Mentorship Podcast #1

[00:00:00] Okay, trying something new today. We're going to call it Season 1, Episode 1 of this Mentorship Podcast. And we have Mike on here and I have Brent on here. And we're going to try to put our heads together and listen to what Mike says about his strategy and some of the things he wants to accomplish and some of the struggles he's having either technically with the strategy or psychologically. And then see if we can kind of untangle some of it.

[00:00:26] So Mike, I'll let you describe your situation and your strategy or whatever you want to provide. Awesome. Yeah. Hey, everyone. My name is Mike. And yeah, basically, I've been trading futures for a couple of years and been developing strategies for a couple of years. And I have found a method that I like to trade.

[00:00:57] Basically, I like to swing trade, basically entries based on trend on daily charts. And what I did for a long time was trying just to enter with futures. And then I went through a period of trying just to enter with futures options.

[00:01:21] And, you know, I would do things like straddles, which has a lot of premium costs involved. And basically, these are, as far as the strategy, it is based on a cyclical method. So aiming for a cyclical decline that can be bought. So it's really something that only shows itself at a minimum once every four weeks.

[00:01:50] But in many cases, I plan out an entry really eight to 12 weeks in advance. And then I'm kind of waiting and watching for the opportunity. Those are what I would consider the best trades for my strategy. And I enter based on anchored VWAP deviations on daily charts.

[00:02:18] And then I'll add in some oscillator studies as well and backtrack with those. And so, you know, right now, the one that has been good has been just a basic stochastic RSI. And, yeah, I look for triggers that would cause me to enter a swing low.

[00:02:40] And that's typically going to be after somewhere between a 4% to 10% decline on S&P, NASDAQ, or gold. And now I have traded that on other instruments and has not done as well as it has on S&P, NASDAQ, and gold. But that is basically my strategy. And what I've been implementing with that more recently has been entering with a married put contract.

[00:03:09] I've done that a few times and found success with that. And I haven't – I'm in a little bit of a honeymoon period with it. I'm still iterating. But I am – I like the way that feels, having a married put, because it gives me a few weeks of potential protection and decreasing the risk to just the cost of the premium on the put.

[00:03:41] And at the same time, you know, gives the trade time to play itself out. Because in many cases, the real fruit of these entries is in the first few weeks, and a lot of them end up being V bottoms. And, you know, like in August 2024, for example, I actually missed that trade because it was so fast.

[00:04:09] So that's basically, yeah, that lay out there. Okay. And then when you emailed me, too, we talked about – or you mentioned a few things about your average holding time. You said it was intended around 4 to 16 weeks, but actually it's sometimes around 2 weeks. And then you mentioned getting into a little trouble when you're not hedging. And you also mentioned how there's some angst.

[00:04:36] It seems like some incongruency or some psychological angst with you kind of checking your stuff a lot and wondering when this is going to go or not go and noticing that you feel that. But yet when you say it's supposed to be 4 to 16 weeks, it kind of feels like there's something that's not psychologically lined up properly with, you know what I mean, your emotions and your timeframe on the trade. Right. Yeah, absolutely.

[00:05:01] Like I'll have the – I have this 4 to 16-week timeframe in mind. And it's what I'm actually doing the backtracking on as well. So it's essential to the strategy to have it be a longer trade.

[00:05:17] And even despite that, I find myself rarely going longer than six or eight hours, really six hours in many cases, without checking prices of the S&P. That used to be account balance, and I stopped doing that as far as checking dollar values. But then it became checking what price was doing.

[00:05:43] And it's not rare for me to get stressed out just on basically like even a quarter of a percentage move in some cases against the trade direction, something that really doesn't impact the setup that I'm entering into. And then just as far as you mentioning the holding time as well, that was a big trouble – the holding time and the lack of hedging were big troubles in 2024.

[00:06:13] The lack of hedging was earlier in the year, and I started experimenting more with hedging after trying to enter these swing trades without a hedge and not having clearly enough defined exit points because there is an element of time that I'm working with.

[00:06:35] So if something continues 2% past where I entered, that doesn't necessarily invalidate the setup itself because it is partially time-based.

[00:06:51] And so it ended up in bad losses where I bought into something, and then it continued to decline, and I didn't really have a defined reason to exit. But I had a reason not to continue to hold, but it was basically just because I was losing money and not so much necessarily due to price action.

[00:07:20] It wasn't invalidating the idea right away. And then on the flip side, my best trades of the year, the two best trades I had in the entire year in 2024 were – I did very well in those times.

[00:07:40] But the gain became over 50% of my total account value within just a couple of weeks, and in both cases, I just closed the trade because I just felt like I had to or was just worried about it coming all the way back down and losing that, which had become a huge amount for the balance.

[00:08:03] And then in both cases, the trade continued on just slowly and gradually to my eventual target and would have quadrupled what I had actually captured when I closed the trade. Okay. So I want Brent to talk in a second about if there's a better way to put on this protection and handle it. But I just want to ask you, do your trades – can they be wrong on time only, or do they have to be wrong on price, or how do you determine if it's not going to work?

[00:08:33] They would be wrong on price and time. So as far as them being wrong on price, there's often, I would say, about a 2% to 3% zone around a given level.

[00:08:58] And that would be an anchored VWAP level or an anchored VWAP deviation level, which, just for reference, often I have noticed tend to begin to overlap over time with the 100 and 200-day moving average. So it would be fair to say it's somewhat similar to tracking the 100 and 200-day moving average. Okay. And, yeah.

[00:09:25] So it would be based on the also closes. That's the other thing. So it would be like something continuing 1.5% or 2% past the 100-day moving average.

[00:09:40] And if you're someone who's trying to enter on the 100-day moving average, that level of invalidation, if you're looking to hold for three months, doesn't invalidate the trade or at least per what I'm looking to do. But it does cause short-term danger and volatility. Sure.

[00:10:03] And then, you know, we're at to really, you know, get past that, which, of course, could be in a sudden – sort of a sudden way, which is the idea of the protection. And if it gets past that, you know, that would invalidate the entry. But it could already be 3% past the level by the time there's a price-based exit. Okay. So, Brent, this is like right up your alley.

[00:10:31] So how do you – what do you do to – how do you put this on? Do you use the same strategy he does with these puts against the outright futures or do you do it differently? Well, so a couple quick questions, Mike. One is that – so from what I'm hearing so far is that one of the issues you're having is that you're not allowing the trade to fully play out to your – to what your time zones are, right?

[00:10:55] Because it sounds like, yes, price can be a factor that says I need to get out of this on the downside. But is price also a factor like you have a target of a price or is it a target of a timeframe where it should get to X level after a certain amount of weeks? And if it gets there beforehand, like describe that a little bit in more detail. Yeah. It is both.

[00:11:20] And I would say that the price targets usurp the time targets. Really? The – you know, if it reaches the price target faster than I expect, I wouldn't necessarily – I would probably more likely start to think about it potentially pulling back again as opposed to, you know, expecting that to continue through the full time period that I might anticipate.

[00:11:51] And so the price targets – the primary way that I get those is from having backtracked similar moves and cyclical rises and declines going back many, many years, over 50 years on the S&P.

[00:12:11] And so that is where I get the targets for these multi-month swings is – and that tracks for gold as well.

[00:12:24] But basically in an ideal setting, having three exits of the shortest average, the mean average, and the highest average reaction or rally off of these declines that there's been in the past.

[00:12:50] And basically for the S&P, that's, you know, 8% off of an isolated low would be the first target, and then 12 to 15. And then, you know, maybe 25, 30% of the time, you could get it up to 20% off of an isolated low.

[00:13:09] Okay. So when you have gotten out, let's just go back to the trade you talked about that you said it could have quadrupled that you got out because of what your account level was at. So this is a really important thing, and it's a problem that a lot of traders have. It's the fear, greed kind of thing. What specifically caused you to get out of that trade?

[00:13:37] Was it because, A, you had seen something that changed what your target should be? Or, B, was it just like, my account's up so much. I've already gotten so much into this trade. I don't want it to come back. It was really the balance and really not wanting it to come back. Nothing price-based. Yeah. Okay.

[00:13:58] So second question, I've talked about this with Brad, and I've talked about it with a lot of guys that I coach, and that is like, how did that make you feel when you got out of it there and then you saw it go all the way up? Not great, right? Yeah, not great. I mean, at first, relief. Definitely a little bit of relief. But then I was watching it the whole time.

[00:14:27] I wanted to be in it the whole time and ended up taking a number – I ended up taking several different C or B grade trades that most of which lost. Well, in reality, I just wanted to be holding that one. Right.

[00:14:44] So this comes into the conundrum of like, well, which – A, first part is that you have to – if you're going to be trading on this system with these points of like, this is my exit for this reason on the downside, this is my exit for the reason on the upside.

[00:15:00] But you kind of have to really be disciplined to stay within those boundaries because otherwise you're constantly going to be doing those B and C trades because you didn't stick to your rules of the first system that you had. And that's what – you know what I mean? And so you're going to have that regret and it's going to cause you to make poor decisions because you're still living in that first trade that you exited for no reason. And it's a tough thing to do when you see that money piling up in your account.

[00:15:30] You're like, I need to take this off. I don't want to get – I don't want to lose it. But the regret that it causes you if you don't stick to your rules can be so damaging that instead of like you collecting that money, you end up giving some back while the trade is going for you. Do you know what I mean? Yeah. Absolutely. So my advice would be to like if you're going to have this system and you follow the rules to the downside, you have to follow them to the upside no matter how painful it is.

[00:16:02] So now getting back to – getting onto the next one which is like how can you structure this? Like how did you structure that trade? That trade was just a long call actually. Just a long call. Okay. And now let's say the trade comes up again and you do something similar. How will you structure it in the future? How I structured it – how I would structure it in the future and I had a similar setup later in the year that I structured differently.

[00:16:29] That ended up being the second best trade of the year which was with a long put three to four weeks to expiration depending on the implied volatility cost and a long future. So long put, long future. So what is your typical – and we're going to get – I'm going to get to the structure part here in a second. I just – what is your typical risk reward? Like you're risking X to make Y?

[00:17:06] Because – yeah. I mean basically it depends how far – if I use the lowest target, if I use the first target, it would be three to one or four to one. From a – you're risking one to make four, right? Yeah. Yeah. Right. Okay.

[00:17:28] So one of the first things I would say is like when you buy a put and buy a future, that's essentially you're just buying a call, right? Mm-hmm. So one of the things – if you're going to use options, like when you pay for those options, regardless of what implied volatility is or realized volatility, you're still paying for time. Mm-hmm. Right? So that's a big expense when you're looking for protection.

[00:17:57] And it's more than the expense of like what you would give if you're just using the stop loss. Mm-hmm. And especially if you're looking to hold that position further than what the option may do.

[00:18:10] So one of the things I would suggest is A, if you can get it from your local library or whatever or buy it and you might already have these – some books on options – excuse me – on some options strategies and how those work to manage that. Have you read anything on that? I don't think I've read any books on that.

[00:18:36] I've experimented with some other things, but I don't think I've read a full book through on options. So what you would like to be able to do is to somehow mitigate that cost of the decay of those options values. And so maybe you're looking at something that says, well, I'm looking for this trade to work out in 16 weeks. Mm-hmm.

[00:19:03] Well, how do you – how you might want to think about this is like, well, not only am I buying an option, but I'm also selling an option. So maybe some sort of spread or something that really kind of mitigates that. But if you – I think a lot of people get confused when they're not looking – when they're not trading options – when they're only buying options as like a hedge. You forget that there's that big cost of the decay and the value of that.

[00:19:29] And so you say, well, I would only pay five handles for this call. And then as it loses, you're like never can retrieve that. But if you look at like say something like – because your targets are pretty far out there, right? Mm-hmm. Like 8%.

[00:19:46] So if you think about like what the return is like 3 to 1 or 4 to 1, like maybe you're buying a call spread that's so far out of the money that you can actually get that 3 to 1 or 4 to 1 or even 10 to 1. But you can also save on the decay value of those. Mm-hmm.

[00:20:08] So I would urge you to explore like if you – because your strategy sounds great for like if you're looking for something really long-term. And it sounds like a great candidate for using those options as a way to take advantage of that as opposed to having the risk be so tied up into the futures and just that massive theta and vol decay that you get from just buying a put. Mm-hmm. Do you know what I mean?

[00:20:38] Does that make sense? Yeah. Yeah, absolutely. That makes a lot of sense. And that does help shore up the direction that I was kind of looking at as well because I have been looking into what you said, like out-of-the-money spreads as well.

[00:21:03] And being able to manage a trade with a smaller dollar amount but a higher RR that can still accomplish the targets that I have as well. You know what I love about? Go ahead, Brad.

[00:21:21] What I love about what he said, Mike, and it's been helpful to me is that one of the things kind of that I noticed that you said was there's an incongruency, like a mismatch between like the fretting about the movements and how long you're in them and the size of your account and all that psychological stuff. And it's very frustrating. And then it starts to play into your trading because you take the winner because you see the amount of money go up even though it's not your target. And then you end up making the low probability trades.

[00:21:48] So you're left with kind of like a paltry winner on something that you worked hard to study that didn't really pay off like you wanted. And then when you unwind all of it piece by piece, you realize that like, wow, like how do I get that psychological, emotional thing equalized? And I think something like this is like this might be a way to do it because if you do the call spread, you can leverage yourself a lot harder for the same amount of risk. And then it doesn't, yeah, if it goes up a little bit, you won't make any money.

[00:22:16] But if it goes up to the full extent, like a lot of your back testing showed, you'll catch that thing leveraged a lot harder and you won't, you'll be able to sleep at night and give it room to run because you're kind of locked up on your risk. You don't have to worry about it. You know what I mean? Like you don't have to worry about fretting so much because you've kind of placed your bet.

[00:22:34] Well, the other thing is that if your true target on the trade is like, well, I think it's going to go up 6% from this point, is that when you do a further out call spread, it kind of locks you in a bit to like, well, I got to hold it till my target because I don't get paid unless it hits my target. That's a great point. Yeah. It forces the discipline because that's the trade.

[00:23:01] I mean, it's like if, and I've been looking at these this week and some stuff that I'm watching, it's like, okay, the stock's at 50, but it's really volatile. I think it might go to a hundred. Sometimes it's better to go out further and say, I'm going to buy the, you know, 90, 100 call spread and put it to bed and just give myself the amount of time I think I need. And then just not worry about it anymore versus like screwing around three times in there and getting chopped up. Right. Right.

[00:23:28] And before you do any of this, though, I, I strongly recommend just reading a basic book that can walk you through some of the different strategies to help you. Because through the strategies that can kind of like take advantage of your idea, you know, and not just blindly go put on a call spread the next time. Like there are multiple strategies and multiple things you can do to help you, you know, take advantage of your idea.

[00:23:53] That isn't just basic call spreads, but you should, I encourage you to read a book to kind of familiarize yourself with those. What's the book called Brent that you, that you really like? That was a simple one that we loved. Oh, there's a, I got it from a guy that I coach actually. It's called retail options trading and that, and this all available on Amazon. But another good one is called, it's called options trading, the hidden reality.

[00:24:20] And that also has a bunch of strategies in there and kind of breaks down, you know, some good ideas on what you can do. Very cool. And the biggest thing I would encourage you to understand though is, and this is what people who have not traded to options, you know, exclusively, is you start to think, well, okay, if I buy the, let's say we're talking about the S&Ps right now.

[00:24:47] Let's say I buy the 6,100 calls and they're going for, you know, five bucks or whatever. Well, the price of that option isn't going to move up the same way that the actual underlying does. You know, they have deltas that change with that. So you're going to want to set your expectations to the options model as opposed to the futures model. Right. Yeah, absolutely. And that might be something you already know.

[00:25:14] And I just figured I would say for people who don't know, it might be listening. I think too, depending on your style, I can get a little bit in my own head. Like you can sometimes mic with this. And when I have, when I know that that's a possibility and I see a little bit bigger horizon of how far the trade could go, I really like this strategy.

[00:25:34] And I've, during the day with futures, Brent has too, but I've pretty much moved to almost exclusively looking at the later half of the day and doing the one day options for, instead of trying to get in and get out, get in and get out. Because the peace of mind of having that locked in and kind of having to wait for your target is it's the quality of life improvement was big.

[00:25:56] And I can also bet a lot harder and just, I mean, you can make a lot of hard bets that are wrong, of course, but it eliminates a lot of that, like that psychological gunk that happens where you're, you're cutting it out early. Then you're doing something stupid after, and I'm trying to clean up a lot of things. And it has been a tool that's been helpful for that.

[00:26:13] What have the two of you found to be helpful things in times that you've been, if there are times beyond intraday that you're waiting for a trade or any sort of multi-month investment to work itself out?

[00:26:33] What are some ways that you've gotten better at just letting that process take its place without micromanaging it or watching it constantly?

[00:26:53] So I'll jump on this one here, Brad, is that the one thing I always ask myself, and I learned this early on, and it would be like, well, how do I feel? How am I going to feel when I get out of this trade here? Am I going to hate myself if I see it go up to my target and I'm out early? Yeah, I'm going to hate myself. But what happens if I don't get out and it comes all the way back? Am I going to hate myself? Probably.

[00:27:24] You're kind of screwed either way. So you have to kind of figure out, like, where are you going to hate yourself the least? Right? And so it's whichever one inflicts the least amount of pain on you is kind of how you have to navigate that. And you have to be able to – it's part of the discipline of trading is, like, sticking with whatever your rules are for what got you into the trade.

[00:27:47] And unless you have some other thing that said, this trade has changed and I have to exit now because it's not the same thing that I saw when I initially entered it, you have to really work on the discipline. And it's hard. It's not easy. Are we talking about stuff that you have on the books that you're kind of like, all right, come on, let's move? Or are we talking about stuff that you're waiting and you're trying not to be impatient and you're waiting for an entry? Once you already have it on the books. Okay. Yeah.

[00:28:18] Yeah, I think what he said was important because it's really tempting when – one of the challenges is if something moves really fast your way, it creates a problem because it's like, oh, shit, now what do I do? It's moved 80% of the way really quick. And then that's a challenge. And the other challenge is it's not moving and your original thesis is still intact, but you're just getting bled away by time. And I think going into it and asking as many of those questions before you put the trade on and, like Brent said, sticking with it can really make it easier to continue the plan.

[00:28:47] Otherwise, it's just – it's so easy to move. But here's the other thing too. Let's be realistic about it. If you put on something and it goes 80% of the way to your target right away, sometimes I just get the hell out and take the money because who cares? It's 20% more and I don't want to give it all back. And I maybe caught something like real quick that I didn't expect and I'll just – I'll take the money in that case. I think that's okay.

[00:29:09] I mean that's – some of the riskiest trades that I have are when it goes 80% of the way to my profit and I'm holding down for the last 20% or 10% and then it comes all the way back down. So you have to really be able to count for that. Yeah, I think something with that that has gradually made a bigger and bigger difference is just taking the time backtracking.

[00:29:34] So I have those targets that at least are represented in numbers for me based on backtracking. And, you know, I was just getting kind of started into that process of backtracking these like a year and a half ago. So I do think that that has made a really – a big difference over time.

[00:30:01] It takes time to add up all of that backtracking of this particular strategy. But the more that I've done it, it gives me, you know, specific ideas of probability as opposed to some of those trades I've had in the past that, you know, I guess the only thing that I'm looking at is how much it's up.

[00:30:28] Without having a specific number for like, oh, okay, this has a 42% chance of going up an additional 5% or something like that. Got it. Yeah. How do we feel about got some decent stuff to work with? Yeah, absolutely. Yeah. It's been super, super helpful. Awesome. Good. Great. Well, let's leave it there then.

[00:30:58] I'm really glad we did this. Thanks for coming on. And Brent, thanks for being here, doing it with me and Mike. And we'll – maybe down the road we'll have you back again and see how things are progressing. Yeah. Sure. Yeah. Thank you guys both for your time. And, yeah, it was a great thing to chat with you today. You too. You're welcome. Take care. Take care. Bye. Bye.