil: Who says it’s popular with short sellers, I’m looking at the charts right now and it’s been range-bound since April. I’d rephrase the question, it’s popular with short sellers, not it’s worth short selling.

[01:14:00] Sean: That would be a more accurate question if it was reformed. There had been a lot of press.

[01:14:49] Phil: The bare side of the equation is not necessarily raising its head but the reality is, it’s essentially in neutral phase. It’s a very volatile stock, it is probably popular, I’ve got no numbers to back it up.

[01:19:04] Phil: Long-term it’s not, short-term I can see the argument for it being popular with short sellers.

[01:21:34] Bulls**t of the Week

[01:21:54] Sean: Do you remember that podcast episode we did a few months ago talking about Cobalt? We were talking about this in December of last year. Right, before it rallied into March and it has been on a decline for the last few months. Now it's making the news cycles. When we say the public is the last to know, we mean it.

[01:24:10] Phil: You can almost understand why I turn the media off. Process of elimination, oh price is going down, it probably means that something has happened. We’ll find out in six months when mainstream media tells us and by then it’s too late.

[01:25:24] Phil: What do we do as the more informed trader? We know this is bulls**t.

[01:27:10] Phil: We know it happened months ago, maybe the opposite is now true. The people who are knowledgeable are turning the ship around.

[01:28:40] 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.

[01:29:14] Phil: You can also connect with us on social media on Facebook and on Twitter also What have we got coming up in next week’s show Sean?

[01:29:25] Sean: I’m going to exams what are popularly considered as ten of the greatest trades of all time andthe lessons they can teach.

Resources & Links Mentioned in This Week's Show

3 Key Takeaways From This Show

  • Mistakes are lessons if you acknowledge them and learn from them
  • There is a huge difference between the average trader and the supremely successful trader and it’s not what they do that makes a difference
  • Learning from those that came before you and gaining the sum of their experience can save many years and many painful lessons you can avoid

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