What to Trade, Not How to Trade

Every Tuesday Chuck releases a new Trader Tip video on YouTube. This week we will discuss how the "What to Trade, Not How to Trade" Mantra could change your life! It's changed mine!!!

You can read the episode transcript below or watch the video that follows.
If you have any questions, please reach out to us. We look forward to being a continued part of your trading education!

I just finished a workshop last week, where I had the whole class repeating this mantra. It was a chant that we were doing at the beginning of every lesson: “What to Trade, Not How to Trade. What to Trade, Not How to Trade. What to Trade, Not How to Trade.”

Now, why would I have them saying that? When we talk about trading, there’s the five components of trading. They ranked by the order of importance: psychology, money management for position sizing, market selection, and strategy selection, exits, and entries, ranked in that order. And in Trader Tip, Tuesday, we’re going to talk about the role that each of these five components play.

Today we’re going to talk about number three on the list, which is market selection. So psychology is the most important thing. Money management is next. And the third component, the third most important component is market selection. So we want to be incredibly efficient with our time. We want to get the maximum bang for our buck when we trade. This is one of the things I’m constantly preaching to people I teach how to trade. We want to be efficient. We want to trade the best. So when we talk about what to trade, not how to trade, we’re talking about spending our time finding what we are going to trade, not how to trade it.

Now it’s interesting, if you step back, the average trader spends so much time thinking about how to trade the market that they’re looking at. The most amount of time is put into entries, How and when do I enter and exits aren’t talked about that much. But entry and exit logic is the primary focus. And that’s why the results are mediocre to suck.

We need to focus on what to trade. Now, let me give you some context of that. So my old partner Brian Johnson, and I Brian was one of my best friends. And he was my partner. And when I had Brian come out, Brian had an engineering and computer science background. So Brian came in to be my math guy and my computer guy. We worked together, and basically the first set of back tests we ever did, I had a pattern that I have been trading for about five years, and I had been trading it profitably.

It was one of my core patterns, and so when we finally build out this back test, I was so excited, because we were going to take this pattern that I’ve been trading for five years, and we were going to test it across the board. And I just knew it was gonna work. And when it worked, when I saw work in the back test, and I’m like, Okay, we’re going to scale this, we’re going to leverage it, and we’re going to make a frickin fortune. That was my mindset.

So he coded up the pattern. And the first back tests we ran. We ran it on a set of NASDAQ stocks, and we ran it on a set of Dow stocks. This is in 1998-99. We ran this test in 2000-2001. Okay, so we run the test on the data and I look at the results. And it didn’t look at all like what I thought would.

So huge performance disparity between the NASDAQ stocks and the Dow stocks. Dow stocks, the results were mediocre. NASDAQ stocks were outstanding. They were amazing, and I’m like this can’t be right. I know this pattern works on everything. And I was new to the process. So I made a lot of mistakes. I attacked things in the wrong way. One of the things I did is I really dug into the doubt trades to try and figure out like Why are these so mediocre? I know this pattern is great.

But if I step back and I look what it was telling me the NASDAQ trades were really good and the Dow trades are really mediocre. But it was telling me was the NASDAQ stocks were high Hot. They were trending. They had money flows into them, and that is why my pattern kicked ass in them.

The Dow stocks were congestive, this was the new economy versus old economy era where new economy stocks all the.com stocks just went up up up up, and the old economy stocks are thought of as not being good investments anymore. One interesting thing is during that time, Warren Buffett, who we all know is one of the greatest investors of all time. And Warren Buffett was a value investor. He was an old economy investor.

And literally in 1999, there were there were headlines, articles being written about Warren Buffett saying he didn’t know what he was doing anymore. It’s insane. But what was happening was these NASDAQ stocks were hot, and the Dow stocks were congestive, my pattern was a trend following pattern. So it worked great in markets that were hot. It didn’t work very well, in markets that were congestive.

That was the first time I saw the importance of what to trade over how to trade. I was focused on how to trade. Or if I just shifted to putting my focus on what to trade, it’d be a lot better. Now. What this means for you is that if you can find the best markets, your technical systems, your technical patterns don’t have to be very good. If you look at a crypto space, I’m going to piss some of you off when I say this, but I don’t care. Hopefully you’re flexible enough to listen to what I’m telling you.

When you go through and you look at crypto. There are all kinds of people that are making a fortune in crypto in the last two years. A good friend of mine who is an IT guy makes $150,000 a year. Told me last month he made 2.1 Million in 2021 in crypto. I bought a monitor us that was brand new right out of the box and I went over and same thing guys IT guy was telling me he’s asking me what I did. I told him trader, he’s like Oh I’m up $950,000 this year trading crypto. What’s going on there?

Crypto is hot. Crypto has a fundamental story behind it. And so both these guys don’t know really much at all about technical analysis or much at all about framing trades. They’re just buying crypto and it’s going up. So their technical method is super simple. You could even make the case of stupid. So what you see is when something’s hot, the mediocre people do really well, and the really good ones become famous. That’s because they’re in the right thing. They’re in the right what to trade. Now, eventually, crypto will die out at some form just like it did in 2018-19. And when that happens, people who are unaware that it’s dying out, they’re gonna give all the money back, they’re gonna lose a frickin fortune. This is what always happens.

What I teach my traders is they actually need to spend the majority of their time not looking at charts trying to find the right entry or the right exit. But focusing on what is the best market to trade right now. And I teach a framework of how to identify what are the best markets to trade. It’s a very robust framework, it comes from different angles, and it leads you to finding the best things to trade.

Back to the how to trade, we have a system that we teach in our Matrix Money Machine called the BB Gun. And it was interesting because the first time I taught BB Gun was back in November. And when I unveiled it right away, the class just went crazy. And we at the time, we were using Basecamp they were all going back and forth on Basecamp having this big debate about well, what should the inputs be? Can I use it on this timeframe? And can I use it in this asset class? And I could use this exit and I could improve the entry by using this. And it was this chatter, chatter, chatter. Noise. It was fucking noise. It was wasting time.

The eloquence of the system that I was teaching them and I could potentially teach you is that we find the right markets to trade, then we run the system on. So seeing how all of them behave when we taught it again last month. That’s why I instituted this, “What to Trade, Not How to Trade. What to Trade, Not How to Trade. What to Trade, Not How to Trade.” Need to focus on what to trade. That’s where the money is. The money is not in the how to trade. You want to follow the path of least resistance. The path of least resistance is to find the right things to trade.

So the question I have for you, here’s a couple questions I want you to think about. What is your process for identifying what you trade?

I have a lot of traders that I’ve started to work with I have discussions with, they have no frickin clue why they trade what they trade. They traded because their friends traded. They traded because they saw it on CNBC. They traded because it was in the first workshop they ever taught. They traded because it was the first place they ever made money. None of that is logical. None of it makes any freaking sense, but all their focus goes into this mediocre thing, that they don’t even freaking know why they’re trading it. But what they do, “how to trade, how to trade, how to trade,” And then they wonder why their results suck!

No, you need to ask why do you trade what you trade? Why do you pick it? And then when you look at how you use your time, where is your time spent? Is your time spent finding the best things to trade? Or is your time spent on how you trade? Once you get there the answers to those two questions, and then I want you to go actually find data that backs either point. So if you’re in the what to trade camp, go find best things to trade, go look at your performances, and you’re gonna see it matters.

So let me just show you one thing quick. And then we’re done. Here’s our what to trade, not how to trade. This is some stats from the BB Gun System that we teach. There’s different versions of it. This is a very simple, simplified version of it. And there’s a couple things I want you to notice out of this. So the expectancy when we use a stop is 51 cents 46% win rate, average point average loss of 2.3. This is a good system. This is a good system. But what I want you to notice is when we bring in options, first of all, we get rid of stops, which is a whole nother story. Stops kill performance. And I will be doing a whole session on this. But stops kill performance. And you can see it expectancy with a stop is 51 cents without a stop is 60 cents. Almost probably 98% of the time, the system does better without a stop. Think about that. But then we actually incorporate options instead of trading underlying. And you can see the expectancies go up even more 71 cents, $1.09.

It’s so fascinating to me that I go and share a system that works. It’s totally simple, and all they have to do is follow. It’s really fascinating to me that I could give a group of traders, I could give you a system that works. Everybody wants the system that works. Where can I get one? And then when you give it to them, the first thing they want to do is change it. Isn’t that interesting? If I could just have a system to trade. BOOM you get one? Okay. Let me see how I can change it. So that whole chatter that I saw when I first taught the system, all the dialogue they were having, they were fucking it up. They were ruining it. They were contaminating the system. It wasn’t enough to take something that worked and just do it. No, we had a complicate it. They had to make it more difficult. They had to make it worse.

When you focus on what to trade, you’re not going to contaminate the system. You can use a simple methodology to trade it and you don’t need to be in all of this. So I’m showing you here this is one of our systems that works. It works even better using options and it’s simple. Just do it. Just get paid. So think about that.

This is one of the 10 irrefutable truths of trading success I talk about. “What to Trade, Not How to Trade”, see how that affects you, how you can implement this to improve your performance, and I’ll see you next week for next week’s trader Tuesday. Everybody have a great week and God bless!

~Chuck Whitman