MTH Approach

If you've enjoyed "Reminiscences Of A Stock Operator" by Edwin Lefevre, then there's a YouTube video that you'll certainly want to watch. I stumbled across this video after seeing it being recommended by LoneStockTrader on Twitter. Although this video was published a bit over two months ago, I've listened to it approximately five times now.

The video is - A Trader's Journey: Charles Harris. Charles is a professional stock trader with over 20 years of experience. Each time I listen to this video, I have different takeaways. If I keep listening to this video, this post will never materialize.

My thoughts on this video are prone to recency bias as this post is based on my most recent listen earlier today. I admit some details may not make it into this post. I also admit I've struggled with figuring out the best way to section up this post. In the most logical order given my current state of mind, here it goes.

Competing Aggressively

Charles had very ambitious goals. He says he remembers telling his wife that he would never be up less than 100% per year and he would never make less than a million dollars a year. This held true as he was definitely up over 100% and multiples over 100% in numerous years.
This reminded me of a Topstep's Limit Up podcast episode where they discussed the difference between an okayish trader and a top trader. The okayish trader was happy to make a quick buck from the markets and then take off early on a Friday afternoon. The top traders are the ones who meticulously refine their craft by pouring over historical data, working on their strategies, re-evaluating their own performance, and refining. This is a recurring theme that we can observe with seven-figure traders at SMB Capital and Don R. Wilson.

Trading Rules

While Charles went through his journey to explain how he established his trading rules, the rules themselves are quite standard.
There were a few that stood out.

Never take a big loss. Preservation of capital is key.
Always have an expectation of what the stock should do and sell if it violates that expectation.
Trade in line with your personality.
Never trust an analyst's recommendation.

The takeaway here is that the rules you design need to keep you in check. As soon as you start breaking them, they will lead to your downfall. But in the moment, you're probably not conscious that you're breaking them.

Downfall

Charles focuses on the upside. During periods of a bear market, he struggled to find winners. This led to various insane drawdowns in his account. As he tells his narrative, he shows how he begins to violate his own rules.
Rather than taking a break, he loaded up on more and more call options as Tesla began to fall. In this case, the stock violated his expectation. But he was committed to accumulating a bigger and bigger position.
He states, "I should have stopped all together, gather my thoughts, get my head straight, but I didn't. I kept trading and nothing seemed to go right." It's a hard but necessary thing to do. Telling a trader to stop trading is the last thing they'll want to hear.
Jumping to near the end, he talks about how he studied everything he could get his hands on about the fiber optics industry. He took a position in Acacia Communications in hopes of making a rapid recovery. The rational thing to do was sell when Acacia continued to fall, but he remained hopeful. He listened to conference calls, how analysts asked questions, looked at industry research and buy ratings, etc. He did everything he said he wouldn't do according to his rules. Recall never trusting an analyst's recommendation. The pain of consecutive losses makes it tough to remain rational. Even more so when you have ambitious "wants" out of the market.

Purpose

"I was thinking about mansions in Malibu and throwing lavish parties when I was already living a pretty nice life. I still am, but I wanted more. [...]"
This reminded me of another Limit Up podcast episode where they discussed the opportunities the markets bring. If you're a part time trader, the markets can offer you some supplementary income. If you're a full time trader, the markets can provide the means of making a living on your own terms. If you're constantly chasing for more, you may just be caught in a rags-to-riches-to-rags story.
Charles recounts a call with his wife when he had his first seven-figure day. His wife advised him to take some out and take a break. Despite already living a comfortable life where his trading covered the bills, he wanted more.
My takeaway here is unique. It ties into my days at the poker table. While you do need to be aggressive, you also need to ride the periods of positive deviation and set up a cushion for when they end. This will become clearer as I discuss the MTH Approach.

MTH Approach

I've always wondered how I would approach the markets when I have the opportunity to be sufficiently capitalized to trade full time. This means having emergency funds set aside to cover a year's worth of expenses. This means having excess funds set aside to replenish my trading accounts if I take a hit in a particular quarter. This means having sizable trading account that generates livable returns off of the markets.

My personal belief is that there's a huge importance in taking a Multi-Time Horizon Approach. There are several parts to this.

Trading to capitalize on short-term momentum plays is for income generation. It covers bills and replenishes short-term capital reserves.
Periods of positive deviation, such as consecutively hitting large winners, are considered abnormalities. It's a no-brainer to take advantage of these periods. However, it's important to realize that they won't last forever and it's not completely reflective of your skill. The trading error that's prone to occur is when the trader linearly extrapolates this return projection into the future.

Excess profits generated during these periods should be passively reinvested in broad-based market index funds. After all, it's certainly possible that a trader can be a part of the statistic that doesn't beat the broader market at any given time. Rather than irrationally sizing up, building a long-term index portfolio provides a cushion should the positive deviation that the trader experienced ends.
It's much easier to stay flat with a trading account than it is with a long-term index portfolio. Although the long-term index portfolio is passive, I do believe it should be actively managed in one particular situation. Hedging, by buying puts, is required when the broader market experiences an exponential move. These moves are never sustained and they should be taken advantage of especially by an active trader.

In my opinion, the MTH Approach is designed to protect overall capital rather than that situated in a shorter term trading account.