Turn losses into big profits (Trading Psychology)

have you ever been frustrated and pissed off and felt like the whole Market is moving precisely to make a fool out of you I know I have and in this video Lance brightstein the number one p l prop Trader in back-to-back years shows you how to fix the one era that can make all the difference all the difference in the world to your trading this one tweak can be the difference between success and failure I'm Mike belafuri and we're one of the top proprietary trading firms located in New York City and proud to have developed numerous seven and even eight figure per year Traders we hope you agree this is the top YouTube channel to help you grow your trading account [Music] hi I'm Lance brightstein and you can follow me on Twitter at the one land speed in this video I'm going to discuss how you can turn losses into big profits with this one really super crucial mean reversion concept it really comes down to trading psychology so let me tell you there is no hope in sight for me have you ever been there where like you're really really struggling month after month after month and it seems like every single thing you do the whole Market is moving precisely to make a fool out of you every trade that you do take doesn't work then you finally cut yourself off and the bounce you're looking for happens does that sound familiar it definitely does to me because I was there for so many months doing the same psychological mistakes again and again so many days I would sit there and Marvel at how my boss and I had such drastically different results despite us trading pretty much the same tickers and going for like the same the same types of moves then the concept finally clicked and it changed everything for me A lot of times really small changes can have outsized impacts in this video I'm going to present one of the most important but counterint intuitive Concepts and mean reversion Trading the reality is in markets untrained human psychology results in the exact worst decisions you can make I remember starting out how often I would be buying the top and selling the wick lower it's so so common we've all been there but fixing these psychological errors of the untrained human psychology and then more importantly understand the concept that I'm going to present to you can make all the difference in the world to your trading this one tweet can be the difference between success and failure it really was for me and this is what helped my media version trading really really take off the question I want to ask you is do more legs make an opportunity better or worse so in general how do you deal with situations where you think the right side of the V is in but the but then you get stopped out and it has another puke lower do you re-enter that was a question asked of me on Twitter and it's a really really great one that's so important to dissect something's selling off you go for what you think is a bounce waiting after the turn but then it makes a leg lower and really pukes what do you do there do you stay out or do you jump back in so we're going to have a process of how to judge whether these opportunities are getting better and worse and therefore how you want to trade them so I drew up the simple chart of really what's the mistake that every rookie always makes and me included in this I've seen this so many times while trading dozens of Traders because it's just basic human psychology until you train yourself otherwise and understand this concept it's just so common to do I don't fault anyone for that so in this sample chart a stock makes it like lower from six down to five you buy the turn you have your stop at Lowe's and you take a loss okay no problem it makes another dollar leg lower from five to four you buy the turn and now you take a loss once it fails again at this point you're really frustrated you're thinking to yourself oh man am I just um gonna keep taking these losses am I gonna hit my daily stop is this a bad idea and so what very frequently happens if that makes one final leg lower oftentimes this is where the real capitulation occurs it increases in speed or volume and then it turns and what I would find myself always doing is because of those previous losses I'd be unwilling to get back into that trade what I recognize my boss doing is he would always be buying more there and getting a bigger position than he did on the previous attempts and once we spoke about this it finally started to click and I did the math for myself which I'm going to help walk you through this process so really it all comes down to this in in mean version the more legs down in a straight line all things you know held equal about those legs the more probable a bounce becomes I can't stress that enough right so let's just make up some numbers if the first leg down has a 30 chance the second leg might have a 40 chance the third leg might have a 60 chance and the fourth leg is an 80 chance if they're all the same type of legs the it's super super important to internalize and what this really comes down to is almost like that pendulum is swinging so so far over right the other thing to recognize is the more legs down in a straight line like this the more the reward increases I use a 50 base case retracement of the overall move so in subsequent legs that's getting bigger and bigger so let me explain to you the psychology of why this works and we're going to use something very simple like apple and we're just gonna you know really break this down in simple terms let's say Apple's trading at a hundred bucks let's say the first leg down goes to 98 so a two percent discount right assuming no fresh news or anything like that you can buy Apple two percent cheaper than you did before that might attract you know some people not only are you getting more potential buyers but you're also getting less potential sellers right maybe people are willing to sell at 100 but at 98 some incremental less amount of people are willing to sell there now just for the sake of a crazy example let's assume it went all the way down to 50 bucks the amount of people that are willing to buy Apple 50 lower on no change in fundamentals is enormous right Warren Buffett would be at the front of that list along with many others and guess what how many people are willing to sell Apple at 50 bucks certainly much much less people or fewer people than they were willing to sell at 50. and you can take that to the extreme right let's say apple went from a hundred to one dollar the reward on that would be enormous right if that reverted back to the uh you know previous price the the unaffected price your reward would be 99 x your risk right that is incredible buying at one dollar everybody in their right mind would want to buy it one dollar right so I know that's an extremely crazy example but it these working these extremes is what really builds us our framework right so for every leg lower you get less people that are willing to sell at those prices you get more people that are willing to buy so that's why this concept works right I'm not making this stuff up it's just purely based on Supply demand economics and psychology so now one of the most important points to stress though is this assumes no fresh news mean reversions in stocks with fresh news is infinitely more complex and dangerous right a fundamental change in the stock due to news is different right if Apple says uh you know their sales are down 99.9 I don't want to buy that stock at 98 or 50 right this is assuming all things held equal and it's just the price action that's moving so now let's dive into the expected values in that previous example I gave you and I beg you when you do your reviews you must look back and break down all the expected values and run the math all the time in the SMB meetings we do this right so much so many times Traders have preconceived notions but they haven't ran the math and once they do it really informs their opinion and often changes use their mind in that example I gave let's assume 50 retracements are the base case and that the risk to lows each time is about 20 cents so a point a in the example when we've gone from six to five bucks or so let's say the reward is 50 Cents and the risk is 20 cents and we're just going to assign a probability of 40 chance it works sixty percent chance it goes to lows the expected value on that is 32 cents right wonderful and so a lot of people ask why would you trade point a and point B instead of just trading Point C and so the reason why we're trading point a is because we perceive that it has positive expected value anytime there's positive expected value theoretically um if you trade that trade enough you're gonna make money on it so that's the reason why you're going to enter there but when it doesn't work as anything can right this is a probabilistic game you get stopped out no problem so then it makes another leg lower to point B and now the overall move is two dollars as a fifty percent retracement we're going to say the reward is one by and again our stop is 20 cents lower at those lows but now based on that concept of having less marginal Sellers and more marginal buyers the probability of this trade working is now going to be 60 40. when you run that math your expected value just a little bit more than doubles and you get 68 cents so that's really really great now we're going to go to point C and now the move is from six to three dollars based on a 50 retracement Buck 50 same risk and again what do we see here I've upped through probabilities even more why because again the people that are willing to sell at six there's way way fewer that are willing to sell at three on a quick you know multiple succession move of legs like something like that you count the expected value you get a buck 24. that is a huge difference so really the expected value Reveals All like every single trade you do whether you recognize it or not it's it's a hundred percent based on your perceived perception of like what is that expected value if that expected value isn't positive you never want to be involved if it does you probably do to some degree so what we found is based on those very rough assumptions is that point B was 2x the expected value of point a and point C was 4X expected value of point a so much like in poker the higher expected value the more we want to bet it is so often that people don't recognize that concept you know the higher expected value more you want to bet in general right so how does a typical rookie bet as we discussed they might bet on point a but then in point B you've already taken a loss you're you're licking your wounds and so many people then in point B bet less they lose again despite the expected value being better so then when it comes to point C where it's the best opportunity yet because of those two previous losses they end up stepping back and not betting at all you know but trust me it's classic I've been there and done it we all have but it's so important to recognize what's happening underneath the hood with the expected value so this is how Elite Traders BET right because it's positive expected value of point a they might still buy and take their loss there but they recognize that on that second leg the expected value is getting better um so they might then buy more and again it's totally fine to take a loss but when you make three legs in a row you want to buy way more and win big same for four legs five legs and so on so now it's so important to discuss the caveats and again I need to stress this assumes no fresh news mean reversion in stocks with fresh news is infinitely more complex and dangerous right so what can make the neck looks like worse than the prior leg rather than better so here's the way I like to think about it if the new leg is slower velocity or if it's smaller and ground covered or there's no volume or Price capitulation or if it occurs after a ton of consolidation those are some nuances and variables that might make me think okay maybe this expected value isn't getting much better in this second leg what I really want when I see the first leg and then the second leg to point B is in an Ideal World each subsequent leg is getting larger faster more panicky and velocity is just so important I want to see all that volume flush out I want to see all the weak hands panicking and what that does is when people panic and you get that flush out you get all the people that are going to sell out you get new hands and at a new average price and based on that marginal uh willingness of the buyers and the sellers like I discussed you end up with this imbalance that then changes those probabilities so also keep in mind though this concept does work to the upside but the upside moves are inherently more dangerous just due to no upper bound what do I mean by that well something that's going to the upside can technically go to Infinity whereas to the downside you can only go to zero so in a lot of plays that can come into play where the upside becomes more scary the other thing with upside is you have to worry about short availability in stocks that are really really going especially the low floats so does this concept apply yes but I do urge caution and uh you really need to be sure about how you're handicapping those trades here's a big misconception that kept on coming up so many people would say betting like this is how you blow up but I need to stress like what this concept is really about it's about recognizing that your expected value is increasing that in no way does not mean blow up so let's not conflate what I'm saying all I'm saying is in pure mathematical terms the higher the expected value the more you want to bet that is inarguable that is just basic math guys so I'm simply making the point that the more legs down the better the EV is getting and in theory your betting wants to reflect that most amateurs due to psychology do the opposite Pros take advantage and their sizing reflects this concept so that does not mean forget all risk management and go out there and blow up you always need to be using a daily loss limit and you always need to stop so what does that mean in practice that might mean that in point a you might need to size down on the early legs so that you have room to size up if the trade gets really really juicy so sizing and having a stop is how you control your risk that's true in any situation right you can theoretically blow up in any trade if you're not sized properly if you trade if you trade any trade three times even if it's a breakout or whatever else if you're not sizing anything can take you out of the game right so risk management and proper size is not mutually exclusive from this you need to always be following your rules always be sizing appropriately and always be trusting you know that like if things aren't working you need to make sure you're handicapping in second CH uh second guessing uh to make sure you're not missing anything right so this is uh you know this is like really what that concept's about this drove me absolutely insane but on Twitter so many people are saying oh this is just the Martingale system for those that might not know a Martingale betting system is where you take something like a coin flip and you just double your bet every single time and like the reason why this drove me my drove drove me out of my mind is this is not remotely the same and like people that thought that they don't understand what a Martingale betting system is because that's where every bet or in this case subsequent legs or coin flips or whatever has these same odds and expected value the whole point of this video is making making the concept that subsequent legs have better odds and better expected value right so that is exactly the opposite of a Martingale betting system so I can't deal with the armchair idiots trying to sound smart but they don't know what they're talking about and just talk nonsense on Twitter you know this is not the same so what this really is is this is one concept that can really change everything for your trading right because what happens is risk management is always key but in your betting you need to recognize that the EV is constantly changing right and in so many subsequent legs as things get better your bet sizing needs to reflect that and so often our human psychology does the opposite this is my number one most important tip for mean reversion and when I struggled so often these strategies and and saw my boss doing so much better and getting different results from me this was the only tweak I had to make to start turning that strategy around and becoming consistently profitable and scaling it higher I've seen so many Traders be negative and fail simply because they couldn't fix this common psychological mistake that all rookies make I hope this helps you and let me know your thoughts on this in the comments thank you for watching okay do you want to learn more actionable trading strategies like the one you just learned from Lance then watch the video the quickest way to profitable trading Easy Money trades appearing on your screen right now

Channel: SMB Capital

Views: 46,890

Keywords: stock market, day trading, smb capital, trading, investing, markets, wall street, stock trading, options trading, options income, economics, finance, lance smb, smb lance, lance b smb capital, the one lance b, profit from losses, getting stopped out, buying the dip

Id: T3OJfV39Twk

Length: 16min 35sec (995 seconds)

Published: Sat May 13 2023