Rebel Traders 058 : Trader Mythbusting

It’s time to put on the Beret and grow out the walrus mustache as we do a little trader myth busting as Sean and Phil pull apart some of the most shared and often misleading myths that can hurt traders success...

Are entries the most important parts of a trade? Is trading REALLY that risky? Does greater leverage really mean more profits? Well, in this weeks Rebel Traders podcast Sean and Phil dive in to a wide range of popular trading myths and see what’s the truth, what’s a myth and how you can be a smarter trader.

Armed with a deeper insight in to these common pitfalls that befuddle many traders it’s time to get an edge...

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Automated: It's time to put on the bray and grow out the Walrus mustache, as we do a little trade busting, let's do it.
Automated: Rebel traders takes you inside the world of two underground master traders, who take an entertaining and contrary look at the markets. To cut through the noise of Wall Street and help you navigate the trading mine field. 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. I am joined as always by my partner in podcasting, the man with the other funny hat, Mr. Phil Newton. How are you doing, sir?
Phil Newton: I've always got a funny hat, although I have thoughts of that from Black adder when you start talking about giant handlebar mustaches, or the French Barry. What was the guy that Sam some of us do?
Sean Donahoe: Yes, what's his name? Michael Crawford, yes.
Phil Newton: Michael Crawford.
Sean Donahoe: There you go, okay, again, some British pop culture-
Phil Newton: Britishism.
Sean Donahoe: But, yes, bloody Black adder. I tried to get my wife into Black adder-
Phil Newton: Along the same lines of Monty Python type of humor, just to kind of.
Sean Donahoe: A little qualifier.
Phil Newton: Yes, just to kind of put you into that qualifier.
Sean Donahoe: Indeed. So today though, we are going to be talking ... we're actually bringing it back over to the U.S side of the border here. We are doing a little bit of Myth Busters, I guess, that makes me Jamie Hyneman and Adam Savage over there across the pond. But what we're going to be doing today is, we're going to ask questions like, are entries the most important parts of trade? Is trading really that risky? Does greater leverage really mean greater profits? These are some of the popular mentions we're going to tackle a lot more here in today's show.
Phil Newton: And then we're going to wrestle them to the ground tackle.
Sean Donahoe: I think we're going to wrestle them to the ground, bury them six feet under and really pull them apart here. Basically, you will be armed with deeper insight into these common pitfalls that have befuddled many traders and help you get that rebel trader edge.
Phil Newton: Until you don't need any more befuddling, that's what it comes down to.
Sean Donahoe: The bottom line here, this is an educational program.
Phil Newton: Yes, we've also got the rebel trade a mailbag, it's where your trading questions are answered. No, it's the thought provoking questions that people have kindly written in, on Chi pigeon or via email or they must have Twitted us somewhere along the way.
Sean Donahoe: Some before.
Phil Newton: -we're going to try, exactly yes. I mean, maybe, some smoke signals, pick your preference essentially. We've also the bullshit of the week, we call the hype of all the shenanigans. The nuisance, the nonsenses of the industry and we'll do our best to jump as high as we can, on the taller soapbox, and rant about whatever nonsense and shenanigans we can probably do.
Sean Donahoe: And we have some good ones this week.
Phil Newton: We just need an excuse to go all ranty pants, that way, and somewhere amongst of all our own ranty pants, we're going to rummage around in the pockets, pull of the fluff, we're going to try and ask the cold question of where is the trade.
Sean Donahoe: Absolutely, I love that. So mental image and just like okay. Yes, okay, off the reservation already here, but what we're going to do, we all new you're going to say that.
Phil Newton: I was going to say, you know what, why not, you need a little bit of budget crazy why not.
Sean Donahoe: .
Phil Newton: My viewpoint Sean is, it's completely for my amusements. If you happen to find comical frustrating or amusing for yourself, that's a bonus, but it's for my pleasure. My pleasure is paramount, and you know how I like to push myself frequently.
Sean Donahoe: Indeed. Well, yes we have the photographic evidence that we're holding in storage locker just in case we ever need it.
Phil Newton: That's a low one.
Sean Donahoe: Indeed, anyway, so, this is going bad real fast. Okay, we're going to move the hell on, and we're going to start asking some of the ... Well, tackling some of these myths that are really common place in this industry. We want to just put a magnifying glass on them.
Phil Newton: .
Sean Donahoe: It is, it really is. And the first one, which I think is the most common myth outside of trading, it's like an outside perception of trading and traders, is that trading is risky. That you need to be an Ivy League, Wall Street hot shot or insert other-
Phil Newton: What's not.
Sean Donahoe: Yes, indeed, to make it as a trader.
Phil Newton: Oh, that's the worst image, I think.
Sean Donahoe: You didn't improve the matter, indeed. But basically, you need to be an Ivy League, Wall Street hot shot to make it as a trader, and trading is risky, and all this kind of stuff. I want to put a nail in that one right between the eyes.
Phil Newton: I'm evidence that a poor farm boy can make it good.
Sean Donahoe: He done good.
Phil Newton: In trading ... yes, he done good. No, but seriously, yes, there is risk involved. But let's put it into perspective Sean, what isn't risky?
Sean Donahoe: Indeed.
Phil Newton: When it comes to a business, and we're only talking about financial risk here, but what is risk? Starting your own business is risky, but no one tells you off for doing that. To be fair, it's probably from a life risk, crossing the streets is probably more risky. Getting in a car and driving somewhere, is more. There are genuine risk, you could lose your life. But trading risk, what's the worst that can happen? You lose a bit of cash. That far is literally the worst. But the good news is, it can be defined with the way that we talk about it, and are always advocates of.
Your risk is defined if the smelly brown stuff hit the very fast spinning metal thing and they collided and they all went apart, then what's the worst that can happen? You lose your deposit. So the way that we do it, it's fixed risk. But even before you get that and you tried it in different ways, with different instruments, very often your risk is defined. Sure, you could see an Enron and be on the wrong side of an Enron type experience, but you will be able to do something about it. They're very rare instances, as we highlighted in the last week's show, those black swan events that everyone's fearful of, they don't happen every day.
Sure, you might lose a bit of money, but the reality is, is those things that people are typically scared of, they don't happen, it's not risky but there is risk involved. But it's just like every other business. Surprise, surprise, Sean there's that phrase again, it's just like everything else that you could.
Sean Donahoe: Absolutely, one thing with the, again, the common perception is that trading is gambling, and that there's no control over it, and yada, yada, yada. Here's the thing. It's a numbers game. And if you come in understanding where your risk is defined, that you have a process that mitigates a lot of that risk and actually has a strategic or tactical advantage, because you're applying certain strategies that have a positive expectancy, again, a lot of weird words in there. But at the end of the day-
Phil Newton: Here's why it's risky, when you start a business, people are the first thing you need and that people very commonly grasp, even if they've never done a business before, I need a business plan. And they'll sit down and they'll write down everything that they think that they should do. They may go and ask an expert to help fill in the blanks to help get the things that they should do but don't know about, or maybe they'll go to the bank manager. And then they'll have a look at it. And they'll tell them, well, you need this, this, this and this. So they'll get evidence, they'll ask for help, they'll get support and they'll have a business plan before they even commit to doing it.
And when it comes to trading no one does that, and that's why it's risky. Because people think you know what, I can do this. I've got this little, there's the stock market, there's my trading account, click, click, click trade on and close your eyes. Hope for the best. And that's what people do.
Sean Donahoe: Unfortunately, it is and that situation.
Phil Newton: When we put it into perspective, and that's how most people start, that's what most people do. The worst thing is they do that for several years, thinking that they've got some strategy or tactic or, and they'd get lucky every now and again. And that kind of keeps them in the game and then suddenly they're trying to crack the code, and all they need to do is just stop, pause, and sit down and write a plan. It doesn't have to be a war and peace tight plan, doesn't have to be that big. My first one as you know, Sean, it was a very simple one pager that just said, here's what I'm going to do, what I'm going to do, why I'm going to do it. These are the conditions that needs to happen before I take that action. And when all those things, when all those get in a row, I'm going to go, bang, bang, bang, that's it. That's all you've got to do. Just like any other business.
Sean Donahoe: It is not surprising. We bang that drum real hard that trading is a business, you need to treat it. There's so many analogies between traditional business and our style of trading. I'll be quite honest, I don't hear anyone else talk in this vein about trading. I think it's one of the biggest pitfalls and one of the biggest things that most traders miss. It really is.
Phil Newton: If they just sit down and gave it some thought for a few days or week, put some time aside to think about it, and go and ask people for help or support. There's lots of people out there that know what they're doing and then they're not have to be industry gurus. There's lots of people are very good at this. Just figure out okay, what do I want from trade? I don't want to be sat there all day or maybe you do want to day trade and be there all day. You can start to figure out, okay, well, what's going to be the best plan for me to start to shape up? When you figure out what you want from trading, just like a real business. When you figure out what you want to do for your business, you can start to put some meat on the bones, and it's the same process that people take. Then because they don't do it, they've got this perception that trading is risky and that you need to be an Ivy League or Wall Street hot shot to make it as a trader, and it's complete nonsense.
Sean Donahoe: It really is, it really is. So okay, let's kick it up to the next one. Entries are the most important parts of your trade. I just want to categorize it, we should have this is like an entire bullshit of the week, actually. Entries are fantastic, you can get into any trade. Exit is just as important, your position size.
Phil Newton: Actually the exit more important personally, but yes, position are, it's a team effort I think is what we are, before we hop back on that soapbox. I think it's a team effort between various elements.
Sean Donahoe: Absolutely.
Phil Newton: Just like, if you had a business, think about the components of a trust, we've talked about this before. The more we talk about this, the more I love the comparison. It's like having different departments, like a department store and you've got different employees in that department. All the components of the strategies, they're like your employees working for you. If you had a business you wouldn't do everything yourself. You might have a bookkeeper, you might have a bank manager you can ask for advice on financial, or a business consultant can come in and give you some specialist knowledge that you don't previously have.
We've got an employee that's particularly knowledgeable on something, some particular thing that they're good at in the business. And that's what the strategy is, it helps you with various components of the strategy. We've talked about this before in the past, in the context of, it's like a department, you got a department head, you've got employees, you've got managers, you've got assistant managers. They're all there to support the strategy of the business and all your components makeup the strategy. They are like your departments, they're like the employees, there's lots of ways to kind of illustrate and paint this picture.
But you wouldn't open the shop up and then walk away and just let people have an honesty box for the things that they want. I know that some people have tried doing that over the years and various successes, but that's what you're doing. So I think it's a team effort Sean, entries are not the most important thing, but getting in the position is what most people think about first and then they worry about everything else afterwards.
Sean Donahoe: Absolutely, the thing is, entries are not the most important. To highlight it another way, you can be late.
Phil Newton: Yes, you can just pick random entries, if your viewpoint is right, you can just pick any points on the chart. If you've got deep enough pockets, it's the exit that matters.
Sean Donahoe: Absolutely, yes, I mean, you can be late to a trade, you can be end of a trade. Just because opinion doesn't matter, it's not ... But yes, the highlight point is, and I think you're banging on the nail here, is the exit. If your strategy is saying, "Okay, now it's time to take that money off the table. It's good to go. I've hit my target." So what I've-
Phil Newton: You've cut lost.
Sean Donahoe: Yes, it's great.
Phil Newton: the other way, you know,
Sean Donahoe: Indeed, where are you going to close that trade? Is it in line with your strategy? The entry is not the most important part to at all. But again, it is a common misconception.
Phil Newton: I was just going to add on to that, you could have bought at the peak of the 2008 crash, right before it fell off the cliff. If you've got deep enough pockets, and I know people who did, they had positions on. But they weren't exposed to the eyeballs with that position. And they had to sit through a nine year draw down phase and they're back to scratch and showing the profits. If you've got deep enough pockets and prepared to wait-
Sean Donahoe: You can ride anything.
Phil Newton: You can turn a profit. That's one hell of a heart attack spot, I don't like doing it myself.
Sean Donahoe: No way.
Phil Newton: But to illustrate the point, it's possible. The entries don't matter if you've got time and resources on your favor, if not get out, cut the losses short and move on to the next opportunity.
Sean Donahoe: Absolutely. Absolutely. So here's the other thing, kind of in line with the one that we just mentioned, but it takes it a little further. You must have perfect timing to make money in the markets to pick highs and lows exactly. Well, we skimmed over that by saying-
Phil Newton: If you can figure that out, welcome, sell out and keep that knowledge to yourself.
Sean Donahoe: Yes, you will replace mystic Meg or, I can remember the American equivalent of, listen, bullshit, because no one has that. I know there are people that can get it pretty drilled down and would say that, with reasonable expectation, that they are-
Phil Newton: That's the best you can say.
Sean Donahoe: -that they are close. And again, there are things you can compound or we can talk about this till the cows come home. But doesn't matter, no one truly knows. What you can have is like indications, or a opinion that you are at a high or a low of a move, and you don't have to be pixel bloody perfect, as I like to say in some of our design business. Which is literally down to the tech, you're not going to get that. What you're going to do is, you're going to do ... most of the time we look for confirmation.
Phil Newton: You know what Sean, I've got lucky plenty of times where I've picked the perfect points to profits.
Sean Donahoe: I asked you to say then you try to do a little
Phil Newton: , but I've picked the perfect points and I thought I'll say it again, it rose off the tongue quite nice.
Sean Donahoe: Like Peter Piper picked a piece of paper-
Phil Newton: Yes, Peter Piper picked a pack of piece of paper-
Sean Donahoe: It's good, usually I can do that. Usually I can do that, but when I'm live on the podcast I buzz it all up, that's great.
Phil Newton: I've gotten lucky plenty of times, is all I was going to say. It's like we keep saying, I'm not swinging for the fence. I'm not trying to tie my entries to a position, because I generally don't know what's going to happen. I've got lucky plenty of time, if I consistently do the same thing over and over again, yes, sure, I'm going to get lucky. Sometimes, in fact, most of times, price doesn't always go the right way straight away. With trading the way that we do, I mean, we use options, we don't have to use a stop loss, we've got that built in risk parameters we're always talking about.
So it means that I don't have to be picture perfect on the entry. I can put the trade on when I think the timing is right as per the strategy. And if you get it wrong, it's not the end of the world. It might be that you have to wait a few extra days. Or it might be that, hey, you do pick the right points and it takes off like a freight train and it's picture perfect. It doesn't matter so much in that regard. I think if you have a style of trading that allows you flexibility to have imperfect timing and imperfect exits. If you've got that, oh you're looking for that, I mean, the old cliche adage is you don't need to pick tops and bottoms, you just need to profit with the bit in the middle.
So with that in mind, stop trying to pick tops and bottoms and just look for the bit in the middle. And if you've got a method of trading and trading, so the vehicle that I use is stock options, that allows me to be imperfect on the entry and imperfect on the exit. I know if I'm right on the broad direction, I'll get the profit in the middle and that's what I want.
Sean Donahoe: Exactly.
Phil Newton: It allows you to, well, if I'm wrong today, it's not a big deal. It just takes that pressure off. And then there's so many things, the off side benefits to the style of training that we've adopted as our preferred method. It means that we don't have to stress about these traditional things. We don't have to worry about these common myths that we're talking through. Because it takes all the pressure off the table, it takes all the pressure away and just allows you the freedom to, well I think the stocks go up and I think the timing is right because we can't say for definite. But if I put the trade on in the way that I do, with style of trading, the vehicle I like to use, then it doesn't matter so much if I get the entry wrong. I'll be on it when my viewpoint is correct, that's how you are going to make money.
Sean Donahoe: Absolutely. So here's the thing, when you're looking at ... try to, you miss opportunities if you try and always pick the perfect top and the perfect bottom. This is one thing I think is a trap for a lot of traders as well, is they will stop getting into a good trade because they're not sure if it's the perfect top or the perfect bottom, and they let an opportunity go away. The quest for perfection.
Phil Newton: That's where scaling in and out of positions would benefit, if your strategy is to try and position yourself from a timing points of view in that way, you put a test position on, you put a small percentage of your overall design position on, and you test the waters. And if you're right and it starts to move favorably, you start to compound in and add to the position. You don't add to the position if it's not going your way.
Sean Donahoe: Yes, that's a very, very good point I was going to make as well.
Phil Newton: Surprisingly, this is the scribe, we talked about some of the best traders. I think Paul Tudor Jones talks about that in one of his interviews or books. We also see it in, there was a bond trader in reminiscence, not reminiscence, market wizards. I think it's the original market wizards, but there's a bond trader and he always bought within 7% of the market top or market bottom because he would put a test position on and close out if he was wrong, test position and closer up. He was always within 7% of the top or the bottom of the market, because when he was right he would start to compound in the movement and he was looking for those big multi month, multi year type of movements.
And it's also surprisingly, Sean, it's also described in one of our favorite books, reminiscence of a stock operator, it talks about testing the water with position. You put a test position on, don't load up the boat, if you've got a viewpoint, test that out first. Because if you're looking for those big swings, the investment type opportunity with multi month, maybe even multi year positions, then you're not going to put your whole position on at once you're going to test the water for this very reason that you're talking about. You don't need to be perfect on the timing to make money. You just need, If I'm right, I'll be on it. It might be in a small way, but at least I'm on it. And if I'm wrong, I'm wrong in a small way. And that's the key elements here.
Sean Donahoe: That's exactly the point I was going to make, so yes, perfect knockout. Okay, so here's the other thing, you need a lot of money to stand any chance of making money in the market.
Phil Newton: This was my big myth, Sean, yes, I had that until someone pointed out that it wasn't true to me. That was why I thought that I couldn't be a part of the markets all those years ago.
Sean Donahoe: I'll be honest, I had the same opinion or shall I say I had the same opinion before I was educated as well. Because you don't, you can get started right now pretty low. I mean, depending on how you want to-
Phil Newton: In fact, when we started in the 90s.
Sean Donahoe: Oh, my Lord, yes.
Phil Newton: We did need slightly deeper pockets than what you do right now. I mean, things have improved for the better, that is the one thing that has changed is, my introduction to it was, when I was 15-16, one of the neighbors who was trading gold in quite a large, large way at the time, he basically said it doesn't matter much about your status or your education. You don't necessarily even need a lot of money. If you've got some money you can start, it's not an exclusive club. The only condition is the one that the broker give you which is what their requirement is to open an account. For many people or for many brokers, even back then it was a few thousand. If you've got some, to be fair, even if you've only got a few hundred dollars or a few hundred quid, you can go and buy outright a couple of shares.
I mean, I'm looking at a GLW, it's on my chart right now, it's a $31 stock. I can get my one share for $31, or I'm not going to get rich overnight, or for $31 I can buy one share. You don't need a large amount of money, no I'm not saying you do it on margin, you can go and buy out rights for cash with the cash account, one share for $31. And if it goes up by $5 you make $5. It's slightly longer route to profiting but I'm just trying to illustrate the point. You don't need deep pockets to get involved. You can start at whatever level you're at. And when you start to understand that there's a variety different ways to trade then you can get involved in proximal smarter and more clever way.
The rules and regulations have changed from back in the 90s to now so that the stock options is a viable alternative to outright stock purchases or margin. Because you don't need ... you can use them as an alternative in the way that you can speculate with stock options now, whereas most people didn't use to do that, and if you did, then you still needed a good chunk of change. What has changed in the last few years is you need even less money to hold the position open, because all you need is the price of the option. I always compare them to a, it's like a deposit, you just need your deposits to open the position. If you're right, then that deposit will increase in value. And if you're wrong, no matter how wrong you are, all you'll lose is your deposit.
Most people are familiar with that example in the real world, if you reserve a car for example, you can just put a deposit down, that will not particularly cost all the bells and whistles that I want, and you put a deposit, couple hundred bucks, a percentage of the cars value got your deposit, I'll let you know at the end of the month or wants it or not. You might lose your deposit if you don't go back to them. That's the worst thing that can happen. And that's what we're saying here with the options. That's what's changed. It's not a large amount of money that's needed anymore. And this is the thing that allows us to trade comparatively with the big institutions, the big players, the portfolio traders with very small amounts of money. It's a wonderful time to be trading, right now.
Sean Donahoe: It really is. It truly is. And the one thing that obviously has also grown over the last few years, is liquidity which is means-
Phil Newton: .
Sean Donahoe: True enough.
Phil Newton: I've already got myself to play myself.
Sean Donahoe: Yes, there you go. There you go. But with the more efficient and smarter ways to trade and as you get into this industry, you can get in without a lot of capital behind you. But like you said, there are ways to get started really, really at the lowest low end of capital risk and as low, as low as end of capital requirements, if you know what you're doing and that's what we try and do here. That's what we show traders.
Phil Newton: We are trying to raise your awareness, we're always talking about be aware. It might be that you decide, you know what, I like what you're saying Phil and Sean, that option is not for me. And that's great. That's a personal preference. At the very least what we've done is we've given you the knowledge to say, "Okay, what you do isn't right for me," that's great. That's a perfect situation to be in. But then there's someone else that might say, "This is exactly what I'm looking for." Trading Forex isn't trading bonds, isn't trading bits, not coin, whatever thing isn't for me, I like the relaxed way that you talk about.
Maybe I should learn more about that style of trading. If you want to learn about it, in most cases, if you want to learn about it from someone else, that's great. The objective is, your awareness has been raised, that there's a better way of doing it. And that puts you in a better position than the herd, I think that's what we're always against. You won't be like one of the sheeple, The point that was coming around to Sean, Your just armed with a small amount of information. You don't need to know everything about everything, but just with a small piece of information puts you miles ahead of the game compared to everyone else.
Sean Donahoe: The way I see it is, and again, we talked about the herd, with the lions on the rock looking down all the stakes, so come join us on the rock, and we'll have a porterhouse as it rolls back. There you go. Anyway, with that being said, let's move on to the next one, which I think is one that pisses me off the most. Greater leverage equals greater profits. Now, I'm tempted to get our minds answers.
Phil Newton: Yes, but not in the way that you think.
Sean Donahoe: Yes, indeed. So, okay, I'm going to stop on my bloody soapbox here for a moment. One thing we talked about is that a lot of people let you feel that they're trading much bigger accounts than they are when they get leverage. When they can get like a four to one, or greater, you say, hey so we'll give you the, basically we'll extend credit to your festival.
Phil Newton: Yes, we'll extend your line of credits, we'll give you four to one leverage on your account. So if you've got $1200 you can treat it as if it was 400,000. The mistake that people make is they pretend then that they've $400,000, and that's why people were jumping off on buildings, in 1929, if you look back at the history when the market crashed then, that's why people were jumping off the buildings. And we had a very similar thing not so long ago, didn't we Sean?
Sean Donahoe: Indeed.
Phil Newton: In 2008 the crashed out and people were borrowing money that they couldn't afford at ridiculous, 15-20 times earnings and it depended on your choice of grace, and they were being given ridiculous amounts of money to buy houses that they could not afford to repay. Anyway, leverage is the point there.
Sean Donahoe: Yes, the problem is that, yes, more leverage.
Phil Newton: It's great, how do we normally suggest that we deal with it, instead of a multiple-
Sean Donahoe: We just treat it like it's, all your base count is, it's a discount.
Phil Newton: Perfect, yes.
Sean Donahoe: But at the end of the day, I don't like trading on leverage, period. The reason being is, you can use it, but a discount. Keep it in mind that you do not got, and we're using the numbers in the examples, $400,000 at your disposal or great. What happens is you end up using and leveraging a greater multiple of what your position size of what money actually have in your account. If you're say, using $100,000 if you're trading a 1% position. Yes, great, that's $1,000. But if you're thinking, "Oh, I have $400,000 at my disposal," and you've increased your position size with that 1% to 4000, well, no, that's actually 4% risk of the actual money you've got in your pocket.
Phil Newton: Not using leverage in a bad way is what we're talking about.
Sean Donahoe: Which is why a lot of people, I've got to say this-
Phil Newton: Treat it like a discount. Still use the working position size of 100,000 but the margin requirements gives you a discount that you can maybe open a second position with. So you've got this discounts on the position, and that's probably the best way, to be fair, that's the only way you should think about it. Not the best way, it's the only way.
Sean Donahoe: Yes, I agree, I was about to say that very same thing, it's the only way you should think about it. Do not think-
Phil Newton: You do not got the cash. The only thing that everyone agrees with no matter who you talk to, no matter what style of trading you have, no matter where they are in the world, do not risk money you can't afford to lose. And yes there was a full stop after every word there, don't risk money you can't afford. If you're using a multiple and pretend that you've got more money than you actually have, that's risking money that you don't actually have. If you don't have it you can't afford it. It's simple.
Sean Donahoe: Yes, I couldn't put it better myself. You see, trading on leverage is a risky proposition if you're not doing it in a smart way, and that's just like someone coming into Vegas saying, "Oh. Yes." A guy in a funny suit saying, "We'll give you $100,000 all you have to do is leave us $1,000 and we'll give you $100,000 to play with in Vegas," and when you lose or when you screw it all up because you're taking crazy risks, Ronnie here the leg breaker, will come and collect on that money.
Phil Newton: Why is his nickname called the leg breaker, well, you'll find out if you lose all your money.
Sean Donahoe: Exactly. I'm not saying, I'm not implying fracas. But if you get a margin call, if you get someone saying, "Oh, my God, yes."
Phil Newton: It's horrible. I've had one of them in my life. It was a horrible, horrible experience. Thankfully, I'll tell the story, it was very short lived as it happens. I was in a position surprise, I was in a position and it wasn't going the right way, surprisingly, and I got a margin call in the morning, saying Mr. Newton, and if you'd like to hold the position open we're going to need some more money from you, because I'd done stupid things, to be fair, I'd put a position on that a friend of mine had given me a tip.
Sean Donahoe: I remember the story.
Phil Newton: , completely levered, surprisingly, Sean, completely leveraged up to the eyeballs, "It's going to be perfect Phil, don't worry about it, buy as much as you can. Fill your boots." He was trading my account with, it was his idea, with my money. And I am, "Yes, okay that sounds like a great idea."
I was just completely brainwashed in the situation, then unsurprisingly when it didn't work out the way that I thought it will work out immediately, the very next day you get in a margin call to say, "If you'd like to hold the position, you've lost all your money Phil, there's nothing in the accounts and now you owe us money." Okay. Okay, and then I'm like thinking what I'm going to do? What am I going to do? I can either wipe out my accounts or I can transfer some more money, over which I didn't have easy access to it that moment, and I'm phoning him I'm saying, "What do we do? What we do." And he said, "I'll just close it out," like it was no big deal.
It's my money that you've lost idiots, but I had no one else to blame other than myself, because I bought into his belief. Now, thankfully, later on in the day it did this miraculous turnaround and we made a few hundred quid on it, and he was made up. But I had to take a few days off from trading, because I was an absolute wreck, an emotional wreck, and it was all because of this experience. But that was the one time I had a margin call. I had a happy ending, but I was ill, Ill. Ill. Ill. It's a horrible experience.
Sean Donahoe: Indeed. So again, I make it my thing, I don't like leverage-
Phil Newton: Yes, you don't want an experience like even again.
Sean Donahoe: I don't want ... again. But then again, I've got capital, I've got significant capital, so I don't need to do that. Some people who are just starting out may feel that, yes, you know what? It'll help me get that bit faster, I'll get there a little bit faster but again-
Phil Newton: Safety over speed, I think safety over speed every time-
Sean Donahoe: That's what we talked about a lot. That's one of our things that we advocate, especially as you're just starting, it's very tempting to get into, "Oh, they're going to give me $10,000 on top of my initial deposit or they're going to take my 10,000 and send me $40,000 fantastic." Look at me, I'm JD Rockefeller here. Oh, no, that's a trap.
Phil Newton: You might get lucky. In fairness, you might get lucky and people do and there are success stories there. I got lucky for a very brief period and therefore that means that you can do it. The reality is most people can't. Looking back on my trading career.
Sean Donahoe: Look at the experience-
Phil Newton: I consider myself an outlier, I did do that. I did over position. I didn't know any better and fairness, but I tried it with what I felt was, I was actually quite comfortable, but it was still quite emotional, but I was comfortable with it. But looking back on it, it's not how I would trade today. It's not how I trade today. But it was, I'm trying to think of the best way to describe it. It was again, it was just not something that I would repeat, knowing what I know now.
Sean Donahoe: Yes, the one thing I really want to highlight though, is when people first start, they're opening their accounts and everything else. A lot of people and traders don't have the quality experience that can qualify their approach to trading in a more efficient manner. So when you're presented with the option of leverage, and you haven't cut your teeth that much in the live market and everything else and the emotional roller coaster, it's a temptation to catastrophe.
Phil Newton: They say is the quickest road to success. And the reality is, the reasons that you've just mentioned is it's often the opposite, the quickest road to blow your account up.
Sean Donahoe: Unfortunately a lot of people do, that's why safety over speed, I think, in this case, is really why we teach, the way to trade that we do is because we like to be very conservative with our risk. We also like to be ... yes, and it replicates a lot of the aggressive styles of trading, but without the risk profile. It's a lot more, you can sleep at night. You're not worried about margin calls and everything else.
Phil Newton: Yes, yes. It's like that tortoise and the hare story, isn't it? I mean, surprisingly going slow and taking your time and making sure that you crossing the T's and dotting the I's as it were, that's actually the quickest way to get to where you want to be. And as we keep saying, you're not short term lucky, you're setting yourself up for long term success. That's more important.
Sean Donahoe: Now I've got to flip it around here, because this is a common myth that would say, okay, take your time and everything else or you've got to get that experience, I'm going to flip the script around, this is the myth, screen time will make you a better trader, and I'm going to flat out say, bullshit.
Phil Newton: It's like that 10,000 hour thing, I can't quite remember because I'm paraphrasing, but it takes 10,000 hours to be good at something.
Sean Donahoe: To be considered a master of any skill, requires 10,000 hours, I say, bullshit on that too.
Phil Newton: I don't agree with that, I think if you don't know what you're doing, you can medal around for 10,000 hours and become an expert, but if you if you've got a roadmap, a blueprints, a philosophy that is proven to work, you don't need 10,000 hours to make your success of it. You can be smart with your learning, your investing, and the way that you operate with whatever you do and become good at it in a very short space of time.
Sean Donahoe: An efficient application of proven strategies and an understanding of that will make you very, very efficient at .
Phil Newton: I was reading about the military and it was a Navy Seal training, I think. And they were talking about how they, one of the examples that we're using is they were using immersion tanks, the sensory deprivation tanks to get them into, along with all techniques. They were using it to get them into a familiar, it's called flow state, isn't it? Where is the ideal aptitude for learning and the idea was, is it was to speed up their ability to learn new skills. One of them, for example, is a language, so instead of them being out of commission for six months to become conversational with a language so that they can be deployed wherever they need to in the world, so that they can converse with locals they can speed that up to three weeks because they're in the right.
So now that they are utilizing the resources they have more efficiently and the armed forces can specialize in learning a language and they utilizing their ability to learn a new skill. And this just proves, that the proof that you need 10,000 hours or that you need a lot of screen time to make you better. You just need to do what you're doing more efficiently. And the example I like to use Sean, is how to put your screen time on crack, on acid, speeds it up, press the fast forward button. And if you want to really get the screen time in without the 10,000 hours, a way that you can do it is get your favorite charting platform on and puts a one second shot on. And that's like pressing, because you don't know what's going to happen next, you're not using the replay functions, that's popular on a lot charting platforms.
But you can put a one second chat on, or if you want to go even faster or slower, you can throw it up and down and put a tick chart on, so every 10 ticks, every 10 price prints on the challenge is a tick. Then it would develop a new bar, let's do a second, so you just put a one second chance on a three second chat on, every couple of seconds, there's going to be several bars develops. And you can watch the chart unfold. And if you give yourself like a little ... like you're watching sports, you give yourself a little running commentary of what's going on. I think this is going to happen. And there's a trend line here. And this is developed and map out, whatever skill or tool that you're trying to practice with, you can do in real time in seconds. And you can get six months of learning in a 30 minute period.
Sean Donahoe: Absolutely. Actually, I've done that. And one thing I do that-
Phil Newton: I recommend it to everyone. Yes, if time is a factor, it allows you to practice the skill, to practice the art of trading. If you want to speed up in real time how to put trend lines on as the charts are unfolding, put a 10 second chart on, or put a 30 chart on.
Sean Donahoe: With a liquid stock, I'm going to qualify that with the liquid stock.
Phil Newton: Yes, do on like index futures, it'd be perfect or Apple stock. Yes, you've got no intention of trading it first of all, but it will allow you to watch the markets in real time without full knowledge of what's going to happen next and practice the art of chart reading with the tools that you want to master. And in a 30 minute period, you can master several weeks or several months worth of air fingers screen time.
Sean Donahoe: Indeed, indeed. And it will dramatically accelerate your understanding of movements, and I use it with, funnily enough, like I said, I usually with algorithms, and I'm when I'm testing some of my indicated development and some of my strategies, I'll do it on that one minute chart. I'll do it on a tick chart. I'll do it on multiple time periods, because it allows me to see what some of my stuff does in real time.
Phil Newton: And you can swirl up and down, it's like listening to a podcast either faster or slower. It's slower if you're a slow typer or if you're taking notes, or faster if you're on speed, or if it's a slow talk. You can speed up or slow down to the pace that you want. It's just a fabulous way to learn the skill or to get that screen time. Again, this is the points, you put yourself into a state where you can speed up your learning curve without investing. Even if you've only got 30 minutes a day to do this, you can be very efficient with that 30 minutes you're on.
Sean Donahoe: Absolutely. Now, one thing-
Phil Newton: I was just going to finish off, I picked up on this when I was day trading stocks, because I again, I've done quite a few things over this. I used to look at level two, and I was looking at the flow in the time and sales quite regularly. In my mind's eye I was doing that with time and sales, which is like the tape is how to refer to-
Sean Donahoe: As you say, was reading the ticker tape.
Phil Newton: It's essentially the raw data feed. And when you start doing this, if even if you just said out loud to yourself, it sound a little bit crazy, but you'll start to build a mental picture of what the chart is, there is support and it's such a micro level but it's a very valuable skill that you will pick up if you do that, that will help you trade daily charts. As crazy as it might seem go and do it's an exercise while worth. Sorry, I just wanted to finish that off Sean.
Sean Donahoe: Yes, and the flip side of this is, and again, it's a big misconception you see of people who are flicking through chart after chart trying to find that next opportunity. And they spend hours a day, they consider that their investment of screen time, going up picking through chart after chart. But listen with 27,000 plus US equities alone, and again without all of, many of these stocks are just not worth trading. They don't have the liquidity-
Phil Newton: As Butcher of Plato said, "I ain't got time to flip through charts."
Sean Donahoe: There you go.
Phil Newton: Or is it bleed? I can't remember the quote exactly.
Sean Donahoe: They ain't got time to bleed, yes-
Phil Newton: "Quit your bleeding ain't got time to bleed." But we haven't got time to flip the charts, I've got other things that I want to do. I've got a date with a coffee shop after we've done this show.
Sean Donahoe: Absolutely. So at the end of the day one of the things we do to minimize our screen time, because we want to be more efficient, is we have our specific universal stocks which is the kind of pre filtered, pre qualified, liquid stocks that match our specific criteria.
Phil Newton: All highly liquid, optionable, they meet all the criteria, yes, it's fantastic. Because it's pointless trying to, again it comes down to what we've said in the past, it's probably hard to learn how to day trade if you don't know how to day trade, or you don't have time to day trade more specifically. It's the same with the stocks, if you're looking to trade options, then it's pointless looking at stocks that don't have options on. If you're looking to trade stocks that moves, it's pointless to look at penny stocks that don't move.
Sean Donahoe: Exactly.
Phil Newton: It just doesn't make sense.
Sean Donahoe: And that filters out a lot of the noise, a lot of the ... and then we have a further process to refine it down, to find filter and sell stocks in a certain way. So out of the universe of stocks we only need to look at the ones that meet further criteria for the day, and guess what that brings-
Phil Newton: Click and pick, bingo, there's the five stocks for today.
Sean Donahoe: Yes, that's it, so that brings 27,000 plus US equities down to maybe five to look at, and then we do a little examination, does it meet our third level of criteria? Okay, good. Now we've got something we can actually trade go put the positional simple, it is a simple as that. And, again, chart time, while it has its place while you're learning, and again, that little process and exercise that Phil mentioned is fantastic and I highly recommend it. When you start getting into trading screen time, actually, becomes a higher risk profile because the end of the day-
Phil Newton: Now we feel the compulsion to go and put on the trade.
Sean Donahoe: Put on mediocre positions, yes. And that in itself is not cool because then when you get really efficient, you become like, Well, do I need to do anything else?" You'll be surprised how little time it takes when you're efficient with your trading, and then you can avoid the temptation of staying in front of the screen the whole day, trading less, and then you've got more time for the coffee shop or whatever else you do it your life and that's what this is all about.
Phil Newton: Laugh and go spend time with your family, you don't need, "Are you looking at the charts again, Phil?" Yes, I'm looking at the charts again, this is how we make our money, what do you want me to do. It saves those arguments. I've not had those, you know what I'm saying, but this people don't get . Don't tell my wife, please don't tell my wife.
But you get the point, it just saves those arguments. You can do what you need, and get it done fast and efficiently, and then go spend time with the family without stressing over, should I be checking my positions? Because you've done everything you need to do, you don't worry about it. You can be off, I think this is the life, you can be 100% present with your nearest and dearest in your family or kids or your golf partner, if you're on the golf, whatever it is that you're doing, it's more important than sitting there ogling in the charts like it's trade up on.
Sean Donahoe: Indeed, indeed. And skip around that subject real quick. Just goes off the rails.
Phil Newton: Let's move on to something more interesting, price action and indicators, they're always more important.
Sean Donahoe: There you go.
Phil Newton: It's the same philosophy, is it?
Sean Donahoe: Absolutely, here's one, so price action is better than indicators. Let's jump into that one real quick. They are essentially the same. Here's the thing, an indicator is a formula applied against historical price action, okay? It's nothing new, it's not like some sort of Voodoo, it's just math. It's statistics. And at the end of the day, there's not even they indicate what price action has done applied to a certain formula, but here's the thing-
Phil Newton: Not going to predict the future.
Sean Donahoe: As you say, combine them. Combine indicators with the latest price action and you've got a refinement process, so you can use indicators to raise awareness, which is one of the things we do when we're finding filtering and picking stocks, but then we use this additional looking at the latest price action to determine and fine tune an opinion or an observation and then decide what to do from there.
Phil Newton: Think of it like a quality check, again we're talking about this production line over time. The indicator is like a quality check, this condition as happens, then goes for a visual inspection to the quality assessor how's that condition? It's the thing that you're being told is it confirmed by price action, yes or no. And if it's not then you throw it back into the reevaluation pool, but if it does meet the criteria, you can move it along to the next step of the production, because it's met that quality check.
Sean Donahoe: Exactly.
Phil Newton: Then if you think about it like that, indicators are there to support the trading. As we've just established, you can't look at everything all the time. I don't want to do it even if I could. So it's just that an indicator is to say, "Hey, this thing that you're looking for, this condition that you like to see has been met, you need to quality check it," and that's what we're doing. And then you get spat out every day this list of things the five or six stocks maybe, that meet that evaluation and then you can quality check it. It's like, "Okay, now that I've got these five stocks, is this thing that I should be paying more attention to. Is the next step of the production line requirement being met. And then you might get a list of two stocks and then the next step and so on and so on. You've got this production line but it starts with that indicator, and again, I think the thing that we've stepped over, they don't generate signals.
Sean Donahoe: No.
Phil Newton: It's not a signal generator, there's no such thing. We've got an average expectation based on research that gives us a positive expectancy, that's called a strategy. Just like every other business in the world, they've got an expectation that they can sell the products with their complicated system of leads , the marketing machine and all the rest of it and blah blah blah, they can sell their shoes on the high street. I've got to get the shoe shop there again, Sean I saw the opportunity and it's okay. But you know you can sell your shoes on the high streets in your fancy little shoe shop.
I've forgotten where I was going with this, Sean, but you've got this expectation otherwise you wouldn't be doing it in the first place. You're not going to make it up as you go along, you're not going to suddenly decide, you know what, "I think, I'll buy flip flops this week and see what happens," it's winter goddamn it don't have to sell flip flops. You're not going to have that stupid thought with a real business, and this is what keep saying, in the financial trading world treating indicators like a signal generator is like buying flip flops in winter to sell.
Sean Donahoe: Very much so. Another analogy I'll use which is no way near his kinky shoe shop over here, but the way I explain it or explained it to someone recently, was like a sniper. A sniper has a spotter. Spotter is out there finding the target, that's your indicator, okay. And he's found your target, he's told you the position, you zoom in with the scope, you get that target, that's the price action side of it. You get that target in the cross hays until you've got it, you've got everything lined up in the cross hays, you take your breath, you pull the trigger. You see that is basically the process. Indicator, the price action, evaluation of target, pull the trigger. And that really makes all the difference in the world, based on precision.
That's an analogy I use and I think, it really kind of highlights the refinement process until you're ready to pull the trigger on your trade. So, okay, jumping on then, consistent profitability is the most important thing. You notice there's a lot of these myths are everything is, it's the most important thing. Some might sound important, but at the end of the day consistent, profitability is not the most important thing. Consistent application of a positive expectancy strategy and a trading plan, I would say is infinitely more important. I wouldn't say is the most important thing because there's, it's like teamwork. It is-
Phil Newton: It's a group effort.
Sean Donahoe: But at the end of the day, consistent application is far more important than consistent profitability. Because if you have a positive expectancy strategy and you are consistent with your application, you will tend to be consistently profitable. But if you're going for consistent profitability, and you're not quite hitting your deadlines or your targets and everything else, you start becoming erratic in your application to try and take further risks to be consistently profitable. So it can be a double edged sword if you're not careful. So that's why consistent application is more important in my mind. What do you think?
Phil Newton: Consistency again, the real world example, business hours, your operating business hours between nine and five, Monday to Friday, it would be like opening up the shop anytime that you chose. "You know what, I'm not going to tell anyone, but I think today I'm going to open up at one o'clock till three o'clock because I only feel like work in those hours today." There's no consistency, your customers won't be able to come in and shop because you've not got the consistency of your standard operating opening hours. That's, again, we're doing the financial trading equivalent.
So having the shop open, Monday to Friday, nine to five or whatever it's supposed to be open for that particular business type where your customers would commonly come in, we're doing the same thing in the stock market. The consistent application of your strategy is vital to allow that teamwork that we were talking about earlier to be deployed. If you're not consistently operating your business then the team can't get the customers in front of the front door, they can't make the profits happen, they can't operate, it's just all the business equivalent that were are talking about just in the financial trading arena.
Sean Donahoe: Yes, absolutely, couldn't put it better. And this is a really simple one just to say, no, it's not consistent profitability, it's consistent application. So moving on to the last one that we're going to tackle today, you need to predict where the market is to know what's going to happen next, and how it's going to end to make money in the markets. So we kind of touched on this one with the tops of the bottom, but at the end of the day, this is more of a broad scope, you need to know where the market is and know what's going to happen next.
Again, we kind of skimmed around this one but no one knows what the markets going to do next, per se, okay. You can have an opinion based on analysis or whether its technical analysis, fundamental analysis, you could look at different things. You can have a broad stroke opinion or an impression or a analysis. But no one knows what's going to happen next. And anyone who tells you that they can hold on to your wallet and walk away, that's all I'm going to say is, that no one really knows what's going to happen next.
Phil Newton: Yes, now if they can, they say back it up, I expect this because my research suggests that on average, that's the most likely thing to happen. That's why I might not my pay attention because in fairness, the qualifying why they think happen next, but if someone's adamant that this thing is going to happen at bitcoins to $70,000, for example, no one knows what's going to happen next. There's no precedent for this moments which is why everyone is a bunch of crazy about it. But if you've got a historical precedent for an expectation then, yes, it's like I know 65% of time that all there abouts on average I'm going to make money somewhere. I don't know which 65%.
Sean Donahoe: Exactly.
Phil Newton: You can't predict that part. That's the only that's the only thing that I don't know.
Sean Donahoe: Exactly. We can have a positive expectancy, we can have a overall opinion that on average is correct, but it's an on average. And then again, that also qualifies that there are times when we're absolutely wrong, but that's the way the thing crumbles. As long as we're on the right side of, when we've got an analysis that is causing us to generate a position and you say, "Yes, okay, we're good, we're good, we're good." Some of them win, some of them don't, some of them play out, some of them lose money, that's fine as long as on average we're correct and we have an opinion based on reasonable intelligence, evidence and analysis, then yes, absolutely, that's perfect. That's what you need to listen for those qualifiers, you need to listen, okay, on average what is the result? And that is more important than anything else.
Phil Newton: When I stopped worrying about being right on my, again effing is again prediction, when I stopped doing that, my stress levels reduced dramatically and I started being able to sleep at night more consistently. Because you've got positions on you're worried about them. But when I started just focusing on applying a consistent methodology that I have an average expectation of profit over, when I have that mental shift, again my stress levels went down. I started to sleep better, and I didn't care about the outcome. I start to become a loof about whether I made profit or loss because now I was focusing on the process that gets me to the outcome. And then that created consistency, which is what we were talking about earlier.
The confidence that I've got a positive expectancy on my outcome that allowed me to put the next trade on, and then the next trade on, and the next trade on, without worrying about, will this be the one that works out? Or will this be the one that stops me out? Or will I be right? And I wasn't worried about, what if I'm right or wrong, we've spoken about this before, redefine what you consider right and wrong. What is a winning trade to you? It used to be, thinking about the results and being right and making money, now it's deploying my strategy. A winning trade to me, is when I accurately deploy my strategy with consistency over time, that is a winning trade for me.
When you have that mental shift, you don't need to worry about the prediction and being right, and everything going the right way, and doing the right thing and all the right moves happening. It doesn't matter anymore because your expectation, your viewpoint is shifted, the focus is somewhere else. It's such a freeing and liberating experience when you have that mental shift.
Sean Donahoe: Absolutely. So there you go. We've done a little bit of myth busting, and we haven't blown anything up yet. But those are a wide range of common myths that we decided to pull apart here for you, hope you've learnt something, and hope you've had a couple of myths absolutely busted. So with that being said, let's move on.
Automated: And now it's time for the rebel trader tip of the week, brought to you by ready to take your trading game to the next level? Discover where smarter traders come to get coached by the best, and learning to trade just got easier. Trade Canyon smarter traders live here.
Sean Donahoe: Okay, rebel trader tip of the week, here's the thing, and this is something I hear a lot of people talk about, and it's a myth unto itself, but I'll do kind of one more here, you don't need a high percentage of your trades to be winners to make money. Now we talk about being right with our positions and trades, X number percent and everything else and that on average, that's because that's one of our core strategies. And that's what we're talking about there. But it's a common myth that we didn't really discuss in the last section. But I want you to think about this, as an example, Phil has a strategy that only works 5% of the time, which means 95% of the time it loses. It loses money, should I say. However, when it does return profits on those 5% where it does work, it makes up for all that, all those actual losing positions-
Phil Newton: All the losses and then some.
Sean Donahoe: And then some, obviously makes profit, and that's what the strategy is. So even if you have a strategy that is not on average, every position is a winner or most of them are winners doesn't matter because again, you don't have to be that way as long as the ones that do win make you ultimately profitable. And that is the thing. It's all about that positive expectancy of return of capital, not the percentage of trades profitable that makes the difference. What would you say about that Phil?
Phil Newton: Yes, I mean, I would argue any strategy that makes money overall is a good strategy. The success rate is what we're talking about here, on average 65 out of 100 trades make money. So 65% . Now, I only know that with my strategy because I've got enough, I've got many, many years of data to support that expectation. Now, it might be that say, 35% of those trades that you take, make money and if overall your strategy makes money, then that's a good strategy.
Now, the difference in whether you continue to use that strategy is what you might do when you measure the peak to value draw down. So if the experience of making that money with that 35% winning strategy, experience that the peak to value is tough, not just practically from the money point of view, but emotionally the experience of trading, you might want to re evaluate that. So you only know that when you take a look at it. From my perspective, any strategy you that makes money is a good strategy. It's only then, whether, you can cope you can handle with the experience of that strategy, is to whether you continue to use it.
Sean Donahoe: There you go perfect. Okay, that being said lets rock on.
Automated: If you've got questions, they've got answers. Sean and Phil dive into the virtual mailbag for this week's rebel traders quick fire round.
Sean Donahoe: Okay, rebel traders mailbag, taking a dive in seeing what came in by carrier pigeon, semaphore and smoke signal, I've got the first one here for you, Phil. If I don't have much capital does that prevent me from using wide stops on my stock traders?
Phil Newton: There's so many ways I want to answer this, Sean, so many ways. No you don't have to. I mean, I think if you using stock and you've not got much capital that might be the wrong style or the wrong vehicle to use. I mean, trade with smaller position signs. If you insist on trading with stock and using a physical stop loss with your broker, take a smaller position size. You can buy one share. If your strategy says that you need a wider stop loss, well, you don't need to, you can widen your stop loss but reduce your position size to compensate. So that the risk remains the same. So if you are going to do that, that's the way that I used to do it. It was, reduce your, surprisingly Sean, there's that phrase again, reduce your position size to give you the stop loss that you require, that is necessary for you deploy your strategy successfully.
Sean Donahoe: That was the first way I was going to go with it as well.
Phil Newton: And the second way is, why you are you trading with stock? There's other ways that you could trade, that would be less capital intensive. So an alternative solution is to look at stock options, I advocate the first strategy people learn and it's what's based on our newsletter, is a stock replacement strategy. So instead of using stock, use a stock option to replace the necessity for stock. Because the margin requirements, the money that you need to hold the position open, are vastly different. We've already compared a stock option, is comparable to an option a year, a very small amount of money by comparison to open the position.
Now why is that important, because then the risk is managed on the entry because the worst that can happen, is you lose your deposit, which is the price of the option. So, if you reserve 100 shares, and the option cost you $1 per share, so it's going to cost you $100 to hold the position. Now it might cost you several hundred dollars to hold the same position with stock on margin or several thousand dollars depending on the value of the stock in the size of the position. The point here is, is that the capital requirements are drastically lower and the risk is fixed on the price of the option on the entry. As a result of that I don't need to use a physical stop loss because my risk is managed with the full price of the option.
Sean Donahoe: Absolutely, no, that's bang on the money, bang on the money.
Phil Newton: So two possible answers there. Two possible.
Sean Donahoe: Okay.
Phil Newton: What else have we got, so rumor did round here, I got a little smoke signal over the weekend, does Confluence improve your trading?
Sean Donahoe: Oh, now by Confluence which is a very fancy word, I'm assuming-
Phil Newton: What do we by mean confluence?
Sean Donahoe: They mean, when things coincide, unless take it as indicators, which is why I believe they are talking about is, when two indicators or when two, when two indicators collide, sounds like a bad song. If say, for example, we're looking at, say, RSI20-
Phil Newton: RSI and CCI.
Sean Donahoe: RSI and CCI, I'd say that they're both saying they're oversold or overbought. That's kind of what-
Phil Newton: They are giving similar common readings.
Sean Donahoe: Yes, now again, I think that there is, a lot of these indicators do the same thing. They're looking to say, Okay-
Phil Newton: This is my bone of contention.
Sean Donahoe: Yes, it's an indication that it might be, in this indicators opinion-
Phil Newton: It's a statistical measure, it is my constant immediate response to indicators. This particular reading has happened and a similar one with a different mathematical formula is also showing something similar. That's what we mean by confluence.
Sean Donahoe: There are different ways of doing the same thing, a lot of them are different ways of doing the same thing. I always look at refinements. Now there are, you can spend a long number of months studying confluence.
Phil Newton: It's a very deep rabbit hole.
Sean Donahoe: It is, and I've been down that rabbit hole, as Phil will attest to many times. Because, again, I develop indicators.
Phil Newton: And I had to drag you out several times.
Sean Donahoe: Well, the thing is, I am a coder as well.
Phil Newton: It's in your nature.
Sean Donahoe: And it is something I do go down and I still go down every now and then, because again, it's part of what I do. I am indicator and a strategy developer in that regard. I look for things that compliment, don't repeat. I look at, okay, refinements and that's my hole, that's the rabbit hole I always go down. Is refining that sniper scope, and that is what I specialize in. It is basically long barrel shots, okay, that's my thing. And you have to recognize when you have or you're trying to compound indicators that have tried to do the same damn job, that's not efficient. What happens is you end up with confusion.
So say for example, the example Phil had, you've got RSI, you've got CCI, you've got another couple of oscillator type indicators, and all three of them say, yes, it's overbought. That's not a signal, that just means you've got three things saying, "Oh yes, we're a statistical extreme," which you can do just by looking at just one indicator. However, if you start relying on Confluence, which I love that word now, I think that's a great word. I haven't used that word for a long time.
Phil Newton: I've got mixed things on this, because yes, if you've got two tools, reluctant to use the word indicator, but if you've got two indicators or tools that do show similar things, but you've got them set up, if you use different settings so that one gave you a longer term perspective versus a shorter term perspective and then there was Confluence, I think I would value that more than two similar indicators with similar mathematical formula behind them, with the same period length setting. Say like the default 14 for most tools, that wouldn't mean much to me. If you've got a longer term and a shorter term, so that you've got this different perspective with slightly different tools, then I would wave that more important.
Sean Donahoe: You have to have that right perspective of what it's doing, time frames is a great example.
Phil Newton: Yes, suppose it comes down to what you're trying to do with the indicators in the first place.
Sean Donahoe: Yes, now there's one danger, otherwise, actually a few dangers. But again, if this is an awareness of what you're doing, if you have say, three similar, let's just use the three similar versions. You got three similar oscillating type talks to qualify this, and they're all saying the same thing. That would raise your awareness to look at it in more depth. But if one of them is saying, yes, this is overbought, and they're out of sync, does that mean it's not a valid opportunity that you could look at and would be a good trade because the other two are not meeting that over bought awareness.
Phil Newton: Whatever the requirements is, yes, whatever the requirement is.
Sean Donahoe: It might keep you out of a good trade that would highlight a statistical extreme because the other two, with whatever version of the formula are not quite there. Does that start creating risk?
Phil Newton: I was just going to jump in there, I know what you're saying there Sean, when they're all the same indicators, it plants the seed of confusion, because you've got two out of three and you're thinking, well, it's not there. Or maybe they're all showing different things and it's like, I don't know what to do because they're all, and then what you thought was going to happen with price, say, it's going to go up. But the indicators don't suggest going up any further and you ... it creates all sorts confusion. I think if you're going to do that with a multiple indicator approach, and this is what my research has suggested in the past, is that, treat them like a grading. You've got one indicator to indicate two and three indicators. Okay, you've got one point for one indicator, another point for another indicator, and a third point for the third indicator. So when you've got all three indicators saying this, you've got a three points, a 3 grades or however you want to phrase it, Sean helped me out I'm struggling with my words.
Sean Donahoe: Let's say it's A level, B level, to C level. If all three it an A level rating go. I had a look at that one-
Phil Newton: or a double A rating or a single A, you're grading your signal. And again, you would only do that if your research backs it up. So when you're researching your strategy and you're looking through historical evidence to support to your hypothesis, if you can do that, then it makes sense and I get to know people that do, do that. I've used it myself in the past where you're looking for that supporting evidence. But again, it comes back to why are you using the tools in the first place, what pillar, what settings, make sure that they're all doing different things so that you can have that genuine grading through support. I've got a triple A rated setup here, or a double A rated or a single, you've got that evidence to support the confluence of those tools that they're all suggesting a similar thing. Doesn't mean it's going to be a better indicator? Sorry a better setup, your research will tell you that.
Sean Donahoe: Yes, and back testing and forward testing and everything else, which is what we spend many, many hours do.
Phil Newton: Yes, I would expect that and what could happen, but your research will tell you that.
Sean Donahoe: Absolutely.
Phil Newton: It's an interesting exercise actually, it's an interesting thought exercise to bounce around how would you use multiple indicators.
Sean Donahoe: It is something that I've spent a lot of many, many years.
Phil Newton: Many people have spent many hours and many years trying to figure this out. The poor farm boy in the room is not that smart, so I'm not going to figure it out, I've cracked the code as far as I'm concerned. Mine consistently makes money, I don't need to make it complicated. Surprisingly Sean, let's just keep it simple.
Sean Donahoe: Absolutely. That's is what we do. But I must admit, that is my private little joy, because I enjoy doing this kind of stuff.
Phil Newton: I did it for many years. I mean, to be fair, take my own advice, what I suggested earlier was that you and look on, say, a 10 second shots and you speed up the learning curve. And I got into the habit of doing that and researching strategies. So part of one of my problems as I was over trading, because I was in front of a computer all day, blah, blah, blah. I was putting trades on unnecessarily, so what I would do is, I would analyze instruments that I had no intention of trading and I would develop strategies to help me with the itchy trigger finger. So I've researched quite a lot of things over the years, just for the sake of research, and then so that I was filling the dead time productively and I was turning that compulsion to do, again to air quote it again, to do the act of trading. Which is to research and analyze things and drop pretty trend lines all over the charts and do whatever you want to do.
The act of trading, I was using it productively with research. So that compulsion to do something trading, because the act of doing is very strong with everyone, because we get paid to not do anything. It's such a counterpoint to conventional jobs and conventional work. You're doing something, you're working, so we get paid to not do something. We get paid in the waiting, so to fill that time and to not unnecessarily trade, and that's what I did. So I would be looking for all these strategies, tools and indicators, and look for confluence. I filled my time with the research on those stocks, or features, or Forex on different time frames, just so that I could expand my knowledge.
Again I practice what I preached earlier, which is put them on a 10 second charts and watch everything unfold in real time. You'll soon see what those indicators are telling you very, very quickly and maybe you'll spot things that the traditional, and this is how my strategies developed, you start to spot traditional interpretations. And then you start to spot the unconventional ways that you could use these tools, because I don't the tools in the conventional way most of the time.
Sean Donahoe: Absolutely. Okay, so the third and final question today, this is kind of we touched on in the main part of the show, but I think this is this is a question that we got, I think is really worth tackling just a little bit is, is leverage really that bad? So Phil, what say you, sir?
Phil Newton: Yes and no. In fairness, I think yet the knee jerk response is yes. I think yes, but it depends. I think it's yes and no. Yes, it's that bad if you consider it as a multiplier, which is what we spoke about earlier. From a multiplier points of view, if you use leverage as a-
Sean Donahoe: That's what most people do.
Phil Newton: Yes, and I think it's a mistake. I think, to be fair, the people that use it as a multiplier, because people do use it that way and they use it very successfully, they know what they're doing. But I think if you're a retail trader, you shouldn't, because you can get into a whole world of pain very, very quickly. So if you're using as a multiple, if you've got $100,000 account, and you've got four to one leverage, than the multiplier would be, you've got $400,000. And the mistake is, what makes it bad, is if you then pretends that you've got $400,000 and then work out your position size, and all the rest of it goes along, you've not got that money.
So the better way would be to use it as a discount as opposed to the multiplier. So a discount might be, if you've got $100,000 and you've got four to one leverage, you get a discount on your position. So for example, I'm looking at Alaska rate at the moment, it's a $60 stock. I can buy one share and to use it as a discount, it would only cost me at four to one, it would only cost me $15 to hold that position open. Does that make sense Sean?
Sean Donahoe: Absolutely.
Phil Newton: So a cash accounts would be, it cost me $60, I need the full $60 to hold the position open, margin accounts at four to one leverage, I would need $15 to hold the same one share at $60. Then the mistake people make, is that with four to one leverage if you've only got $60 in your account they would buy, with four to one leverage they would buy four shares at $60.
Sean Donahoe: Yes, they'll be using $40. But they can only get the money on $60.
Phil Newton: Yes, so that's multiplying, using it as a multiplier, you've got the cash accounts and then you've got the discount. So I want to use it as a discount, I only want to use $15 to buy the same position that I was going to buy anyway, and that means that I'm using it more sensibly. That would be a better way of using leverage, and again when you're using options, to kind of take it one step further, to use the same position. Now in this case I'm replacing buying stock, with buying an option, the reserves shares for $60, and I would only need a percentage, and usually it's around about 10%. It fluctuates, but there abouts. So I would need just small percentage of the stocks, if I donated say $6 to hold the position, it's going to be a lot less.
But you know what I'm saying, I would only need a small percentage of the overall position size to hold the position open, because my margin requirements are significantly lower. That's again, an even better way of doing it. Again, it's still this discounting doubt that allows you to make better use of the money that you have available. I'm not discounting down then means that you can increase your position size sensibly within regular parameters and you can trade more frequently with multiple positions and start experiencing a portfolio, having a portfolio experience that we're all . I'm not using leverage in a good way and that's what it allows me to do.
Sean Donahoe: Now again, it takes discipline to keep it in mind that it is discount.
Phil Newton: Yes, because we all want the big position and swing for the fence. I get it. We all do. But that's the quickest way to the poor house if you get it wrong.
Sean Donahoe: Absolutely, the last thing you want is one of those magical.
Phil Newton: We want to be in business tomorrow, that's why we do it this way, that's why we do it this slightly, well, it's perceverbly the slower way, but that's the quickest way to get to where you want to go and if something bad happened you're still in business tomorrow.
Sean Donahoe: Absolutely. Okay, so with that being said, let's rock on.
Automated: Don't forget, if you have a question you want to ask Sean and Phil, just go to and your question may be featured on a future show.
Oh- oh what's that smell? It's time to pull out the Wall Street shenanigans and Mainstream confusion and outright of called experts. Yep, it's time for bullshit of the week.
Sean Donahoe: Okay, so, bullshit of the week, and I've been noticing a trend, I don't know about you Phil, but I've been noticing a trend in the news media. Again, they're trying to find the good hype story. They're always looking for some eyeballs.
Phil Newton: They're struggling to find them at the moment.
Sean Donahoe: Well, here's the thing that I've been noticing as a trend, it's that who's going hit the trillion dollar market cap fist.
Phil Newton: Oh, I did see this one.
Sean Donahoe: I've been noticing it more and more as a trend, as who's going to do it?
Phil Newton: It's eye roll news time.
Sean Donahoe: It really is. So is it going to be for example, with the first trillion barrier inside the surprising tech stock that is the best buy, or Amazon is going to be the first trillion dollar company, or Apple vs Apple? Sorry, Apple versus Amazon even, the race to one trillion, or Microsoft will be the first trillion dollar company say analyst.
Phil Newton: It's like commentary on the world's slowest horse race. Amazon in the first lead followed closely by Apple, now Apple's taking it by nose. It literally is the world's slowest commentary on a horse race, it doesn't fucking matter dude.
Sean Donahoe: It really doesn't. Now while it is a nice known quantity-
Phil Newton: It's entertaining.
Sean Donahoe: -milestone and everything else, the fact that you just have to, okay, play them off each other, who's going to be the first trillion. Because, obviously, god great, they're all getting to that market cap level that they have that book value, so to speak. You're looking at these companies like, okay, fantastic they're going to hit that, great. Does it affect my trading, no. Is it going to really make a damn difference to what I do every day, no. It's just more eyeballs commentary for getting you to look at ads, that's it. It really is nonsense.
Phil Newton: Six months ago, to be fair, a little over six months, seven months ago they were talking about will Bitcoin get to 20,000, 60,000, $100,000, they're not talking about it at the moment, because it's kind of like-
Sean Donahoe: How do we build the rally inside a valley.
Phil Newton: It's not doing anything at the moment.
Sean Donahoe: But it's not newsworthy and noteworthy again.
Phil Newton: Exactly. Exactly. So this is the hot bullet for the week. It's, which is going to be the first ... Yes, it's great. It's informational. It's entertaining, but that's all it is. It's not financial reporting at its finest.
Sean Donahoe: No, no, no.
Phil Newton: I think that's what makes it bullshit.
Sean Donahoe: I was going, funnily enough, there's so much BS this week, I think we have time for number two.
Phil Newton: Sure we've got time for a number two in the bullshit of the week section show.
Sean Donahoe: Yes, no pun intended. I've got to give a shout out, again, to the crypto crowd. A lot of the other coins haven't been rallying, but Bitcoin has undergone a significant rally in the last few days pushing above it last kind of logical stopping point or point of interest. And again, that's kind of caused a little bit of interest and suddenly my Facebook feed is full of, "Oh, crypto is on the run again." And everything else is so good, and then it's down today. So a little bit of a bull trap, is looking like it's emerging, it's one of the things I've been, people have been asking me privately what do I think? I said, "Yes, I would want it to get above a certain level before I'm back in again."
Phil Newton: It's in a range, it has been looking on it. Surprisingly, Sean, it looks, as if you squished it up, it looks like one of the stock indexes. You've got the big rally, you've got the sell off, you've got the consolidation for most this year. Surprisingly, we could look at the SNP, or finance that, or the Dow, it looks very similar, hot shape. This for me, just proves that history repeats itself no matter what market you're looking at. But yes, I think you're right, it's had a bit of a rally and then suddenly people are going, "Oh, Bitcoins are doing this," no it's still doing nothing this year. It's still not really going anywhere, because it moved a very small amounts. Everyone's losing the mind over it.
Sean Donahoe: It's having a little bit of a breakout above its 8000 level, which was, yes, that was a point of interest.
Phil Newton: It's a round number, is all I heard, it's $8,000 round number. We could be talking to anything. I know we're bashing Bitcoin again, because it's, it's one of our hobbies, but we could be talking about anything. I can't even remember what we were talking about, was it the index or is it gold, I can't remember the other week.
Sean Donahoe: That was the main indexes.
Phil Newton: We were talking about the one minute, one of the big financial things on websites was talking about, we had to say it was gold. It might or might not have been a gold taken, swan dive off the cliff, and when you look at the chart, it was on a one minute chart and it was just one big red bar on a 30 minute chart. Last 30 minutes of a one minute chart and it was just one big red bar and when you look at the scale it was just a few point. It was not a big move, they made such a big deal of it. It was ridiculous.
Sean Donahoe: I've got one for you as well, which is, today go look at GMs chart. Okay, now we're recording this on Tuesday by the way. . Yes, well here's the thing, okay, so let me just pull this up myself. They have been talking about a plunge, which they told you about a plunge yesterday, because they came out with-
Phil Newton: They just released earnings.
Sean Donahoe: Yes, they released earnings, they beat expectations but they said, okay, well, we are going to have to cut guidance down, bom, bom, bom and yesterday the head, okay this is completely news driven. But think about this, they said, "Yesterday, stocks plunged after GM announcement that they're cutting guidance." But here's the thing, that was yesterday and if they said stocks plunged, you look at yesterday's tick it was only down 1%. That's not a stock plunge, now today the stocks plunged, because everyone is freaking out.
Phil Newton: That's called a , it actually gaped higher and then sold lower. So technically it was down on the day but it was still up from the day before. This looks crazy, it's not phrase of lies, lies and it's all about perception. The perception of reality, and the reality is distorted when you look at it under a microscope. What do you want to do, you want take a big step back and look at the horizon, take as much of a view as you can see and then make your opinion. This is the nonsense and the bullshit that's just trying to grab attention, fair enough, they do a great job of it and their reason for reporting what they do is different from what we do as traders.
We want to be able to make an educated and informed decision on what the market may or may not do so that we can profit from it. If you're looking at the news headlines, it consistently, consistently highlights the bullshit that we're constantly talking about. It's just there to get your attention to sell more. Sell advertising for eyeballs. That's their business model, and we're not bashing that as a business model, but why are they over sensationalizing things that truly, truly don't matter. That's why I'm always objecting to nonsense like this.
Sean Donahoe: Yes, but look at the knock on effect, today because of that over hype about it, , everyone shorting this today, if you look at the volume compared to the last few days just this morning a massive volume spike. Again, cheap people are shorting the hell out of this based on that, all the stocks plunged yesterday. But it didn't really plunge yesterday.
Phil Newton: I reckon this will turnaround.
Sean Donahoe: Oh yes, absolutely. Actually this is on my radar for the turnaround to grab into, I'll catch a bit of the action.
Phil Newton: Just because my default setting is do the opposite to what else is doing, that's my default setting. I'm looking at the volume as you, yes, there's an increase involved, it's only just above it's one month average. It's not that much in fairness.
Sean Donahoe: We are only an hour into or like two hours into the frustrating trading day, so I that kind of volume at this kind of time period, that's going to be pretty big for the day. But-
Phil Newton: It be most for the day, but my default settings do the opposite. It might be by the end of the week as we've recorded this or so maybe as it is released over the weekend, we've seen some type of turnaround. I would be looking for it, just a call it in real time and we can see what happens. I would look back to the around the 5, May, I don't you can see that, Sean, little bit of a spike, little bit of a sign of exhaustion after a little bit of a sell off. That's what I'd be looking for.
Sean Donahoe: That's what I'm waiting for, the same.
Phil Newton: So about $34-35 level, yes, that's what I'd be looking for. Now my awareness being raised that something funky is going on with General Motors, and it's not really doing anything that hasn't already done in the last 12 months. It's not really doing anything new as far as I'm concerned, is how we phrase it. But that's what I'll be looking for. A little bit of a trade ... where's the trade? That's what I've been looking for on General Motors right now. Maybe by the end of the week, over the next few days as we're doing this now, in some sign of exhaustion to suggest that, "Hey, that move is over." Perhaps I'll sell some puts rather than buy some calls and look for a bounce. I just don't think it's, yes, I just don't think it's going any lower.
Sean Donahoe: I'll be curious to see, well, we'll touch back on this one next week. Let's make a note of that, come back to this one next week, let's just see what happens but again, initially driven by a little bit of bullshit.
Phil Newton: Yes, to be fat right or wrong, we'll find out next week. Let's go max this one, Sean. It'd be an interesting exercise because, it's just to highlight we do it in real time, and we truly don't know what's going to happen next. My expectation if there's going to be a trade, is it's going to find at logical stopping points between $34-35, if I see a sign of exhaustion, I'm tempted to adopt a bullish viewpoint.
Now I might then sell some puts, I don't think they'll be a directional move but I think that the move lower will be exhausted. Or probably, a little bit more of a conservative thing by putting that view on and sell some puts, that would be the way that I'd be planning on doing this. Now what I've got to do is see if reality unfolds for me. If that scenario happens the trade will go on, there it's out in the world, we'll find out next week. Tune in to next week's show and we'll see what happened.
Sean Donahoe: Yes, to my mind this is a hype move, and usually when I see a hype move, that's usually time to something.
Phil Newton: Default setting do the opposite, do the opposite every time.
Sean Donahoe: So okay, we'll come back to this one. But yes, there you got three pieces of bullshit this week and little bit of where's the trade? Awesome stuff. Okay. And with that being said, ladies and gents, we're going to wrap up the show right there. And I appreciate you being here. It's always good to have you guys listening in or we're just talking to ourselves, we do that anyway.
Phil Newton: I frequently talk to myself.
Sean Donahoe: Indeed. But we do enjoy sharing this stuff with you, going through all of what we're talking about on a regular basis between myself and Phil. Again hope you get the benefit and value from that, so do remember that you can go to if you want to subscribe to this show, make sure you don't miss a single episode. You can do it right there on your favorite way to hear us and again this helps us reach, if you leave a review as well, helps us reach other traders just like you.
Phil Newton: I think we should also add a little warning to our podcast, this podcast may contain nuts.
Sean Donahoe: Absolutely.
Phil Newton: You can also connect with us on Facebook, Twitter, the usual social medias, you can find our nice little link I think we also mentioned a few things earlier, we talked about our universe of stocks, earlier as well. I think if you go to that link you can even get freebies at the same link, is all I was trying to get you there. We know we've work on next week's show, so we've got a nice little call back to General Motors and to see if we were right or whether you're wrong. Yes, we generally don't know whether we will or we won't. That's what I'm looking forward to next week. But what have you got coming up next week?
Sean Donahoe: We're also going to talk about dealing with decline. And basically, how to handle and bounce back from something we talked about earlier on, called draw down. Exactly how to manage it, how to manage not only your state of mind, but also the state of play. And we're going to be going into in a little more depth than everything else. Because everyone does experience draw down every now and then. Regardless of how experienced you are, what strategy you're using-
Phil Newton: It happens.
Sean Donahoe: It happens.
Phil Newton: It happens to everyone.
Sean Donahoe: And it can be devastating. It can make you feel like all sorts of different things are going wrong, but we're going to talk about that because again, it's a natural state of the game. So we're going to be talking about that in more depth and coming back to the GM one.
Phil Newton: It's going to be a good show. I'm looking forward to that one.
Sean Donahoe: Well, we're not putting on the trade yet. We're watching it, but we're telling you-
Phil Newton: We're waiting for the setup, yes, what we're waiting for it to happen. That's what a plan is. I've got an expectation of what I think will happen and if it does happen, and the trades going to go on.
Sean Donahoe: Exactly, right now, there's no trade on because we're just raising an awareness. So just pre qualify it. We're just keep saying, okay, when something extreme happened-
Phil Newton: It's on the production line.
Sean Donahoe: It's on the production line for further for further analysis.
Phil Newton: Stage one, awareness is at race, we're waiting for it to move along the bus.
Sean Donahoe: Absolutely, so with that being said, rock the hell on and we'll see y'all next week. Take care for now.
Phil Newton: Bye for now.
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[00:08] Show Introduction

[00:01:15] Sean: Today, we are kind of doing a little bit of myth-busters. We’re going to ask questions like are entries the most important parts of trade, is trading really that risky, does greater leverage man greater profits.

[00:01:54] Sean: Basically you will be armed with deeper insight into these common pitfalls and help you get that rebel trader edge.

[00:03:40] Sean: We’re going to tackle some of these myths that are really common place in the industry. The first one, I think is the most common myth outside of trading is that trading is risky.

[00:04:27] Phil: I’m evidence that a poor farm boy can make it good in trading. Starting your own business is risky but no one tells you off for that.

[00:05:10] Phil: The way we talk about it and are advocates of is that the risk is defined. The way that we do it, it’s fixed risk. Sure, you might lose a bit of money - there is risk involved but it’s just like any other business.

[00:06:12] Sean: The common perception is that trading is gambling and that there is no control over it. Here’s the thing, it’s a numbers game and if you come in understanding that the risk is defined, you have a process that mitigates a lot of that risk and a strategic or tactical advantage because you’re applying certain strategies that have a positive expectancy.

[00:06:40] Phil: Here’s why it’s risky, when you start a business the first thing you need is a business plan. When it comes to trading, no one does that and that’s why it’s risky.

[00:09:34] Sean: Okay, let’s kick it up to the next one. Entries are the most important parts of your trade - we should have this as an entire bulls**t of the week’s actually. Entries are fantastic, you can get you into any trade. Exit is just as important, your position size.

[00:09:53] Phil: I’d say the exit is more important personally. It’s a team effort between various elements.

[00:13:16] Sean: So, here’s the other thing kind of in line with the one we just mentioned but takes it a little further. You must have perfect timing to make money in the markets, to pick highs and lows exactly.

[00:13:33] Phil: If you can figure that out, keep that knowledge to yourself.

[00:13:49] Sean: No one has that. Some can get it pretty drilled down and would say with reasonable expectation that they are close. What you can have is indications or an opinion that you are at a high or a low.

[00:19:10] Phil: If you’ve got a viewpoint, test it out first. Because if you’re looking for those big swings, the investment-type opportunity, multi-month, maybe even multi-year, you’re not going to put your whole position on at once, you’re going to test the water.

[00:19:43] Sean: Here’s the other thing - you need a lot of money to stand any chance of making money in the market.

[00:19:54] Phil: This was my big one, until someone pointed out that it wasn’t true.

[00:22:19] Phil: What has happened in recent years is you need even less money to hold the position open because all you need is the price of the option.

[00:25:20] Sean: Let’s move on to the one that p****s me off the most - greater leverage means greater profits.

[00:25:29] Phil: Yes, but not in the way you think.

[00:25:40] Sean: A lot of people feel they are trading much bigger accounts than they are when they get leverage.

[00:26:48] Phil: How do we normally suggest that we deal with it?

[00:26:53] Sean: Treat it as what your base count is, it’s a discount. I don’t like trading on leverage period. You can use it but like a discount.

[00:28:32] Phil: Do not risk money you can’t afford to lose.

[00:33:51] Sean: It’s a temptation to catastrophe. Safety over speed, in this case, is often why we teach the way to trade that we do. It’s because we like to be very conservative with our risk.

[00:235:08] Sean: Screen time will make you a better trader - I’m going to flat out say bulls**t.

[00:35:40] Phil: If you’ve got a blueprint, you can be smart with your learning and investing add become good at it in a very short space of time.

[00:38:38] Phil: If you want to speed up in real time how to put trend lines on as the charts are unfolding, put a ten-second chart on, put a thirty-second chart on...

[00:38:46] Sean: With a liquid stock, I want to qualify that.

[00:38:50] Phil: Yes. You’ve got no intention of trading it first of all, but it will allow you to watch the market in real time without full knowledge of what’s going to happen next and practice the art of chart reading with the tools that you want to master.

[00:42:00] Sean: One of the things we do to minimize our screen time because we want to be more efficient, is we have our specific stocks, the kind of pre-filtered liquid stocks that meet our criteria. Then we refine it down, we only need to look at the ones that meet further criteria that day. We do a little examination, does it meet our a third level of criteria, good, we’ve got something we can actually trade so we can go put on the position.

[00:45:27] Sean: Here’s one, price action is better than indicators. They are essentially the same. The indicator is a formula applied against a historical price action. It’s just math, statistics. Combine indicators with the latest price action and you’ve got a refinement process.

[00:48:00] Phil: It’s not a signal generator. We’ve got an average expectation based on research gives us a positive expectancy. That’s called a strategy.

[00:52:24] Sean: The last one we’re going to tackle today - you need to predict where the market is to know what’s going to happen next to make money in the markets. No one knows what’s going to happen next, you can have an opinion based on analysis but no one knows what’s going to happen.

[00:54:07] Sean: We can have a positive expectancy that on average is correct but that also qualifies that there are times that we are absolutely wrong.

[00:57:00] Sean: So a little bit of myth-busting that we decided to pull apart so hope you’ve learned something.

[00:57:09] Rebel Trader Tip of the Week

[00:57:35] Sean: You DON'T need a high-percentage of your trades to be winners to make money. It’s a common myth that we didn’t really discuss in the last section but I want you to think about this. Phil has a strategy that only works 5% of the time which means 95% of the time it loses. However, when it does return profits in those 5% it makes up for all the losing money trades.

[00:58:26] Phil: And then some.

[00:59:00] Phil: The success rate is what we’re talking about here. On average 65 out of 100 trades make money. I know that of my own strategy because of I’ve got years of data to back it up. From my perspective any strategy that makes money is a good strategy.

[01:00:22] Quickfire Round

[01:00:34] Sean: If I don’t have much capital does that prevent me using wide stops on my stock trades?

[01:00:40] Phil: No, you don’t have to. It might be the wrong vehicle to use, trade with smaller position size. You can buy one share and if your strategy says you need a wider stock loss then you can widen your stock loss so that the risk remains the same.

[01:01:40] Phil: An alternative solution is to look at stock options.

[01:03:12] Phil: Does confluence improve your trading?

[01:03:13] Sean: Now by confluence, I’m assuming they mean that when things coincide, let’s take it as when two indicators collide. A lot of these indicators do the same thing.

[01:04:14] Phil: It’s a statistical measure is my knee-jerk response.

[01:06:30] Phil: If you’ve got two tools, or indicators, and if you use different settings, so that one gave you a longer-term perspective versus a shorter-term perspective and then there was confluence, I think I would value that more than two similar indicators with similar mathematical formulas behind them with the same period length settings.

[01:10:53] Phil: I’ve cracked the formula, my strategy makes money, I don’t need to make it complicated. Let’s just keep it simple

[01:13:20] Sean: Is leverage really that bad?

[01:13:25] Phil: Yes and no. In fairness, the knee-jerk response is yes if you consider it as a multiplier.

[01:13:47] Sean: That’s what most people do.

[01:13:54] Phil: I think if you’re a retail trader you shouldn’t as you can get into a whole world of pain. I want to use it as a discount to buy the same position I was going to buy anyway and then I’m using it sensibly.

[01:17:37] Bulls**t of the Week

[01:17:55] Sean: I’ve been noticing a trend in the media. Here’s the thing I’ve been noticing as a trend. It’s that who is going to hit the trillion dollar market cap first.

[01:18:58] Phil: It’s like commentary on the world’s slowest horse race.

[01:19:34] Sean: You’re looking at these companies but is it going to affect my trading? No. It’s just more eyeball commentary.

[01:20:17] Phil: It’s not financial reporting at its finest.

[01:20:25] Sean: We have time for a second bulls**t of the week, I’ve got to give a shoutout to the crypto-crowd. Bitcoin has undergone a significant rally in the last few days pushing beyond a point of interest.

[01:24:18] Phil: It’s all about perception. Take a big step back, look at the horizon and then make your opinion. Their reason for reporting is different from what we do as traders. We want to be able to make an educated and informed decision on what the market may or may not do so that we can profit from it. If you’re looking at the headlines, it consistently highlights the bulls**t that we’re talking about.

[01:28:45] Sean: Okay, that's it for this week’s show. It’s always good to have you guys listen in.Do remember you can go to you can get access to previous and future shows, subscribe, and review us on your favorite way to hear the show and helps us reach other traders just like you.

[01:29:30] Phil: You can also connect with us on Facebook and on Twitter also What have we got coming up in next week’s show Sean?

[01:30:02] Sean: We’re going to talk about dealing with decline - how to handle and bounce back from a draw down.

Resources & Links Mentioned in This Week's Show

3 Key Takeaways From This Show

  • Consistency of application is more important that being consistently profitable
  • Leverage should be a discount process not a multiplier
  • Price action and indications are not better than one another but together they can be used like a sniper scope to pick a target and pull a trigger

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