Rebel Traders 066 : What If…

When we get in to conversations with traders we are always grilled with "What If's" and "If this happened..." questions. Well, today, we roll them all up in to a big Rebel Trader cigar and smoke it while we postulate...

There's an old phrase my Dad used to say to me as a kid and it's something that has stuck with me all my life...

It's one of those little truisms that can not only help you with your trading but in many areas of your life as well.

You may even have heard it...

"Plan for the worst, hope for the best and if it's better than the worst case scenario, it's a bonus..."

Well, my father could be a wee bit of a pessimist... But that doesn't make him wrong.

Here's the thing, when it comes to trading and many areas in life, most people don't plan ahead, they don't plan for when the brown stuff his the rotating blades and get caught in a bad situation.

As you may gather, a lot of the principals we bring to trading revolve around building in Risk management but even the best strategies can't account for every scenario.

So, in this week's show, we're going to break down a few "What if..." scenarios that could throw the ULTIMATE curve ball at your trading and put the proverbial wrench in the works and what you could do about it.

Time Stamped Show Notes

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Sean Donahoe: What will you do when sh- the hits the fan? Are you ready? Let's rock.
Automated: Rebel Traders takes you inside the world of two underground master traders who take an entertaining and contrarian look at the market 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 this is Sean Donahoe and welcome to the Rebel Trader podcast. We are still in California dealing with some, well we're juggling cats, herding elephants and doing all sorts of crazy stuff here but we are rocking and rolling. I am broadcasting again from another hotel room. This is on the move and I am joined as always by my partner in podcasting and the professor of trading excellence Mr Phil Newton. How are you doing Sir?
Phil Newton: Professor of trading excellence, I'm liking the sound of that. I'm going to set up a little but straighter to try and sit into that title.
Sean Donahoe: We'll get you a bow tie
Phil Newton: Handle bar mustache.
Sean Donahoe: Bloody good stuff. So what were going to do today, he's liking that. Stroked his little ego here.
Phil Newton: My ego doesn't often get stroked but I quite like that one.
Sean Donahoe: You've got to take your strokes where you can get them, sir. So, anyway. So heres the thing guys, have you ever rolled through scenarios in your head and asked what would happen if this happened or that happened? Well, it's something we do all the time, it's called planning and is part of business but it's also an essential part of trading. We get asked all the time for different, you know, "Hey what would you do if this, what would you do if that?" You know, what if's and rather than just be flippant and say, "Whatevs," or "Whatever," that's a very British thing.
Phil Newton: As the kids like to say.
Sean Donahoe: Absolutely. So basically we thought okay we'd share what we actually do. So we're going to go through a few what-if scenarios and share our insights and thoughts as we drawl through contingency plans, procedures, how we weather any storm that the markets can throw at us and how you can come out the other side smelling of roses.
Phil Newton: I'm not fond of the smell of roses. I always associate it with manure because the rose patch that we had growing up, manure was used to feed the roses so there was always a faint .
Sean Donahoe: Well, lets stay with the metaphorical reality.
Phil Newton: The faint waft of shit. . Nevertheless, we've got our new favorite segments of the show called Trade, Fade, or Evade. What we're trying to do is we're trying to -- well as the name might suggest, we're trying to find something to Trade, Fade or Evade. What we're more trying to do is just highlights that you don't need to spend hours looking through the charts and this was -- and thinking about it Sean, this was an exercise that I would do. Trying to make a snap decision, I would flick to a charts and just try and at a glance, what would you do is, you go look down and decide who's bullish/bearish, you know avoid it, what's going on here. So that's what we're trying to highlight, see. More than anything it's the -- when you've got a systematic approach you can find something or disregard a trading opportunity very speedily and efficient. So that's what we're gonna do later: Trade, Fade or Evade.
Sean Donahoe: Real time analysis, gotta love it! Okay so let's get started, let's dive in and I think the most obvious what if, and it's the one we get most asked is: what if the markets crashed tomorrow? And I'm not talking about a gradual decline, we're all worried a Bear market, will get in a minute.
Phil Newton: Not one of these fake news events! The markets are off ten points! They're only off ten points!
Sean Donahoe: Exactly! No, we're talking like major S-H-F moments, Shit hit the fan.
Phil Newton: Twenty, thirty percent, in a very short span of time. We're talking
Sean Donahoe: I mean, yeah, maybe a plane... I hate to say it, like it's a terrorist attack, like 9/11. I hate to say even look at these giant black swan events for something that was so dramatic, that is shocked, rocked the markets, yeah.
Phil Newton: Those rates, they -- the emphasis we're trying to put. Not just, I mean occasionally you'll see a one day, kind of knee jerk reaction that's a little bit more than normal. But we're not talking about that hiccup. We're talking about a serious "Oops Moment".
Sean Donahoe: Yeah.
Phil Newton: Where they take, you literally puke and that's the kind of situation. What would you do?
Sean Donahoe: So, okay. Well let's talk Phil, what would you do, sir? What would you -- where would your first of all, gut reaction be and then what would the process be that you go into analysis and then stepping forwards?
Phil Newton: Well, I've been through quite a few crashes in the past 20 years.
Sean Donahoe: Yeah.
Phil Newton: Big. Small. Big markets, individual stocks and instruments. Not the first time I've seen a market when a dramatic movement begins. Because of the way that I trade these days I would probably be randomly high-fiveing people down the streets and handing out $50 bills like there was no tomorrow. Because it probably means that I've cashed in big time. Because the style of trading that I have, I don't care which way the markets are going, and 'cause I'm a directional trader but I try and have a balance of individual trading opportunities. I'll look for Bullish trades and Bearish trades. The actual markets, when people refer to The Market they're normally talking about one of the indexes, usually it's the S&P 500, when people refer to "The Market".
Sean Donahoe: Yeah.
Phil Newton: That's what this a catastrophe happened. This one is not may be, it has happened, it will probably happen again in future. But, I don't care which way the market moves, because half of my portfolio is going to be bullish, half of it is going to be bearish. And I'm gonna be profiting, probably in a big way, on maybe a portion of that bearish movement, because it probably means that that side of my portfolio is benefiting in a major, major way. So I would be high-fiveing people down the street. Because I'm protected against that. If, if it was to happen, and it's an outlier event, keep in mind, while it can happen, it's not likely to happen on a regular basis. And while it is a fear that most people have, I think it's an unjustifiable and unwarranted fear to have every day.
So what can you do to protect against it? Have a back portfolio.
Sean Donahoe: Absolutely!
Phil Newton: As crazy as that -- if, that outlier event was to happen, and I've been on them a few times. Not intentionally. It's just because of the way that we manage our strategy and our portfolio. You know, maybe a third, maybe half of my positions, I will benefit from it. So it's not a case of if it happens, what would I do, I would be taking profits and high-fiveing people and maybe I'll crack out the cigars and start lighting them with Fifties and 100 dollar bills, who knows?
Sean Donahoe: Yeah. I gotta agree with you 100%, because this is something that that we've done all the time.
Phil Newton: That's the way it is. That's what we're in the game for, you know when that sort of thing happens, that's the cherry on top of the cake for us. Once every five or ten years. It's the cherry on the top.
Sean Donahoe: It really is. And that's one thing that even the last month, leading into September, my portfolio was slightly weighted long. I was again seeing a lot of opportunities that were more, I was certainly more confident about the long opportunities but towards the end of August my portfolio was about two-thirds long, about 60-40 long to short. And I thought I might spend a lot of this month actually balancing it out to be back to about 50-50 long short. And you know, it takes a concerted effort to find -- to miss out on some opportunities to kind of just keep that balance in there because you're feeling, I just don't want that exposure or there's that risk for what am I feeling about the general markets. I don't want to have that long exposure.
Phil Newton: When I've had that feeling, I've done exactly the same thing. It's a human reaction that makes you nervous. And I think looking back on those situations after the event, I'd like to know your viewpoints, but I know what I feel. When I've done that and I've gone out of my way to not put the trade on and it's really difficult to not do it, because we're so ingrained to put the trade up. But when you are balanced one way you're kind of really hesitant to put another bullish trade on, when you're already sixty, sixty-two, sixty-three percent of the portfolio bullish. And yet another trade is gonna push it back to sixty-five percent. You know, it's difficult to put that trade on.
Sean Donahoe: Mmm-hmm.
Phil Newton: But looking back on it, if I'd just done it, it would have worked out fine. Because the natural evolution of our style of trading is sometimes it's gonna swing one direction. You know, you're gonna be balanced on that see-saw of being bullish and yet on another occasion it's gonna get you biased in the other direction. And one thing about our half notes, is that if I'd just followed the strategy and put the trade on, the best trade that I saw that day, and if it just happened to take me uncomfortably bullish, that's just the way it is.
Sean Donahoe: Yeah. You know, it is a fine line sometimes.
Phil Newton: That makes me more nervous, I think. Market crash.
Sean Donahoe: Yeah, exactly. But usually you find a lot of the stocks and a lot of the strategies that we employ kinda give us those red flags of warnings about market terms. Which kind of leads us into the next "what if". Is what if there is a big ass bear market turn and I'm talking a big ass Winnie the Pooh, right there, big ass bear market. And it's a boom, we're starting into what we call bearish territory. We've been on a hell of a bull run, the markets are still looking strong. But what if that finally turns over to the bear market that we've talked of. It's a gradual control thing. Not overnight 30%.
Phil Newton: Yeah. I think, just to put it into context from trading set-ups, nothing bullish perhaps is set and go only bearish trades. Or if the bullish trades are set and are failing quite quickly.
Sean Donahoe: Yeah.
Phil Newton: And everything is heading in the opposite direction. So you know the typical bullish set ups are failing. And no bearish setups so you end up being biased, but also don't want to lose, but that's gonna happen as well. So that's the type of scenario where it's not necessarily a speedy crash. It's just that the entire market shifting from that bull-- maybe an overly bullish bias to an overly bearish bias. Then all those trades that are set up in the failing and the bearish trades, well they're just not there yet. You're waiting for that rally in the markets to, you know, join the downward movements. What you do after, I think that is probably more problematic -
Sean Donahoe: Yeah.
Phil Newton: Than a crash.
Sean Donahoe: Because you're not certain of the uncertainty of where are we in the stage. Is this a temporary thing? Is it not? I've got all propositions, they're not working out but my bearish ones are not quite taking over. So it creates a lot of portfolio pressure because your money is going out into the markets and it's not coming back, and you're kind of like, what the hell is going on? Where am I?
Phil Newton: Yes.
Sean Donahoe: Where are we? And then one of the
And people go to the pundits, and they say, Oh what do the pundits, what do the great gurus in the sky saying? And they're like saying both sides of their mouths.
Phil Newton:
But I think this, that situation, where the market is shifting, and it's one of those things, you don't know it's happening at the time, sure there might be signposts along the way and we've got this expectation, we've been talking about it for a long time. But when it's happening, when you're living through it, it's difficult to spot because at first it looks like just a market correction, it's a dip in the uptrend, in the broad market and viewpoints. Individual stocks that are bearish are already pointing downwards. You know, they're already kind of going the other way. And you're waiting perhaps for that next market rally to sell the rally in a down trend. So you've got this imbalance in the set ups. And again, I've got to come back to that for me is, that's the most problematic thing because how I deal with it is I trade through periods of draw down in my strategies
Sean Donahoe: Yes! That, that's what I was going to get to.
Phil Newton: It's the only way to -- as they said in Aliens, it's the only way to be sure!
Got to get the 80's movie quote in somewhere!
It's the only way to be sure. No, that's the only way to do it. Is to put an extra We actually had this conversation earlier, with one of our students, and he was asking me, you know, we've got one or two positions that are not, they're not performing well, but there's only two positions out of twenty in the last month. And he's worried about these two positions. Don't worry about the two positions. It's the portfolio as whole that we've got to be worried about and the situation that we're talking about, it's when the market turns you're gonna have that imbalance of set ups, there's gonna be a chunk, a larger chunk of the portfolio that we operate, is not gonna be performing as well. And it's difficult to get the balance right and to get on the move. We described this in the past show, it's like trying to turn an ocean liner around in a canal!
Sean Donahoe: Yeah!
Phil Newton: As opposed to a
But it's a slow progressive thing and when you trade through it, it's painful, it really is painful. You might see that period of draw down in your strategy not just temporarily but you'll start to see it for an extended period. That may be the time where you see a one a two or maybe even a three month period of absolutely flat set ups. Those things that are getting you, you know, getting you in a position. That just immediately underperforming because everything is turning around. It's trade set ups are, I wouldn't say failing, that's the wrong way to describe them, because everything is changing direction. That's what's happening. And that's difficult to deal with the first time you experience it.
Sean Donahoe: Oh yeah.
Phil Newton: So the only way to deal with it is to, as you said, to trade through and this also explains why we trade small so the individual trades are not, you're not risking the shirt, you're not betting the farm on every position. You've got a small percentage, really small percentage, of your position styles in every trade for this reason. You know, when something is not working it's not detrimental. And when you have a bad month, or maybe a three month, it's not detrimental to the overall situation. Sure, it's painful, don't get me wrong. I've been through it many times. But as long as you've got the ability to put the next trade on, to be in business tomorrow, these are things we work on. This is why -- this is one of the big longevity things, the reasons why. When this situation happens, you're okay with it. I'm not gonna pretend that it's not painful, cause it is! But when it happens, you can deal with it and this is what we talk about on being in business tomorrow. When this situation happens.
We're spending more time on this than if the crash happened. This for me, this is the one that I fear the most. Because it's difficult emotionally. It's difficult to put the next trade up. When the market conditions are not right or conductive for your strategy it's difficult to put the next trade up. That's why you trade small. So you can psychologically deal with that next trade. It's not a big position size. You can trade through it.
We've compared this before to the shop on the high streets. It would be like if you got a series of days or weeks or months where you got no customers. They came in with refunds. You a faulty batch of those fancy knee-length boots, the heels kept snapping off, you know, the shoe shop on the high street scenario. You've just got this bad batch, you've had not great sales and you're gonna have a period of draw down in your business. It's the same thing that happens in trading. It's not gonna be perfect every day and you've gotta have a strategy to deal with those situations. And the way that you deal with it is you have a cash reserve. You have a margin budget. You know, maybe you have to put some of the staff down temporarily to lower hours because you can't get them the full time hours that they want. You try to find areas to cut down on with your expenses. You know that's what you'd do in the real world.
You know, how we deal with that with trading is keep your positions kind of small, trade frequently, put the next trade on. You've got open up the shop for business because you don't know how long it's gonna last but you want to be in things, in positions when the markets do start looking favorably for, in this case, grand trending strategy.
Sean Donahoe: Yeah! I mean it's probably
Phil Newton: I think we're in a positive soap box moment here, rather than a negative, just watch on something. I think this is probably the big one to be worried about. Crashes, I don't care about crashes. You can't do anything about it. But this is what you can actively do something about. When a turn in the market happens.
Sean Donahoe: Now, one thing that I always say is, it's a lot easier to tell the bottom of the market than a top of a market. It's always a little more tricky for that, like you say, psychological turn when your portfolio is going through that. But when you come out the other side, you're on that roller coaster, gravity picks up and then all of your trades, all your set ups, again, accelerate down with that decline. Then you hear the bottom of that kind of dip in the roller coaster. You hit the bottom of the markets, it's a lot more firm when you're kind of thinking, okay, this is the bottom, okay, I'm seeing the turn, and you can be a lot more proactive about your balance of your portfolio. You think, things are turning, things are slowing down, I'll get that little more balance in the portfolio rather than, say a bearish buyer seeing your portfolio. Because you know where you are in the market, where you are in the turn. You can feel that gravity as it's pulling your stomach one way or the other psychologically.
Phil Newton: turning around. It's going the opposite way from a bullish move to a -- you're talking now for a bearish move to --
Sean Donahoe: Back to a bullish territory. Yeah.
Phil Newton: that ocean liner turning around. And it doesn't happen overnight.
Sean Donahoe: No it doesn't. that tip over. But then it picked up again and it shot up like a bloody rocket.
Phil Newton: It did the same thing in -- if you look, key turning points, if you look back at 2009, what happened after a monumental cock-up in the market.
Sean Donahoe: Yeah. Look
Phil Newton: They draw down after a clash, something fundamentally was wrong with the economy -- global economy, not just the US economy, but something fundamentally wrong. And look back sort of 2011-2012 and you've got the 2015-2016 and to be fair, I think looking back on it now, I think we can classify maybe the early part of 2018. We're starting to see new highs being made. But I'm not really seeing it with any volume or momentum. So maybe we could look back, we'll find out -- that's what we'll find out in a few months whether it was or it wasn't.
You know, was this a basing for the next push higher. We'll find out in a few months. You know, no one knows. But you've got those markets, and the markets to look back and say, oh okay, well in history, even recent history in the last 10 years from Whitley charts there are certain markers on the chart that mark, that highlights, that's what a bottom looks like! That's what a -- not a market bottom, that's what a retracement looks like. And if you can spot those footprints and go back through the last 30, 40 years it's a really good exercise.
Sean Donahoe: Yeah, I do that all the time. I like to look back and say look where we've come from, what is repeating itself and --
Phil Newton: I'm a big fan of looking back through history. Look left across the jump, we said all the time, look back. I would compare this to like, remember those difference games you used to play in the back of puzzle books. You know you've got two pictures, and the picture on the right has got a few bits missing compared to the bits on the left. That's what we do with the markets. The picture on the right is the live part of the charts, does the bit on the right, the thing that you're looking at now, the pattern, the set up, the opportunity that you're with; as it's evolving, does it look like any points in history? And that's all that you need to do as a trader. If you can spot evidence to suggest, well this bit over here looks similar, this bit over here looks similar. You know, we started on the weeklies. You know three or four situations that were very similar to what's going on right ...
Phil Newton: Three or four situations that look very similar to what's going on right now. You know, if you can just find those points, you can start to formulate a, it's still discretionary, you can start to formulate a pretty spot on viewpoint of what could happen next. If that happened the last four times, there's a good chance that, surprisingly, it's just going to repeat itself.
Sean Donahoe: I know. What a shocker. the call here with the margin. And we're not talking about the one inch area on a piece of paper. We are talking about margin calls. What if you got that margin call tomorrow?
Phil Newton: You know, I've had a couple of those over the years. The first one I ever had was kind of nerve wracking. You know what the simple solution is? If you're in a situation where something's gone wrong and ... very rarely your broker phones you. They send you an email these days. They don't care so much. You know what the simple solution is. Just close the position. It is nothing to worry about. If you're in a situation where ... let's think about what a margin call is. A margin call is, it's pretty standard now. When you open an account, you get what's known as a margin account. That means that you only need to put a proportion of the notional value of whatever you're trading. Anywhere from 10 to 25%, and maybe up to 60. It depends on what you're trading.
Sean Donahoe: Also depends on your credit rating as well.
Phil Newton: It depends on what you're trading. Let's just say it's stocks, you put 25% down and the broker will make up the difference essentially. That's margin. They're allowing you to trade with discounts. And on face value it's not a problem. It's pretty standard. It only gets a problem, which is a story for another day, is when you start using that discount as if it's a more- We've talked about that in the past and we'll leave it there.
You've got a discount on the money that you have to put up to hold or carry the position. And what the saying is, is that the position's not going favorably and you're losing some money. But now the money that you need to hold the position open, you've not got enough money in your trading account to do it. So that's when you would get a margin call. If you want to hold the position open, then you need to deposit more money in your account to keep the position open. If you don't have that, that's when people start jumping off roofs.
Sean Donahoe: We're talking 1929 specials here.
Phil Newton:
Sean Donahoe: Yeah, there's a hundred dollar bill, put it in the blender. The ultimate money smoothie, there you go.
Phil Newton: That would make a great reality TV show, yeah? Start blending .
Sean Donahoe: Dear me.
Phil Newton: Just close the position. That's all you gotta do. Sometimes it happens where, if you got a small account, you're trading options, depending on what you've done, you might get assigned some stock. If you don't have enough money in your account to hold the stock position, you'll still be assigned but you'll just have this margin call. And all you've gotta do is close the position. And the money will go back in your accounts. It's simple as that. It's nothing to worry about these days.
Sean Donahoe: These days, no. Absolutely not. And at the end of the day ...
Phil Newton: You think I've gotta put the caveat in there that if you're trading sensibly and not doing crazy things with your accounts, and it's not millions underwater, if we're trading the way that we advocate and you've just been assigned a couple of hundred or maybe a couple thousand shares. Depends on your accounts. And it just happens to have tipped you over the edge because you've not got enough cash in your account, blah blah blah. Just close the position. That's it. Problem solved. It might cost you a few hundred dollars, or it might work out in your favor and you might make a few hundred dollars. That's it.
Sean Donahoe: It's a lot simpler than it used to be and suddenly with the way we trade, with options, we don't have to worry about that per se so much. We don't trade amplified versions of margin accounts, which is one thing we say. And again, I really want to kind of reiterate that is, don't trade more than you can afford. And don't think just because you've been given four times leverage, I've got a discount on the budget I set myself, not, "Well I've now got 40,000 instead of 10,000" or "I've got 400,000 instead of 100,000."
Phil Newton: That's when it gets into problems and that's when the margin call would be quite .
Sean Donahoe: That's when they say, "Excuse me, sir, who holds the note on your house right now?" And that's the-
Phil Newton: all those things we've just spoken about. If it just happens that you've been assigned a position, or you've clicked "buy" instead of "sell" or "sell" instead of "buy", or you've got an extra zero on your order-
Sean Donahoe: I've done that.
Phil Newton: We've all done it. "Oh shit, I've just bought 10,000 shares of Apple. Oh bollocks."
Sean Donahoe: I did that recently. I did that with
Phil Newton: We've all done it. You know what you do? Close the position. That's it.
Sean Donahoe: That's exactly what I did. As quickly as possible.
Phil Newton: It's a lesson that'll cost you a couple hundred dollars. Maybe a couple of thousand depending on the position. But you know what? You'll never do it again.
Sean Donahoe: No. Well, you say that but-
Phil Newton: Until the next time.
Sean Donahoe: Yeah till the next time. Yeah, that was not enough coffee or Mountain Dew in the morning, and I was putting a trade on Tesla, it was like "oh, what?" And then you kind of backtrack, it's like, what did I do? What did you do, Ray? What did you do? So I went back and found ... '80s movie reference. I went back, it's like "Oh ... okay, well fine. That's a quick fix. That's gonna cost me a couple hundred bucks. Dammit. Bollocks. I didn't need that many, thank you very much, but okay." That teaches you to have a little more coffee in the morning. It's not
Phil Newton: To be fair, that brings it on to prevent that type ... I've got to admit most of the problems I've experienced over the years have been user error. Nothing to do with strategy. It's always been user error. You've clicked the wrong button, you've set the defaults your platform .
You should put that down ... And then if you do click the wrong button very quickly, you've got to have pressed several buttons before you get into a problem that is actually, "Oh shit I've just bought 10,000 shares of Tesla and I don't have a few million dollars in the account." If you've got the minimums, the default setting set up to low amounts, if that situation does happen, it's only going to be for 100 shares. Or some ridiculously small, where "ah shit I've pressed the wrong button, but it's not a major problem." I think that's probably the best way of And I change all the defaults for just such an eventuality.
And again to be fair, the way we trade, that shouldn't be an issue. Because with option trading, you've got to press the button several times before it confirms the order. Just with the way they do it, 'cause you've gotta select the strike, you've gotta do this, you've gotta change the dates. And you've gotta double check the strategy. And the way that I teach, you then go put it in a spreadsheet to make sure that you double check and triple check as you go on. Then you gotta click send, then you gotta confirm the order, and usually you'll get a confirmation. So lots of buttons have to be pressed. You would have to have seriously buggered up somewhere to have not noticed that you- Yeah.
Again, it comes back to, if you can put little hurdles in your way, I think these user error problems that might cause a margin call are going to be absolutely minimal. The only time it would happen with the way we trade, is if you get assigned stock. Again, easy solution. Close the position. Problem solved.
Sean Donahoe: Exactly. Now, here's another one for us. This is one we get asked a lot. I'm gonna try and frame this as a conversation I had recently. "I suck at trading, all my trades are not working out. I'm having a bad run, I'm having a big draw down in my portfolio. I know we're in a bull market. I'm bullish on a lot of my trades. I just fricking' suck right now. What do I do?" The reason I'm framing it that way is 'cause that was almost word for word a conversation I had with a trader recently. They said, "It just doesn't matter, I've got a great strategy, it's got positive expectancy, I just suck." And he was really taking it very personally because they just seemed to be in a bad streak of picking the wrong trades. They say, "Hey, I'm executing it, I'm doing everything right, it's just kicking me in the nuts. What do I do?" And we've all had situations where-
Phil Newton: My default answer-
Sean Donahoe:
Phil Newton: Reduce your position.
Sean Donahoe:
Phil Newton: This is very linked to the market is turning ever so slowly and this might be the sign that that's happening. Especially if it's a trending strategy, and everything that you touch suddenly stops working. There's two possible scenarios. Firstly, everything that you have been doing was working fine, but then suddenly it's not. That's probably market conditions.
Sean Donahoe: That's exactly why-
Phil Newton: And the hard thing is don't touch that dial. That really is the hard thing to do. But if it is bothering you, and you're having that emotional reaction, I would then suggest your position size is too big. Reduce your position size. But then that means that you can trade more frequently. It's completely counterintuitive, but that for me has been the best way to dig your way out of a hole. The second scenario is, you're brand new, you've just started trading and you hit the ground running. But you hit the ground running into a losing streak.
Sean Donahoe: Reverse engineering what's going on. What's going on with the market, what's going on with your strategy, what are the conditions that are ideal for that strategy, what has changed. You can start backtracking, but you're dead on. If you have everything down, like if you're trading the way we trade, it's trade smaller. Trade through it because hey, you know, that is going to happen and just bear it.
Phil Newton: Again, the same guy we were speaking about earlier, I can't stress that enough, it's such a counterintuitive suggestion, because obviously we're not financial advisors and we don't provide advice, got to say that. It's counterintuitive to trade really small position size on the assumption that your strategy does work, which mine does.
Then you trade frequently. And just one a day will do it. That checks the box of trade frequently. You get 20 positions in a month benefit of that without that major time investment. But it's the same principle. Trade small, trade frequently, trade often. I can't stress that enough.
Sean Donahoe: Absolutely. So, here's the other thing. This is another one, what if. Again, this is funnily enough kind of something I'm going through right now being in California with the family crisis, is, what if I have a bout of illness or something going on in my life where I cannot trade, but I might still have active positions. I might have things going on, and I want to be there, but what if, what if, what if.
Phil Newton: Let's this. I can't remember we mentioned it on this podcast, but I'm open to share it. I've got Crohn's disease. This is a realistic possibility that I've lived through several times since I was diagnosed. And someone as yourself, occasionally, you have times where shit happens in your life, or you're literally not well either personally or someone near and dear to you. There's just more important things than trades. I completely, your firsthand experience with this is all, we're trying to say it. We're not talking about what ifs here. I can say what I would do. Sorry, I kind of stole your thunder there, Sean. I-
Sean Donahoe: No, go ahead
Phil Newton: I literally have first hand experience with this. A couple of ways of dealing with it. First on, close everything. Your health's more important. That would be one way of dealing with it. In the case of options, with the way that we trade, mostly I'm a whatever. Get rid of them. You don't need that added stress when you're ill. At its extreme, depends on the severity, that's one way that you could deal with it.
The other way you can deal with it, which is what I live with on a daily basis, is I have permanent mild symptoms with my condition. That means that ... and this is another reason why I want to be in a very short space of time, because I know if I am ill, I'm not going to be able to focus, I'm not going to be able to concentrate, I'm gonna be suffering with fatigue, and a whole host of other interesting symptoms. One of the ways that I've built my strategy is, it allows me to trade 20 minutes. I could concentrate for 20 minutes and just maintain positions. Most the time I can trade through periods of my own illness, my own extreme, because we've got it down to a refined check check check. Checkbox solution, it's production line. You can probably start to realize why I trade the way I trade, because if I have a personal situation, then I can still do my 20 minute stakes. This is my primary source of income. I can put the trades on and do my thing, and it's not a lot of time.
And then I can switch off, relax, and not worry about it and come back tomorrow. That's if I want to put new trades on. If I'm still not feeling that good, then I don't need to worry about it. I don't need to put the trades on. I can switch it off and forget about it. If I'm real ill, and I'm gonna be a month , I'm not gonna worry about it. Because they're all defined risk. They've all got expiration dates on the horizon. The only thing I'd perhaps need to log in is if I was assigned anything. Then, guess what? Close the position. That's all you've gotta do. If you've got a bout of illness or a personal situation, just close your positions. That's the easiest way to deal with it. Just close the position.
Sean Donahoe: Not worry about it.
Phil Newton:
Sean Donahoe: Completely agree. , five minutes, just see what's going on, okay, done. Whenever I've got a chance, I can find that little bit of time. But if there's a situation where I'm-
Phil Newton: If it's life threatening-
Sean Donahoe: Close them.
Phil Newton:
Sean Donahoe: Yeah, I was in Done.
Phil Newton: Most brokers are decent. Say, "I'm having a life crisis, can you close everything out." And they'll probably do that commission free for you.
Sean Donahoe: Absolutely. If there's any fees they'll usually
Phil Newton: If it's an emergency, they'll be decent. Don't you worry about it. That's why they've got-
Sean Donahoe: Business in the future. They want to make sure that you come back and trade, so they'll often times do something very cool for you like that, because once your situation's back to normal, good. Now you can come back with all your capital intact, ready to go, ready to get back into the market. Get your pulse back into the market, and boom. Off you go again like you never left.
Phil Newton: On that note, if it is gonna be a long term personal crisis, because a lot of brokers will charge, if you read the small print, an inactivity fee. And so they'll often have that chip away at your account. If it's looking like it could be several months, you could put your account on hold with them. And again, just phone your broker and say, "Hey, I'm in a life crisis. Can you close all the positions and put my account on hold so there's no inactivity fee or I'm getting charged." And they'll certainly do that for you. Because, hey, as you said, Sean, they want your business in the future. So if they can help you in the short term, then sure, you'll come back to them. They'll love you for it.
Sean Donahoe: Yeah.
Phil Newton: -more importantly, after events, yeah? Because you're doing them a favor. They're doing you a favor. So it all works out. You know what I'm saying.
Sean Donahoe: Yeah, and that's it. That's really a few very key and very common what if scenarios and different ways to handle them. And here's the thing: usually it's not panic.
Phil Newton: Panic.
Sean Donahoe: Yeah, exactly what I was going to say. It's not a panic situation. There's simple solutions to these big, scary things that a lot of people talk about. And a lot of people are scared of. They're really not-
Phil Newton: One that I'm most worried about is not the headline, it's not the crash, it's not the flash crash. It's not the margin call. It's that slow turn. Because with a trending strategy, which is a big chunk of what I do, that's where
Phil Newton: ... a trending strategy which is a big chunk of what I do. That's where it's difficult to put the next trade on because you're having that ... To be fair, that string of bad trades is probably linked to a market set. But that's the one to worry about because that's the most difficult scenario, and it's usually indicative of, potentially, a big move on the horizon which is quite ...
I remember back before the flash, before the ... flash crash ... the '08 crash, there was a period of several months where there was just that ... things would try to break out ... because I am predominantly a trend trader, but it has been set ups that tried to develop, tried to set up, tried to break out, and they would fail and fail and fail. And I had hundreds, hundreds of positions that just didn't work out over a multi month period. And you know, I'm quite resilient, I had to take a break. And just before the eventual tipping point, I took 10 days off, I hit my brick wall Hit the wall when it comes to trading, because I literally had loss after loss after loss after loss. I couldn't trade through it anymore, and this is the only time that I've hit that wall. But it was loss, loss, loss, it was such an emotionally traumatic experience from a trade point of view.
Short break, got my shit together, evaluated everything, there's nothing you could do. Looking back on it, easy to say, market conditions, you were doing the air fingers. But at the time it is emotional, you know, you can only do that for so long, but you get back in the saddle, you've done everything right, you followed the plan, everything's great, and then I went from the worst trading period in my life to, probably, the best training period that I've ever experienced and will probably never see again. It went from one extreme to the other in less than two weeks.
Sean Donahoe: Now that's
Phil Newton: It was phenomenal. It was literally those two extremes. You know, quite literally I was high fiving people down the streets. It was just an ... I just can't ... It's just such night and day experience. So, ultimately, the point is that slow turn, that's the one to worry about as far as I'm ... because I've lived through a dramatic extreme of that situation and it was difficult. That's the one I fear.
Sean Donahoe: Yeah, the way I explained this recently to someone was it's like pulling back a catapult. When you're on the market, you've got that pressure, you've got it pulled back and it's slow because you're pulling it back, but it's not quite
Phil Newton: and get round, it's slow. Is going to go off? And I go off-
Sean Donahoe: Yeah, like a ballista or trampoline, yeah.
Phil Newton: Yeah, it's ... painful experience. And then it went from painful to joyful in such a short space of time.
Sean Donahoe: That's
Phil Newton: I never quite hit ... I was trading currencies at the time, Sean, I never thought I'd hear myself say, "Let's lock in ... wait for it, let's lock in another 500 points. Let's lock in and ."
On a daily basis, I remember it, the pound Yen, we were surprisingly bearish on it, but we shot pound Yen, and it was, "Let's lock in another 500 points. Let's lock in another 500 points, let's lock in another 500 points." It was just
Sean Donahoe: Happy days.
Phil Newton: it was a regular occurrence. It was just ridiculously great times, but before that, the points big assed bear market turners, we were told. A giant bear market turn, your strategy's going to fail, and that's when I stated implementing that trade small position size, I don't want to experience that again. And all these experience, they color how you trade in the future. Maybe some of these stories, these experiences explaining why we do things the way that we do.
Sean Donahoe: Absolutely, absolutely. So ...
Automated: Trade, fade or evade.
Sean Donahoe: Let's have a look at a couple here. Now, what I have to do is because ... the Justice Department is going after Tesla, or Elon Musk, specifically, via Tesla, for his statements, so let's have a look at Tesla.
Just because it's topical, trade, fade or evade on that one. What would you say?
Phil Newton: He was in the news again, wasn't he, I think, which is why it kind of came up, because we've already spoken about this. Our yesterday, as we record this, he was in the news again because he's been a ... something about him being investigated, wasn't it?
Sean Donahoe: Yeah, he's expect to happen then?
Phil Newton: We've got negative news, bad news, he's being investigated. You would think that Tesla would be selling off like there was no tomorrow. Guess what it's doing, Sean.
Sean Donahoe: Sweet Fanny Adams. Yes.
Phil Newton: it's doing the exact opposite. After its knee jerk reaction, it's back where it was, effectively no change, but it looks like it's going to ... the original viewpoint, it's at the lower end of the range, nothing new has developed, and price is probably going to push higher. It's just tickling about 300 as we do this. Just 297.
Sean Donahoe: Yeah.
Phil Newton: But, you know, effectively no change before it hit, the announcement he was being investigated, where there was a knee jerk reaction, but the reality is it's not new news.
Sean Donahoe: No.
Phil Newton: It was a knee jerk reaction to old news, and nothing's changed, and guess what, the same thing that was happening will continue to happen.
Sean Donahoe: Yep.
Phil Newton: Surprise, surprise. My viewpoint from last time hasn't changed, I'm bullish.
Sean Donahoe: Yeah, I'm still bullish on this one. I'm actually on this one right now, so I'm smiling.
Phil Newton: Yeah, but it gives you a little bit of a just giving a little bit of a knee jerk reaction, yes? Just makes you think, "Ooh, what do we do here?" But if your viewpoint hasn't changed, if there's nothing new developing, you can't change your opinion on the basis of a Tweet or a random headline. It's just sensationalized old news, as far as I'm concerned, and that caused the knee jerk reaction.
Sean Donahoe: Okay
Phil Newton: ... on the running commentary from Tesla, maybe we should do a little bit of a running commentary on the while we're chewing around this ...
Sean Donahoe: Yeah.
Phil Newton: , maybe we could come back to Tesla, and we'll just keep an eye on it because we're both in this, so maybe it's just an unfolding trade and we'll just give our viewpoints every ... I'm just throwing it out there.
Sean Donahoe: Yeah, that's a good idea. Be interesting.
Phil Newton: Yeah because
Sean Donahoe: that we'll keep an eye on that we like.
Phil Newton: Yeah, but it just happens that we're both in this, so maybe we just do a little bit of a running commentary on this in this section.
Sean Donahoe: Yeah, that's fine.
Phil Newton: What else have we got on the trade, fade, evade?
Sean Donahoe: Okay, so we're going to look at China exposed stock. I want to do something a little topical, so there's a lot of talk about Trump doing the extra $200 billion in trade tariffs against China, so I thought let's have a look at some of the stock, the top stocks, that have the greatest exposure to the Asian market, and specifically, China.
So, let's have a loot at Boeing, BA to start with. Where would you go with this one?
Phil Newton: Got to stick to my guns, it's in a range, most of this year, and it's at the upper end of the range, and I've ... nothing, it's not breaking out, so nothing new is developing. As we're talking about this, it's about 30 minutes before the markets close, it looks like it's going to develop what we refer to as a sign of exhaustion. Big spike, small body. Nothing new is happening, it's rejecting the upper end of the range. I've got to be bearish.
Sean Donahoe: Yep, I'm going to be bearish on this one. In fact, if this rolls out and of this at the end of the day, this might be a short trade tomorrow, for me.
Phil Newton: But this is ... if it closes where it is now, or lower, it'll probably set up for tomorrow and be a bearish trade. This checks the boxes for our regular strategy, this one, just by coincidence. So yeah, I've got to be bearish. I've got to follow the strategy.
Sean Donahoe: Absolutely. Okay, next one, General Electric. Now, this is a company that has been under a lot of pressure over the last couple of years, and you can see ... I mean, if you look on the chart since December 2016, but yeah, it's been kicked in the balls a lot, it's down ... it's rapidly becoming a bloody pen stock, but-
Phil Newton: General Electric, it's tickling $13 as we're talking, just for reference.
Sean Donahoe: Yeah. It was at 32 at it's peak, but yeah, I mean, at its absolute peak, it was $59 and that was back in 2000. Next peak was 2007, before the crash, obviously. And it's peak, in recent times, September-ish of 2016, but right now, it went from 32 down $12.87. What do you think there?
Phil Newton: Well, it's in a down trend. I've automatically got to be bearish, however, since April of this year, it has been drifting sideways, so this meets the criteria of nothing new is developing, it's not rallying in a downtrend, it's neither continuing to trend. I think this is in a transition phase, because now it's ... as I'm looking at the last 12-18 months, it's half and half. Half trend, half range, this is an evade.
Sean Donahoe: Yeah, this is an evade for me, too. Okay, simple, simple, simple. Okay, Caterpillar, CAT. What do you think about this one? This is, again, just pulling this one up myself, looking at this ...
Phil Newton: Can I go? are you going first?
Sean Donahoe: No, you go first, what's your opinion?
Phil Newton: Well, again, follow the process. Looking at the last 12-18 months, for most this year, it's in a range. Now, in this case, it's an angled range. All that means is that it's ... instead of a very defined, horizontal upper boundary, lower boundary, angled downwards. You might call this a bear flag if you looked maybe back at the last two or three years, but it's an angled range, a channel is another way it's been defined. So, for me, it's in a range, is the point I'm trying to get to. It's not quite at the upper boundary of the rang, if you were to draw an imaginary trend line across the top. Nothing new is developing. It gets all the way to the point of it's at an interesting location, but it's not to the point to whether I would trade it. I'd be looking for either it to break higher, in which case something new would be developing, or a sign of exhaustion, in which case I'd be bearish and I would fade it.
It's not quite a set to look for me, but it's at a location where this is interest now, I'd keep an eye on this. It's more of a wait situation.
If I was going to do something, I would have to be ... if you had to tell me I had to put the trade on, I would have to be bearish and fade it, because at the upper end of the consolidation, nothing new is developing. That is what I would be thinking at this moment.
Sean Donahoe: Interesting. Now, I'm looking at this because I had a trend line on this one already, and it's broken out from that trend line, tapping into ... if I just go over here, from January of '18 to the two peaks at May and June, and it's broken out from that, slightly, so I might ... thinking this might be on a new tearaway upwards. I mean,
Phil Newton: Yeah. it's not really given me-
Sean Donahoe: .
Phil Newton:
Sean Donahoe: Not quite, not quite. Still,
Phil Newton: It's ready, it's
Sean Donahoe: The paint's still wet.
Phil Newton:
Sean Donahoe: Yeah.
Phil Newton: Yeah. So maybe we should ... maybe it's ... What was it off The Big Bang Theory? You've got the rock, paper, scissors. Maybe we need to add a Spock, lizard into the rock, paper, scissors. Trade, fade, evade, wait, hold, pause. Add a few extra bits.
Sean Donahoe: Yeah, there you go. That's Let's have a look at this one. Qualcomm, again, tech manufacturer doing a lot of semi-conductors and equipment. What do you think of this one?
Phil Newton: I'm having a little flashback, Sean, to 2005, when I first started day trading stocks more seriously, and this was on my regular trade list.
Sean Donahoe:
Phil Newton: This is ... if I was going to do something, this would be fade. I would have to be bearish. It's a rash ... technically it'd be a counter trend trade. Let me just have a look back ...
Sean Donahoe: I'm looking at this one as well, I would be fading this one.
Phil Newton: What I've had to do is I'm looking back over 12-18 months. I've just looked back the last two, two and a half years. Technically we're in a range, it's breaking out of the range. I would be waiting for a pull back to see if it does move higher. Just looking back over the last six to eight months, I think I would have to fade it.
Sean Donahoe: Yeah. I'm thinking that too.
Phil Newton: at the moment it's looking like a failed breakout.
Sean Donahoe: Yeah, I would agree.
Phil Newton: I mean, if I was genuinely put money on this, I probably would wait for more information. But if we're doing this as a game, so if I had to put the trade on today, it would have to be a counter trend fade.
Sean Donahoe: Okay, next one. MU, Micron Technology. It's another technology manufacturer, obviously. What would you say about this one? Me? I would ... I'm going to evade.
Phil Newton: I think my exasperated there, it's going to be an evade. I don't really see anything concrete.
Sean Donahoe: No, I was looking at this earlier. It didn't quite meet my criteria. Looked at this one a few days ago myself, I don't think it's going anywhere fast, I'm going to
Phil Newton: No, I think transition. If you look back 12-18 months, first half the chart's trending, second half, ranging. It's half and half charts.
Sean Donahoe: Yeah.
Phil Newton: Fade.
Sean Donahoe: Last
Phil Newton: Exasperated says it all.
Sean Donahoe: Yeah, exactly. Exactly. Okay, last one, AVGO, Broadcom. And again, there's three tech ones in a row, all kind of doing not too dissimilar things ...
Phil Newton: I think I would have to think similar here. Looking back over the last two years, first half's trending, second half is ranging. If we just look back from the beginning of this year, I would say that we've got this angled range again, slightly pointing down, call it a descending channel . It's not quite at the upper boundary. For me, it would be an evade. It's not at a great location.
Sean Donahoe: No, exactly. I would say the same thing. Evade, evade, evade.
Phil Newton: Yeah. Interesting, interesting, interesting.
Sean Donahoe: So, there you go. Ladies and gentlemen, there you go. Another trade, fade, evade.
Phil Newton: I think we're trying to point out the obvious, Sean. Because we've got a systematic approach to find , the Dow. All the other things you might know as an individual, but it just means that you're not wasting time looking at charts that you're not going to trade today.
That's what we're trying to highlight with this trade, fade, evade. Yeah, sure, we've got a few rambling, meandering points, but to be fair, two minutes to evaluate whether to trade this stock. I think that's a good exchange of time. But the key point is when you've got a systematic approach, that's what we're trying to highlight here.
Sean Donahoe: Absolutely. That's exactly it. So, there you go, ladies and gentlemen. That is it for this week's show. We're going to wrap it up right now, thank you for listening. Please remember this show is not free, it will cost you a five star review, just go to You can catch all of the shows, some great free trading on there, as well as all sorts of giveaways and cool stuff for the smarter trader. You can also subscribe and review us on your favorite way to hear the show. This helps us reach more traders just like you, and get the message out there for smarter trading.
Phil Newton: Awesome. You can also connect to us on the social media things, the Facebooks, the Twitter machine, you can find us at the same links there, We've got a Facebook group as well there to get more active and involved. And if you'd like to do it the old fashioned way, I always snigger at that, but no, if you want to send us a postcard, you can do. I think we've got our physical address somewhere, it's on the website, but if you want to send us the newer old fashioned way, you can do it via email. Quite responsive, [email protected] I'd love to get your feedback. Tell us what you like, don't like. Maybe you've got a question. If you just want to send us some adoring fanmail. We both like our egos being stroked, don't we, Sean.
Sean Donahoe: Abso-damn-lutely. My email, as well, is [email protected], so that gets direct to my inbox as well. So, with that being said, next week we're going to be talking about stress-free trading. Now, we've covered a lot of areas here today about trading and avoiding the what-if scenarios, the butt-clenching holy crap moments, but we're going to be talking about how to further reduce stress in your trading, so you can focus on the more important things like making money. So, with that being said, rock on. We'll do this again next week. Take care for now.
Phil Newton: done.
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Automated: Features options on futures, stock and stock options trading involves a substantial degree of risk. It may not be suitable for all investors. Past performance is not necessary indicative of future results. Trade Canyon Incorporated provides only training and educational information. If you actually understood and listened to this, then that means you are awesome. Congratulations and well done. Notice, this product may contain nuts.

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3 Key Takeaways From This Show

  • Don't panic, any scenario can be navigated calmly and effectively
  • Plan in advance for contingencies and you'll be better placed to weather storms
  • Trade smart, be aware of changes and don't over leverage

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