The Drawdown That Completely Changed How I Trade

The Onset of a Trading Crisis [0:00]

• The speaker details a successful trading period from 2020 to early 2022, followed by a significant drawdown beginning in mid-2022.
• The market shifted into a slow bear market, causing the trader's entire playbook to fail.

• "And then in the middle of 22, the slow bear market started and basically every single trade or my entire playbook started failing."

The Tesla Overextension Trade Failure [2:00]

• A specific example of failure was the Tesla overextension trade in 2022, where the stock dropped to around $105 per share.
• The trader repeatedly attempted mean reversion trades, but the market's range was not expanding, leading to losses from time decay and volatility decay.

• "And the issue with this trade was that, uh, the market, like the range was not expanding."

Adapting to a Faster Market [3:00]

• The speaker emphasizes that the market is evolving faster, requiring constant updates to trading playbooks and risk sizing.
• Market conditions can change drastically within months, from crashing to hot IPO markets to booming sectors and then dead markets.

• "But I think that the market now is evolving faster. Like every month, every few months feels like a brand new market."

Implementing a Trade Grading System [4:30]

• The drawdown led to the development of a trade grading system, from 'Starter' to 'A+', which is considered the most important change in the trader's career.
• This system shifted the approach from intuitive and reactionary to structured, focusing on understanding the variables that constitute a trade.

• "It is probably the most important thing that I've changed in my trading career."

Sizing Down Strategies [5:30]

• When the market slows, signals like dropping volatility, contracting ranges, and stocks moving mid-range indicate a falling edge.
• The trader learned to identify these signals and size down, avoiding lower-quality trades in mid-range markets.

• "If you see our vol start to drop, if you see range start to contract, if you see a stock go mid range, right?"

The Critical Role of Psychology [7:00]

• Psychology is highlighted as one of the most undervalued tools in trading, more so than technical skills.
• The desire to quickly recover losses can lead to worse situations, a mindset that must be avoided in trading as a business.

• "I actually think that psychology is probably one of the most undervalued tools in this job."

Recovering During the Regional Bank Crisis [10:00]

• The beginning of 2023, particularly during the regional bank crisis, marked a turning point with high volatility and massive ranges.
• Despite favorable conditions, the trader was still recovering from the drawdown and couldn't risk maximum size, illustrating the mental impact of previous losses.

• "But I'm not in a position to be able to risk max size, right?"

Risk Allocation by Trade Grade [12:00]

• A detailed risk allocation system is presented: A+ trades (1 per year) risk $500k-$750k, A trades risk $300k-$500k, B trades risk $65k, and Starter trades risk $15k.
• This grading system forces identification of trade variables and ensures that high-quality trades (A+) are the primary focus for career-making potential.

• "An A plus plus, the cream of the crop, I would risk probably between 500 and 750."

Learning from SMCI and MSTR Overextensions [23:00]

• Lessons from a Tesla mean reversion trade informed a successful SMCI overextension trade in January 2024, focusing on expanding volume and range.
• The trader used the SMCI trade as a model to achieve an even larger win on MSTR by identifying follow-up high-edge opportunities beyond the initial turn.

• "MSTR, very similar situation, right? And in terms of sizing up, I made more on MSTR than I did on, um, on SMCI because I use a prior trade, right?"

Intuition and Protecting Mindset [28:00]

• Real edge presents itself through a combination of game planning and intuition, with gut feelings providing valuable feedback.
• Overtrading or feeling nervous on smaller risks indicates a potential to go 'on tilt,' necessitating a step back to protect mindset.

• "Listen to your gut. Listen to your feedback because that is a valuable tool."

Scaling Risk and Diversifying Strategies [31:00]

• Past A+ trades allowed for mental comfort and increased risk-taking on subsequent opportunities.
• Different trading strategies (swing, mean reversion, intraday, etc.) have their own grading systems and appropriate risk levels, with AI further enabling analysis.

• "It's very critical that there's not just some blanket, a risk, a plus risk each, each thing about each strategy as a different business, right?"