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20 Cheat Codes to Beat Every Level of Trading — Transcript

by Mulham Trading · 3,036 words · 459 segments · language en · Watch on YouTube

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0:00Trading has cheat codes, just like video
0:02games, except nobody tells you what they
0:04are. You discover them the hard way.
0:06After 8 years of trading, I put together
0:0820 of them across five levels: the
0:10market, the trade, risk, [music] your
0:12mind, and the edge. Each level goes
0:14deeper, and each builds on the last.
0:16Miss one and you might be missing what's
0:18keeping you from profitability. Let's
0:20start.
0:21Level one, the market.
0:24Code one, a trade is one of three
0:26things. So, every trade you take is
0:28basically trying to capture one of these
0:31three things: a continuation, a
0:33reversal, or a range. And that's it.
0:35Now, when you are trading a
0:36continuation, you are expecting the
0:38market to keep moving in the same
0:40direction. And when you're trading a
0:42reversal, you're expecting that
0:43direction to actually change after some
0:45time. And when you're trading in a
0:47range, you're expecting price to stay
0:49between these two areas. Now, why does
0:52this matter? Because these three trades
0:54require completely different conditions.
0:56Think about it. In a continuation,
0:58buying in a pullback in a strong trend,
1:00and buying the bottom of a range might
1:03look similar on a chart, but you're
1:04bidding in two different things because
1:06these three trades require completely
1:09different conditions, different stop
1:11loss, and different targets for each
1:13type of a trade. And this change
1:15everything. So, before looking for an
1:17entry, ask yourself one question: What
1:20type of move I'm actually trying to
1:22capture?
1:23Code two, each type has one condition
1:26where it fails. So, a continuation setup
1:28struggles when the market is ranging. A
1:31reversal one struggles when the trend is
1:33extremely strong, and you will keep
1:35losing every time you try to short. And
1:37a range setup fails when price breaks
1:39out and does not come back. Imagine
1:41you're trying to trade every pullback as
1:43a continuation while price has been
1:46moving sideways. So, you could change
1:47your indicator, your entry confirmation,
1:50and your stop loss, but none of these
1:52will fix the actual problem. You're
1:54applying the wrong type of trade to the
1:57wrong market. And sometimes, improving
1:59your strategy is simply knowing when not
2:02to use it.
2:03Quote three, every level comes from one
2:05of three places. Now, since we
2:07understand what type of trader you're
2:09looking for, you need to know where to
2:11look. And almost every important price
2:13level you draw comes from one of these
2:15three: a turn, a reference, or a gap.
2:18Now, a turn is somewhere price
2:19previously changed direction, like a
2:21swing high or a swing low. A reference
2:23is something traders can objectively
2:25identify. Think about previous day high
2:28or low, or an opening price of the week
2:30as an example. And then a gap is an area
2:33associated with past where price moved
2:35quickly from it. And these are the same
2:37levels showed in candles or in a real
2:40chart. These are the turns, these are
2:42the gaps, and the references are maybe
2:44round numbers or opening prices or
2:47previous days highs and lows, etc. Now,
2:49this doesn't mean every level work, but
2:51instead of drawing 20 different zones
2:53and hoping one works, you can ask why a
2:55particular area might matter. And more
2:58importantly, what would need to happen
3:00there before you consider a trade. And
3:02this is actually how I approach my own
3:04age model, the one week setup. I don't
3:06just look for random weeks on a chart.
3:08First, I want price in the right
3:10position with the right structure and a
3:12good key level. Only then does the week
3:14actually work and become important and I
3:17can trade from it. Because the same week
3:19in the wrong place might mean absolutely
3:21nothing.
3:22Quote four, the first move after news is
3:25not always the move that hold. You've
3:27probably seen this happen before.
3:29Important news comes out, price
3:31immediately shoots higher, and everyone
3:33starts buying, and then 20 minutes
3:35later, the market's trading below where
3:37it started. So, what happened? Well, the
3:39first reaction to news is not always the
3:41direction that it holds. When new
3:43information enters the market,
3:45participants are adjusting their
3:46position and reacting at different
3:48speeds. So, instead of treating the
3:50first candle as the answer, pay
3:52attention to what happens afterward.
3:54This is actually the same hour as one
3:56candle after the closure. We can see
3:58that it left a week instead of
4:00continuing in that direction. So, always
4:03ask these questions. Does price hold the
4:05move? Does it reject it? Or does
4:07structure actually change? These are the
4:09questions that matter instead of just
4:11focusing on the first candle. And that
4:13bring us to level two because finding a
4:15setup is one thing, knowing whether it
4:18actually works is something else. Level
4:21two, the trade.
4:23Code five, every entry pays a different
4:26price. So, let's say price reaches your
4:28key level. You can enter immediately at
4:30the level. You get a better price, but
4:32you have less confirmation. Now, here
4:35you can wait for a confirmation. Now,
4:37you have more evidence, but your entry
4:39is probably worse. Or you can wait for
4:41the retest after the confirmation. That
4:44might improve your entry price, but some
4:46trades will never come back. You see the
4:48problem? Every entry method solves one
4:50problem while creating another. That is
4:53a different price. And traders spend
4:55years searching for the perfect entry
4:57that somehow give them the best price,
4:59the most confirmation, and never misses
5:01a trade. That entry does not exist. You
5:04need to decide.
5:06Code six, trades that don't move tend to
5:08be weaker. Now, imagine you enter a
5:11breakout. Everything looks good, but
5:13instead of moving in your direction,
5:14price just sits there. 30 minutes pass,
5:17then an hour, then 2 hours. Now, does
5:19that mean the trade will lose? Not
5:20necessarily, but here is something
5:22interesting. In the example on the
5:24slide, 18 out of 24 trades that moved
5:27within the normal time were winners.
5:29Now, for the trades that took longer,
5:32only four out of 16 won. This is an
5:34illustration, not a rule that applies to
5:36every strategy. Time can be part of your
5:39own trading edge. If your strategy
5:41depends on momentum and breakouts, a
5:44trade that is not moving immediately
5:47might give you a new information. So,
5:49don't just journal your entry and exit.
5:51Study how long your best trades normally
5:53take to work.
5:55Code seven, your journal only shows the
5:58trades you took. Now, this is something
6:00I think a lot of traders never
6:01considered. Your trading journal records
6:04the trades that you took, but what about
6:06the trades you skipped? Imagine you take
6:08seven trades this week and you end up
6:10with 2.8 R as a total, and that looks
6:13good. What if you skipped another seven
6:16perfectly valid setups? And what if
6:18those skipped trades performed much
6:20better or much worse? You wouldn't know.
6:21You might think you're being selective
6:24when you're actually skipping your best
6:26opportunities, or you might discover
6:27that your filtering is saving you money.
6:29The only way to find out is to record
6:32opportunities, including the ones you
6:35did not take.
6:36Code eight. Few trades pay for all the
6:39others. Now, imagine a strategy that
6:41takes 100 trades. The best 10 trades
6:44make 37 R. Now, if we look at the other
6:4790 combined, they lose only 19 R. The
6:51total profit is a positive 18 R. But you
6:54remove just four of those best trades,
6:56and the strategy becomes negative. So,
6:58we're only removing four of these, and
7:01you go in negative. This is a simulated
7:03example, but the lesson is important.
7:05Now, this will be applied mostly to high
7:07reward-to-risk systems. So, closing
7:10every winner early can destroy the
7:11entire mathematical advantage. You might
7:14win more often, but make less money. And
7:16that leads us to the next level.
7:19Level three. Risk.
7:22Code nine. An account dies one of three
7:24ways. Now, when traders think about
7:27blowing an account, they usually imagine
7:29one huge loss. And that is one way. One
7:31oversized position, and suddenly a huge
7:34part of the account is gone. But there
7:36is another way. Small losses again and
7:38again. A little [clears throat] revenge
7:40trade here, unnecessary entry there,
7:42breaking a few rules every week. It does
7:44not look too bad until you check the
7:47account three months later. And the
7:48third way is something people rarely
7:50talks about. Quitting. The account might
7:52still have money. The system might still
7:54have an edge, but the trader loses
7:56confidence and stop before the process
7:59has a chance to even work.
8:01Code 10. Fixed percentage and fixed
8:04dollar risk behave differently in a
8:06drawdown. Now, let's say you have a
8:08$100,000 account here, and you would
8:11risk 2,000 per trade. If you lose 20
8:14trades in a row, you're down to 60,000.
8:17But, what if your risk is 2% of your
8:19current balance instead? As your account
8:22gets smaller, notice the difference
8:24between the fixed percentage and the
8:26fixed dollar risk. Fixed dollars will
8:28actually get you more drawdown. So,
8:31minus 29% instead of minus 25%. Now, if
8:34we look at this, after 10 losses in a
8:36row with fixed dollars, you'll be at
8:3980%, but fixed percentage will be at
8:4281%. It's going to be higher with the
8:44fixed percentage. They act differently.
8:47Now, after 30 trades, that's also a big
8:49difference from 40% compared to 54%. So,
8:53they behave differently, and you should
8:55know what to use for each phase.
8:58Rule 11, every system has a shape, and
9:00the shape sits your streaks. Imagine
9:03three systems here. One wins 70% of the
9:06time, but takes smaller profits. Another
9:08wins 50% of the time with more balanced
9:11wins and losses. And then, we have the
9:13last one wins only 30% of the time, but
9:15its winners are much bigger, if you
9:17notice here. All three can potentially
9:20make money, but they won't feel the same
9:21to trade. In the simulations we have
9:23here, the typical longest losing streak
9:26over 100 trades was around three, six,
9:29and 10 losses in a row for the typical
9:31scenario. You're also choosing the kind
9:33of losing streaks you will need to
9:34tolerate. And if you don't understand
9:36that, you'll probably abandon perfectly
9:38reasonable system when it starts
9:40behaving exactly as expected.
9:43Rule 12, profitable system spends most
9:46of its time below its last high. This
9:48one is probably going to surprise you.
9:50Imagine a system with 50% win rate, and
9:53a 1.5 R when it wins, and loses 1 R when
9:56it's wrong. And that is a positive
9:58expectancy of 0.25 R a trade. But, in
10:01the simulation here, the trader here,
10:04the profitable one, spent around 74% of
10:07the time trading below its last high.
10:10So, think about it. A profitable system
10:12much spending most of its time just
10:14below its last peak because making a new
10:16account high is only one moment. And
10:19after that, you might spend 20 or 30
10:21trades trying to reach it again. Of
10:23course, not every down is normal. You
10:25still need to review whether your edge
10:26is holding up. But being below your last
10:29high is not by itself prove that your
10:31strategy has stopped working. And this
10:33is exactly where the next level becomes
10:35important.
10:37Level four, the mind.
10:40Code 13, every mistake comes from one of
10:43three urges. I want you to think about
10:45the last few times you broke your
10:47trading rules. Why did you do it? The
10:49first urge is to act. You're entering
10:51before the trigger, you're trading out
10:53of boredom, or you're taking a setup
10:55that is not even yours. The second one
10:57is to win it back. So, you're a revenge
10:59trade after taking a loss, you size up
11:01after a loss, and trading past your
11:03daily limit. And then the third one is
11:05to avoid pain. You move your stop, you
11:08close a winner too early, or skip the
11:10next valid setup because you don't want
11:11another loss. These are all different
11:13actions, but underneath you're
11:15responding to an uncomfortable feeling
11:18instead of following your process.
11:20Code 14, every loss is one of four. Only
11:23one is acceptable. Now, let's say you
11:26take a losing trade. What do you do
11:27next? First, your analysis was wrong.
11:30You took a setup that was not actually
11:32valid according to your conditions.
11:34Second one is wrong execution. The setup
11:37[clears throat] was there, but you did
11:38not follow the plan. Now, third, your
11:41sizing was wrong. Maybe the trade was
11:43fine, but you risked far too much. And
11:46fourth, everything was correct. Your
11:48setup was valid, you followed the plan,
11:50your risk was appropriate, and the trade
11:52simply lost. Now, this fourth one here
11:54does not need fixing. It's part of
11:56trading, and if you try to fix every
11:58normal loss, you'll never give your
12:00strategy enough room to work. Accept
12:02this and fix these three. Only this one
12:05is acceptable.
12:06Code 15, the more you trade, the less
12:09you keep. Now, we do have a study here
12:12that looked at the trading activity of
12:14of almost 66,000 households. Now, in
12:17that historical sample, the least active
12:19group earned about 18.5 annually after
12:23cost. The most active group earned
12:25around 11.4%.
12:27So, the least [clears throat] active
12:28here, you'll notice, made the more money
12:30compared to the most active. And this
12:32doesn't mean every active trader will
12:34outperform, but it challenges a common
12:36assumption. More trades don't
12:38automatically mean more opportunities.
12:40Every additional trade at cost and
12:43potentially another decision you can get
12:45wrong. Sometimes the improvement comes
12:47from removing trades that never had a
12:49clear advantage in the first place.
12:52Quote 16, "Every result is decision plus
12:55luck." Now, let's imagine you have a
12:57really edgy win 55% of the time at 1:1
13:00reward to risk. Now, that sounds good,
13:02but after only 20 trades, there is still
13:05roughly a 41% chance that you're at
13:07break even or below, even though you
13:09have an edge. After 300 trades, the
13:12probability falls to around 5% under the
13:15same [clears throat] assumptions. This
13:16is why judging your strategy after 5,
13:1910, or 20 trades can be so misleading. A
13:22good decision can lose, a bad decision
13:24can win, and over short periods, luck
13:27can have a massive influence on your
13:29results. Notice here how below 100
13:31trades, luck is more significant than an
13:34edge itself. So, the job is to create a
13:36repeatable process and collect enough
13:38evidence to understand whether it works.
13:40But even when you find an edge, there is
13:42one last problem. How do you keep it?
13:46Level five, the edge.
13:48Quote 17, "Every edge [clears throat] is
13:50someone else paying you." Now, why was
13:53this opportunity available? Sometime,
13:55another participant needs to take risk
13:58off immediately, and sometimes someone
14:00is willing to pay for faster execution,
14:02and sometime other traders simply make
14:05mistakes. Now, think about a large
14:06participant that needs to sell. It might
14:08accept a worse price because reducing
14:11exposure is more important than getting
14:13the perfect entry. That doesn't mean
14:15everyone on the other side of your trade
14:16is stupid. Means different participants
14:19are solving different problems. And a
14:21useful trading edge should have some
14:23explanation why the opportunity might
14:25exist.
14:27Code 18. Every edge has three enemies.
14:30Now there are three problems to
14:32consider. The first one is time. Market
14:34change. A pattern that worked in one
14:36environment may become less effective in
14:39another. And the second one is crowding.
14:41Once a strategy becomes widely known and
14:44more traders try to exploit it, some
14:46opportunities can become smaller or
14:48disappear. And the third one is costs.
14:51You know, spread, commission, slippage,
14:53all of these things. Especially if
14:55you're using very tight stops. So all of
14:57these are going to have a big impact on
14:59the final results that you're going to
15:01have from your edge.
15:03Code 19. Every improvement is one of
15:06three. So if you want to improve in
15:08trading, you have three main levers. You
15:10win more often, you win bigger, or you
15:13lose less. So let's say your strategy
15:15win 45% of the time, making two R
15:18winners and losing one R on losers.
15:20That's an expectancy of 0.35 R. Now if
15:23you increase your win rate just by one
15:25percentage point, your expectancy
15:28improves by 0.03
15:30R. Now if you add 0.1 R on every win,
15:33then the expectancy improves by 0.045 R
15:38a trade. But now reduce every losing
15:40trade by 0.1 R and the improvement is
15:440.055 R a trade. Of course, this assumes
15:47everything else stays the same, which is
15:49not always possible in live trading.
15:51Sometime reducing the size of your
15:53average loss is more valuable than
15:55increasing your average win. So you can
15:57ask which part of your expectancy you
15:59can actually improve. And now we reach
16:01the final cheat code, the one that
16:03connects everything we've talked about.
16:06Code 20. Every rule protects one thing,
16:09your time in the game. Imagine two
16:12traders both have the exact same
16:14strategy, but one risk 1% per trade, the
16:17other one risk 10%. Now, imagine both
16:20experience a 10 consecutive losses. The
16:23trader risking 1% is down minus 10%. The
16:26trader risking 10% is down 65%.
16:30To recover this 65% drawdown, you
16:33actually need approximately 187%
16:37to get back to where you started. That's
16:39the same strategy, completely different
16:41situations. Your trading rules are not
16:43there just to make you feel disciplined,
16:45but they protect your ability to
16:47continue. If you lose your capital or
16:49keep changing your process or give up
16:52before you have enough evidence, that
16:54edge never gets a chance to work. And
16:56that's the real point of all the cheat
16:58codes that we mentioned, not to win
16:59every trade, not to avoid every loss,
17:02but to make better decisions, survive
17:04the difficult periods, and keep
17:06improving without starting over and
17:08over. Let me know in the comments which
17:10cheat code you needed the most. But,
17:12make sure to hit the like button if you
17:13like the video, subscribe, and comment,
17:16and I'll see you on the next one.

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