Clay Trader Podcast
STR 248: Small Caps Suck. Micro-Futures Rock. Here’s Why…
Is this you? You have a smaller account and want to get started trading the markets. Because of the annoying pattern day trader rule (PDT) and the fact you have a smaller account, you automatically assume you need to focus on small caps (penny stocks) in order to have a chance at success. While there was a lot of truth to this in past years, due to some recent changes in the futures market, this thought process is no longer valid. My guest from the community, Heath, discusses his trading journey that walks us through this exact thought process and journey. Heath was very transparent about his journey and the headaches he has gone through in order to get to where he is now… a much more viable place to actually find trading consistency. This is a discussion filled with goodies so let’s get to it!
Clay: This is a stock trading reality podcast, episode 248.
Announcer: This is the stock trading reality podcast. Where you get to see the realistic side of a trader’s journey. Get inspired and stay motivated by every day normal people, who are currently on their journey to trading success. And this is your host. He wants to give a shout out to the person who invented balanced bikes, Clay Trader.
Clay: They truly are a great, great invention for you people out there that don’t have kids. All they are is a bike with no training wheels. But the whole premise is they’re lower enough to the ground where a kid can just balance on them. But if they start to tip over, their foot’s close enough to the ground. So they just barely hold their feet above the ground and then eventually their feet get higher and higher off the ground. And you know, they’re developing that core strength to just stabilize out. Because, I mean if you really stop and think about it, training wheels are kind of a… I mean they’re not a scam, but I mean there is total support for you, whereas a balanced bike, once you get your feet off the ground, you have to literally start to engage that balance in you know, those core muscles and build that sense of balance up which training wheels aren’t going to necessarily do for you.
Clay: So yeah, to the person shout out, I don’t know who you are, but I hope you are rich. Because you deserve to have gotten filthy rich on that because you have provided a solution to a problem that needed to be solved. So, congratulations to you. Like he said, I don’t know if the inventor is rich or not, but I hope he’s rich because he is solving a problem and I’m assuming a lot of people are willing to pay him money to buy one of those balance bikes or her money. I don’t know the history. So yeah, but balance bike for you parents out there. Maybe if you have not heard of them and you want to have your kids… And I have, I have kind of a good little data points that I for kids. So Joy, your oldest, she never had a balance bike but our next youngest, Dot, she was riding around on two wheels way before Joy, because of the balance bike.
Clay: And then our third Trip, I mean he’s already getting solid on it so he’ll probably beat Dot and then Fay’s too young. She’s still a data point in waiting. But needless to say I’m a huge fan of the balance bike.
Clay: Today we are talking with Heath. I always liked these. If I can just shoot straight, because I’ve had, not a lot, but every now and then “Clay, this whole podcast is just one sales pitch for your Clay Trader University. Your trading freedom pathway program. That’s all this is. You just have guests on from there.” And here we have a situation. This person, yes they’re a member of the inner circle, but that’s it. And that’s totally fine.
Clay: That is the only requirement. I just like to have people part of the community because at the end of the day that the history of this was, this was always intended to just be something within the community itself. Where we could all help kind of motivate and inspire each other through our own stories. Then it just got to the point of well, I mean, why not just make it public so other people can benefit? So that’s the brief little history of the podcast. But yeah, sometimes it’s “Whatever Clay, you only have people that…” No. Here is somebody that, yes they’re a member, but that’s it. And it’s a show for everybody. And Heath, this was a great interview. I will be upfront. There are some parts, I mean, if you’re looking for a podcast where Heath is going to be “Yeah, you know, thanks Clay. I’m glad I could fit you in. I just picked up my new Porsche and now I’m driving my Porsche over to look at the yachts.”
Clay: That’s not quite what we’re going to get here. But we’re going to get some nitty gritty details. A real raw look at trading and what it takes. There’s some great stuff here, especially if you’re somebody with maybe a smaller account. Maybe you have to worry about that stupid annoying pattern day trading rule. If that’s something that fits your camp. If you’re not, there’s still going to be value. Especially if you’re somebody with not a whole lot of money and you want to day trade, but yet there’s this PDT rule. Then, there’s going to be some great valuable bits of information in this one for you. So without further ado, let’s hear about Heath and his journey. Heath, welcome to the show.
Heath: Thanks for having me, Clay. How are you?
Clay: Good. I am good. Now I think I might’ve caught you off guard. Did I kind of come across as not very personable cause I, we both hopped on and I just gave you a couple, a little miniature speech and then all of a sudden we’re just here. So I get the impression that maybe did I catch you off guard? Did you think I’d, we’d talk a bit more before we got the thing recording.
Heath: To be honest. Yeah, I did.
Clay: Okay. I thought so. So you can attest to that. This is truly unscripted. This is truly just, I want this to be as genuine as possible. We’re sitting down at a coffee shop and people can be flies on the walls, and then we just pick up with the conversation.
Clay: I meant no offense Heath. I meant nothing by that. I just wanted to keep as much of the conversation as real as possible by getting it recording. But I thought I sensed a bit of “Hey, this guy’s a jerk.” I promise, I’m a bit of a jerk, but I’m not that much of a jerk. So I do appreciate you though, taking time to be here and also, from me to you, thank you. I appreciate your volunteering and not having to hunt you down or anything like that. I do appreciate that. It makes my life much easier. So are we good though now Heath? Well, I’m a miniature jerk, but not that big of a jerk. So does that make sense now why I was a little, let’s get to it at the start.
Heath: Yeah, that makes total sense. I feel like I sort of come off as a jerk too when I’m meeting someone new. So it’s no big deal.
Clay: Yeah, I mean you’re definitely a jerk. I personally think. Let me put it this way Heath. You have a big old hurdle to get across in order to change my mind that you’re not a jerk. We’ll see how I feel about you by the end of this thing. But right now, my guard is up. In all seriousness, where did all this start for you?
Clay: Where did you hear about the market? What sort of things played out that, got you to the point where you thought, “I want to get a bit more active. I want to get a bit more hands on with that.”
Heath: Going way back to about 2014 or 2015 I was just sort of on YouTube, just pretty much watching videos and, like the YouTube algorithm, it’ll just keep recommending videos, and before you know it, you’re watching something you really didn’t think you’d want to watch. But…
Clay: That is so true. You go to YouTube, like ‘how do I change… how do I do a plumbing repair on my sink?’ And then 10 minutes later you’re watching little kitten videos or something. That’s so true, that you bring that up. You go to YouTube with one intention and then the algorithms, just start spitting you up and chewing you out. I can only laugh because I don’t think anybody’s ever made that observation. That is so, so true. Do you have any idea why you originally went to YouTube in the first place?
Heath: I’m assuming I was trying to… I think I was looking… Honestly, I can’t say why I was on [crosstalk 00:07:10]. I was just killing time.
Clay: It would be funny if you originally showed up looking for like ‘How to plant acorns’ and then all of a sudden you ended up, “Oh, now I’m on a podcast about the stock market.” That’d be kind of ironic, but that’s all right. Sorry, while you’re on YouTube and the algorithms are spitting you around, so I’ll let you pick it up from there.
Heath: I just graduated college and I didn’t really know what I was going to do career wise. I think I might’ve just been on YouTube looking at stuff to do and then, I really was trying to find something I could do from home because I’m not a very sociable individual. Sort of introverted. I like to keep to myself and stuff like that. I think I saw trading charts. I think maybe Forex or something like that. And I saw charts and I was like, what is this? And then I did a bit more research and then I figured out you had to have money to do it, and I don’t. I didn’t have any money at that time. So I was just like, well I don’t have any money, so there’s no way I can even get involved. So that is sort of where the buck stopped. And then, a couple of years later, I’m working a nine to five job, and a roommate at the time was involved in the stock market. He said he would take some trades at work. We both worked at the same place.
Heath: I was like, that’s interesting. And then I guess fast forward, and another a couple of years we’re in like 2018, and that’s when I decided to really learn how to trade small caps.
Clay: Okay. I have a question though. I mean you had the baseline. Oh that’s cool. There’re these charts. Oh that’s cool. Oh wait, you need money. I don’t have the money. And then you skip ahead a couple of years, and then your roommate mentions trading. But at that point you never, still, nothing happened.
Heath: No. At that time I don’t know, for whatever reason I guess I wasn’t in the right mindset or something. I don’t know. Maybe it just went over my head that I could try to get involved now because I actually had a bit of money I could put up for it. And also, I was studying information technology. I was trying to get an IT certification at the time. So I was more focused on that. And, I don’t know, some of the stuff I’d heard about the stock market and working from home in general, seemed scammy to me. I was like, well I don’t know. At least I know that with IT work I could probably get a job and stuff. So that is what I was maybe subconsciously thinking. Not totally at the forefront of my mind at the time, but…
Clay: Well, I’m shocked to hear that you heard some scammy stuff about the stock market. I thought the stock market was just filled with clean cut, stand up individuals and everything was just top of the line. Just perfect rainbows and butterflies. So yeah, that’s shocking that you equated the word ‘scummy’ with the stock market. But I don’t blame you. That makes much more sense if you are kind of busy studying other things at that point. Just out of curiosity, I always like to hear people’s backgrounds. Where were you getting this vibe? Where did you have this impression? Where in your mind were you equating the stock market and scummy? Was it from Hollywood movies, or did you hear from somebody who knew somebody? Do you have any idea where that almost stereotype came about? I’m not saying you’re wrong because yes, you’re absolutely right. There is a bunch of scummy stuff out there but, do you have an idea where you kind of developed that at?
Heath: Well, I do agree with the adjective ‘scummy’ I actually said scammy.
Clay: Oh, did I or did you? All right scummy, scam, they’re one in the same, right?
Heath: Yeah. One in the same is fine. So, from just Lamborghinis and YouTube videos and stuff, I got the vibe that it was a trick. It was a front. It was phony. I don’t know.
Clay: Based on what? And I ask, because you’re absolutely right. Its just, it’s so sad how many people are like, “Oh, fancy cars, yachts.” I just had something on my Facebook wall where I’m scrolling down and there’s this person and who knows? Maybe there, but it’s the whole jet-skis and then they’re flying on some supposedly private jet. I just shake my head and be like, “Ah, it’s a shame how many people are probably going to fall for that.” But you didn’t. So, I mean, I
Heath: I will say that it’s just, I think it’s a mixture of pop culture movies like Wolf of Wall Street, The Big Short. Like those type of movies. And then, the YouTube ads, they had, I don’t know if you remember Ty Lopez? He was a guy on YouTube who had YouTube ads on every single video out there. And I was like, you know, he reads whatever, a book a day and it turns out that he doesn’t read a book a day, and stuff like that. Where it’s like self-help gurus and all that. It seems like it was all sort of tied together with the stock market. This is just my experience. I’m not saying everyone goes through this too but, I would say my introduction to all of it was due to YouTube and watching YouTube videos. Seeing people be like, “I watched something on this person.” And then there’s immediately a video saying that this person is lying about all this, and stuff like that. So that was a fear.
Clay: Yeah, it’s pretty wild out there. There’s quite a few. There are some conspiracies about me and the community and where some big evil penny stock shorting hedge fund and, there are some doozies. I realized you didn’t say that you believed everything you write, or believed everything you listen to. So there’s always two sides to every story. But yeah, I’m with you on some of this stuff. When there is,
Heath: And I’m still skeptical of some stuff. I’m skeptical of some people on YouTube, but I can’t, you know, I don’t know. I guess…
Clay: As you should be. And I wanted to defend you a bit because you said, “Well this is kind of just my opinion, my experience”, and that’s great. I want you to share your opinion, your experience, because you actually have the guts to be here. So if you disagree with Heath, then you are more than welcome to be a guest. And you can come on here and you can give your, maybe you’ve had a much different experience. That’s the whole point of the show. So don’t come down on Heath. He’s the one that’s had the courage to be here, and he’s just sharing his take on things. But I got to, it sounds like, let me put it this way, you smelled something funny, which is what you should have smelled. Because that stuff is just a total, I mean that’s right out of marketing psychology 101. Sell the dream, all that. And you sniffed it out. So that is good. I always appreciate that.
Clay: I like to always dig a bit deeper because, it’s just sad how many people fall for it. So maybe if someone listened to that and you could kind of just maybe have that light bulb go on for somebody, well that’s great. You just saved them from kind of wasting their money. You’re getting some sort of false expectation. So excellent. Now you mentioned it was a couple of years later, and then all of a sudden you learn how to trade small cap. So where, where did this whole thing of small caps come into play? Was it because you just had less money, so you needed to play lower price stocks. I guess pick it up from when you decided to get back into the markets. How did that all play out? Let me ask it this way. What brought you back into the markets?
Clay: Because you saw your buddy, your roommate, and then you said, well, and then a couple years later. So fill it in from a couple of years later. Okay, well then what got you interested in the markets again?
Heath: Sure. I just want to disclose that I’m not profitable trader. Just to put that out there. I don’t think I said that before.
Clay: You didn’t. But I appreciate it. And that’s nothing to be shameful of. At least you’re self aware and honest that you’re not a profitable trader. There’s nothing, I mean it’s funny is not the right word because that makes me sound like a jerk. But there is funny, in an ironic way. Where you talk with some people and they’re like, “This person doesn’t want to admit to themselves that they’re not a profitable trader”. Which is fine, because when you admit that, that means you’re going to just figure out how to become profitable.
Clay: So no judgments. I appreciate that. And that’s much appreciated. But, that’s the whole point of the show.
Heath: Right. So what caused me to come back and be like, this is something I want to tackle, I want to take on was that, at the time I feel like I had just been getting rejected from a lot of job opportunities and I applied to grad school a few times and didn’t get accepted. So I just felt like I was getting a lot of rejection and I want to do something where I can, after I learn the skills that I can actually apply them the next day. And it seemed like the stock market was a place where, the barrier to entry is money. You don’t have to apply really.
Heath: And it seemed like a way where I can learn the skills I need and then I can go do those skills. It’s not like I got that IT certification, and then I just couldn’t get work. I was just for one example. So I don’t know. I think at that time I was just like, I want to do something where I still was in that mindset of like, I want to work from home, I want to be my own boss. I have my own sort of independence in that way and the stock market popped up again when I was on YouTube and stuff. I got more interested in it and it seemed like the right time to try it. I’m still young but, I was younger at the time. I feel like, if there’s any time to like take a chance and you know, go for something, it’s now rather than later.
Clay: You don’t know unless you try. Are you willing to share how old you are or is that classified?
Heath: That’s classified information.
Clay: Okay. I don’t want [crosstalk] you to tell me then have to kill me. I don’t want to be buried in your backyard somewhere. I’m always curious, the ages of people.
Heath: I’m 27.
Clay: Oh, nice. You got plenty of time. You’re good to go. What is your degree in? Also out of curiosity?
Heath: English literature.
Clay: You made a comment and, before I forget to just call you out in a positive light, earlier you said that you were more of an introvert. You kind of liked to just do your own thing. Mind you, I’m the same way.
Clay: I mean props to you for publicly putting yourself out there like this. So for an introvert to come on a podcast, not listened to by millions of people, but you know, listened to by quite a few people. That’s some good stuff man. So that’s the only way you get better, is to put yourself in awkward situations. And hopefully I’m not making this too awkward for you, but if I am, you’re playing it all perfectly. Because, this has been a great talk so far.
Clay: Now you get back into the market and where the small caps come about? You determine, I got the entrepreneurial bug, I want to just try to be my own boss. I’m assuming you just started to dig in with the research or whatever. I guess pick it back up from you getting that entrepreneurial bug and wanting to be your own boss.
Heath: Right. So of course you know, money is the biggest issue. So I don’t have, and I didn’t have and I still don’t have $25,000 to pass over that PDT rule. I got to trade small caps at the time I didn’t. I wasn’t aware of futures or options. I had to trade small caps and I had to go offshore, which was sketchy, and to try to trade. And I did purchase an education through Ross and I sort of learned his scalpy type of breakout trades. I was successful for about a week of trading live and I blew up my account.
Clay: Well first off.
Heath: I guess I went pretty quickly through all that. But anyway, I don’t know.
Clay: That’s fine. I don’t mind that at all. Sometimes it’s best to have a top down overview and then I can always circle us back to certain points. I do want to bring up one thing though which are futures and options. Is that going to come up at any point in the future? No pun intended. In the future of the conversation here, or no?
Heath: Yes, I actually… futures will.
Clay: Okay. All right. So then…
Heath: I’m trading futures right now.
Clay: Okay. Excellent. You made a point about that. But knowing that this will come up soon and in the future, that’ll make sense. I know what you’re talking about and we’ll just leave it at first names because the individual, you mentioned sometimes, I mean they’re… And I’m not saying you’re going to say anything negatively or anything like that. So you purchase that education and I know what small caps or you buy the breakout. But did you say it was a within like a week and then like the account was gone?
Heath: Well it was gone. I lost about $900. Then after that I was like, I got to shut this down before I lose everything. I sort of shut myself down on it. I was trading in a simulator for a month, and that was recommended if you’re profitable for a month, to switch over to a live account.
Heath: I was profitable for a month, realistically trading about a thousand shares. I went to live and first three days I made money. Then the Thursday I lost a lot. And then Friday, I lost more. After that I was like, I’ve got to shut this down. And then of course, with an account that small, I’m not getting, my leverage and my leverage had been brought down a lot because I had lost about a thousand dollars in it. So I couldn’t take. I had margin restriction is what I’m trying to say. So I couldn’t take the same sort of thousand shares I was trying to take. And that’s probably a sign that I need to stop and figure this out. Maybe go back to the sim and regain some confidence and then try it again.
Clay: Was this one of these situations where you only had access to the simulator for a certain amount of time and access to the course or whatever or, is this like a lifetime type membership deal?
Heath: Your membership was a year.
Clay: Okay. And that included the simulator?
Clay: Okay. And where did the thousand shares come from? Why a thousand shares?
Heath: I think that was based on how much I had in my account. And I think that was probably the max share size I could take with the amount of money I had in my account. So I tried them
Clay: [crosstalk] What I’m hearing and, in hindsight you probably realize this, but brand new trader and literally your position size is maxing out your account. Is this what you were taught or is this you kind of breaking against the rules of what you were taught. Right now, oh yeah, and on small caps, we have a new trader who’s maxing out their account in a one position on a small cap stock. Was that you breaking the rules of what you’re being taught to do, or is that just basically what you’re being taught to do?
Heath: I was not taught to do that. To be totally honest, that’s not how I was taught. I was taught to slowly scale up. I think what happened is that I got overly confident at the sim. I think I had a 20 day green streak. I was ready for this. I’m going in. I’m going to scalpel breakout, I’m going to hit the bid, I’m going to take 10, 12 cents. I did that and then I didn’t do that. And once it went the opposite way, all my stopping out of the trade, it didn’t work. I was like a ‘deer in the headlights’, typical type of a attitude for a beginner trader. And I can hear everyone laughing at me right now.
Clay: No. The only people that laugh are people that have either never traded, or they just feel really bad about themselves so they need to laugh at others and tear those down to make themselves feel better. But at the core, they’re the ones that are really, really bad. Listen, you’re talking to a guy that thought he had wasted his money on an engineering degree because, he was going to get rich on a stainless steel penny stock company. It doesn’t get any dumber than I am. So there is nobody laughing except people laughing at me. Let me ask this way. I’m assuming you were taught some sort of form of risk management?. I guess what I don’t understand is, I’m assuming you, when you started losing money, you bought the breakouts, but, or what you thought was going to be a breakout, but it never broke out. Is that accurate? And then it just went against you?
Heath: Yeah, exactly. And, I was taught risk management. I guess I didn’t understand it or I didn’t want to believe that something would go against me quite the way it will, or quite the way it does sometimes. And then you sit there and you’re like, I’ve got to get out of this trade. And then you just keep on letting it go and go and to get to the point where it’s like, okay, I really need to get out of this trade.
Heath: And then you hit the bid and that’s it. But I was taught risk management. I just didn’t, pay attention to it. I was more focused on consistency and to be fair, I was actually very consistent for that time. I guess the house of cards fell when I couldn’t stop out with the live account.
Clay: In hindsight, when you look back to your best of your memory, and you’re doing that simulator in 20 days in a row, I’m assuming you realize that there is a massive disconnect between your emotions, when you know the money’s not real, and then when the money actually was real. Is that a fair observation?
Heath: Correct. That is a fair observation.
Clay: I bring that up not to kick Keith or anything but, as a listener, just something and I realize “Whatever he thinks Clay”, they’re just haters. “They’re jealous that they can’t produce the results I am right now.” Listen, all we’re saying is if you’re producing fantastic results in some sort of simulator or a demo account, you know what maybe that is, but just also consider the opposite side of things that maybe it’s not.
Clay: Maybe you’re having all that success because you aren’t actually feeling what it really feels like to have actual money in the market. That’s all we’re saying is, there is a huge disconnect between simulator trading and then trading with real money. At the end of the day, if you want “Oh you guys are just haters”, fine. Then go do what I did. Go do what countless other guests have done. And all I’ll say is just please start with a smaller amount of money because you’re going to quickly realize you have a bunch of crazy voices in your head that’ll show up.
Clay: So you took those losses and, I’m not bashing anybody, but the problem with what you’re essentially trying to do is, when things don’t go your way, by definition, even with the risk management where things should occur, that’s like wiping away a huge chunk of your account. Small caps are so volatile that where you’re supposed to manage risk and put stops, all it takes is one or two to go against you and it can put a hurt on you. Now, if you have a much bigger account, then yeah you can absorb a couple of those and then work your way back up.
Clay: Who that stuff is being advertised to? Smaller accounts, smaller price stocks. Yeah, it can happen if you get a couple, but if you get a couple that don’t work out then I can see how you quickly become a ‘deer in the headlights’. You’re like, Oh well I should be getting out here, but wow, that’s how much I have to take a loss at? What happened to risk management. My risk is I’m down that much and then all of a sudden, it needs to come back up a bit cause I don’t want to manage risk here. That’s X percent of my account. Your knees will buckle in those situations. I’m assuming that’s kind of what happened? You saw those losses and even where you should’ve gotten out, they are probably pretty big losses that were flashing at you. Does that sound familiar at all to what happened or are they really, really small losses and you’re just like, “No, I’m going to just break the rules.”
Heath: No, we’re talking about big losses for…
Clay: Where you should have gotten out even, right?. Let’s assume you had been a disciplined trader and followed the rules that you were taught, even at those levels it was already a big loss?
Heath: No. I don’t think so.
Clay: Okay. So you just got flat out stubborn that “I don’t want to take a loss.”
Heath: Yeah. If I remember correctly, that’s what was happening. And really for these trades, what I was doing was, if I thought that it was going to break up price, I was going to get in. Then, if it didn’t and I was just going to have to get out immediately. But, you don’t get out immediately, then it just starts. There’s like a bit of a flush and then 20 cents is a huge loss.
Clay: Exactly. And that’s what I’m getting at is with those small caps [crosstalk 00:31:56]. And that’s right. So it’s a situation where, and here’s the tricky part, and I’m just throwing this out as an example. Let’s say Heath is watching $10 and he buys it at nine ninety-seven and it goes to ten-oh-two and then it pulls back. Then it goes to nine ninety-nine. I’m assuming Heath you were taught as well, you don’t want to freak out on that. Sure you wanted to buy ten and it broke above ten but it dropped below ten, but you don’t want to freak out cause it’s only a couple of pennies below ten. So you got to let it work itself out. Then you’ll have some that eventually worked their way back up above ten. But Heath’s point, which makes perfect sense is “Well sometimes it’ll drop below ten to nine ninety-seven and then nine ninety-five and then well, it’ll go back up. Goes back up to nine ninety-eight. See I’m right.”
Clay: And then because small caps in their very nature all of a sudden flush, now it’s at nine eighty and you’re thinking, well what am I supposed to do? I don’t want to get out way too soon because, sure you can’t expect something to break and then just fly up to the moon. There’s always going to be some little up and down action. But if all of a sudden one of those down movements get you, then like you said, you’re down twenty cents and from a small cap percentage standpoint, Oh wow. That’s a big bite out of my account. I better hold some more and hopefully it comes back up. And then all it takes is a couple where it doesn’t.
Clay: And that’s game over. Is that right? Because I’m assuming you’re not taught where just because it temporary drops below your breakout point, it drops below where you bought. You don’t automatically just sell. Right?.
Clay: Because you’ve got to give it some wiggle room. But that’s where the wiggle room…
Heath: You got to let the trade breath and small caps, you don’t want it to breath at all.
Clay: But that’s so much easier said than done because the breathing range is quite a bit. You can just turn it into a chop Fest. That makes 100% how you could be following the strategy, but there’s just so much gray area. I mean, it’s one thing to say, “Well, you’re supposed to get out there.” “Okay, I realize I’m supposed to get out there. But when there’re small caps and it happens in a blink of an eye, well my account can’t happen, too many of those blink of the eye type movements.”
Clay: It sounds good in theory, but there’s a lot of gray area there. Which, sounds like you experienced. All right, you have the small cap. You’re like, all right, this is not working. I need to be done. So where did you take it from that point?
Heath: I froze my account. So I still had funds in it and I could trade and then again, but I wanted to regain some confidence and really try to prove to myself again that I could go back with real money. I traded in the sim again for about two weeks and there’s two weeks after, I was profitable. Yeah.
Clay: Amazing how that works out.
Heath: Yes. And then I got back into a live account, but I didn’t feel right.
Heath: It didn’t feel right to trade it out. I don’t know. I couldn’t pull the trigger on any of the trades and I was like, this isn’t working. And so I haven’t gone back. I haven’t traded in any small cap sense.
Clay: Well, good for you. That’s a voice that a lot of people just ignore and then their account goes to zero and they’re like, “I probably should have listened to that voice that was telling me something just doesn’t feel right.” Maybe you can’t answer this but, but what didn’t feel right? I mean you were just profitable in the simulator, and then you go live. Can you describe the feeling. What did that feel like? What was telling you that something didn’t feel right?
Heath: I think I was just way too anxious and nervous, sweaty palms. I mean I had my hands over the hotkeys and they were shaking. I guess, one hand it’s,
Clay: Was it money you could afford? Were you trading with your rent money?
Heath: No I wasn’t trading with rent money or anything. That’s not to say that I had a bunch of money to just sort of throw around. I took it very seriously. I still take it very seriously. And it could be a mixture of stage fright.
Clay: Well I think at that point someone was telling you… And this is the problem I have with people that try to force feed strategies on people because, we’re all different. We’re all different creatures of emotion. We’re all different creatures of risk tolerance. Sure we all have the same emotions, but our emotions are all different under different circumstances because, risk affects us all in certain ways.
Clay: For example, Heath may love to go skydiving, not me. Does that mean that Heath is right and I’m wrong or vice versa? No, that just means I have a much more conservative risk tolerance than what he does. And the same is true for trading. So I think that kind of somewhere in your gut you’re saying, “You know, I don’t feel comfortable with this because I don’t think this fits my risk tolerance.” And I’m not saying the strategy Heath was taught does not work for the person that taught it to him. But, the person that taught it to him is not Heath. Therefore, who knows if it’s going to work for Heath because they are two different individuals with two different risk profiles from a mind and psychology perspective. So if I had to guess Heath, I think that’s why you’re pretty hesitant because something was telling you “I don’t quite feel comfortable with this.” Which is good. I’m glad you listen to that voice.
Clay: So where did you go from that point? You tried and you know this is not going to work out. Pick things back up from there because
Heath: No. This was all my small account. That all place this year. That was back in February and March. What we just went,
Clay: Which is kind of crazy because, where does time go? That’s actually like nine months ago. That’s crazy.
Heath: And so from there I was well, a lot of these small cap stocks, they go up and they always return to a very low price? So I was well, let’s see. I’ve never shorted before. Let’s see how that goes. What I didn’t know at the time was that you have to buy the locates. You don’t just have shares to short. Something I wasn’t actually aware of.
Clay: Yeah. And I thank you for bringing that up because that’s one of those hidden details that they don’t necessarily always tell you. Those people are like “Hey, just short small caps. They always go back down.” Well yeah they better go down a lot because for you to get profitable, it costs a lot from a fee and commission perspective cause Heath did the same. You need to pay, just to borrow the shares in the first place.
Heath: And not to mention with these offshore brokers, you’re paying about $10 to even buy and sell. So you can have a small account like that, to just buy once and so on. So it’s about $10. It’s all very pricey. It all adds up very quickly and you have to have locates. I didn’t know that. And I was basically just trading in a sim again. Shorting stuff. I feel so silly saying all this, but it seems very easy. Just be like, okay, it’s going to go up here, it’s going to double top and then, I’m going to slam it and it’s going to come all the way back down and then, that’s going to be that.
Heath: I did that. And then after maybe two months went by and then I realized after watching more YouTube videos and stuff that no, you have to actually have to have locates on these. Some don’t have shares available to borrow, some do. And then, this is getting really out of hand because you’re going to have a couple of brokers to do this. Some brokers don’t have the shares to borrow. Some do.
Clay: I’m so glad I know where this is headed in terms of futures trading because, what you’re describing is absolutely right. I see it all the time. “I got like 19 brokers and, I have some in the Caribbean, some in Somalia and they got so much stuff going on and it’s all in the name of ‘I have a small account and I need to avoid this stupid pattern day trading rule’”. And I just want to say, “Don’t you know there’s a better way, don’t you know there’s a such a clean way out there”, which as I said, I’m glad to know that’s where we’re heading. Sounds like you never did actually short any small caps with real money?
Heath: No, I couldn’t do that. No, I never did. And then I did actually look into some large caps but very micro size, I guess you would call it. And I had some funds set away for that and of course I was still offshore. I have to be, if I want to get around the PDT. But, something didn’t feel right about that either. I opened that account and then never used it and then took all the funds out of it. Then I found options. I took an options course. It wasn’t very good. Then I kind of just skipped over that and then I went to futures and I was like,
Clay: Was this my options course or.
Heath: It was not. No, I haven’t.
Clay: Oh, okay. That’s fine if you don’t think it was very good but, that would just be a mental note for me to receive some constructive criticism for you after the show or, I guess right now. But, it wasn’t my course. Anyway, proceed on.
Heath: It was actually still through like Ross’s team. I had access to a large cap course and then an options course and a futures course. So I took the options course and it wasn’t very detailed. I really came away with more questions than what I had going in. The futures course made more sense to me. It was a bit easier to understand. It seemed a little more similar to stock trading. And then I found the micros and, here we are today. I’m trying to trade to the micro financial indices. Futures.
Clay: Okay. And just for my sake, when did you come across the Clay Trader community? What point was that?
Heath: I came across you back in May. I came across the Stop Save video or the Start Save video. Excuse me.
Clay: Oh man, that’s an old school one.
Heath: Yeah. I think I was probably doing a deep dive on your YouTube page because I was having problems with stop loss. With the small cap trading and you described it as “It’s not really a stop loss. It’s more of a start to save the money that you have. Don’t lose any more of it.” And that was the first time I watched one of your videos.
Clay: I should probably redo that. I don’t know. I always thought that was a good concept but I don’t know, maybe that was totally a failure on my part. And then you sign up for the inner circle, right?
Heath: Yes. Because I hadn’t been in any other trading communities, I wanted to branch out and see what other people were doing. I was insulated in the world I was in. I saw your YouTube videos and then I saw that you had a course, and I saw that you had the inner circle. And I was like, check out that chat room and see how it is. So I’ve been in it for a couple of months, I think.
Clay: Excellent. I know you’re trading the micro futures. Rally quick to the point that I want to make is, way back at the beginning, Heath made the comment of “Well you know. Because I had a smaller account, I thought that I needed to do small caps, but I didn’t know about options and futures.” And what he meant by that and what I want you to consider… I’m not saying this is the answer for you… but, the nice thing about futures trading is, there is no pattern day trading rule. You can trade, especially with the advent of the micro futures as recalled. We’ve talked about them before. Don’t quote me on this. I think they’ve been around for, we’ll just call it a year. They’re very new to the market, but they’re also expanding these brokers because they’re catching on so much.
Clay: My opinion is they’ll be the death of penny stocks. That’s just my opinion. I think penny stocks as a whole are on their way out. When you have these things like you said called, micro futures, where you can get involved for a hundred bucks if you really want to. It depends on the broker and all that. The main core point is that what was driving Heath to the decision of small caps was that, pattern day trading rule is ridiculous. He’s right. 100% is but, I won’t turn this into a government regulation podcast. And then the other thing is, and I don’t have a lot of money. But futures and especially micro futures, allow you to get over both those hurdles. If you are somebody that’s new and you were in the mindset of Heath meaning, “Well I don’t have that much money, I got to go off shore to avoid the pattern day trader rules, so I can trade stocks. I guess that means I have to do micro or small caps, or whatever you want to call them.”
Clay: That’s not true. I’d encourage you to at least learn about the futures market. In fact, I have a free class on it. Its is on YouTube. A Futures Trading for Beginners and then maybe throw in Clay Trader, it’ll pop up on YouTube. Maybe just Future Traders for Beginners will be enough to bring it up. I don’t know if it will, but if you’re interested, I don’t have any ulterior motive here. It’s a totally free class and it’s something that might help you expand your horizons.
Clay: So I guess Heath, back to you. What kind of trader would you classify yourself as? Are you buying breakouts? Are you just doing patterns? How would you classify what you actually try and do? Of course, you’re trying to accomplish making money, but how would you kind of define your type of trading?
Heath: Right now I am day trading, but I’m holding my trades a lot longer. Of course if it’s profitable. I’m holding them a lot longer. My average trade this week was two hours and 53 minutes. So
Clay: Wow. After playing those micro, those small cap breakouts, that might as well be two years holding something for two hours. Wow.
Heath: And I think it fits my personality a bit better. I’m using the… do you want to know what chart? What timeframe I’m using for trades?
Clay: Walk us through. I mean whatever. Whatever you think listeners want to hear. Yeah, I’d love to hear what’s on your chart, what timeframes, what you’re looking at, stuff like that.
Heath: I have just been trading in the micro E-mini S&P 500 and the micro E-mini Dow. I’ve been using the 30 minute timeframe to get into the trade. Whether it’s short or long, because with futures you can trade out of their way and you don’t have to worry about locates or any of that type of stuff. So whichever way it’s going, I’m just going to jump in with whatever the direction is. Then I use the five minute to put in my stops and then my trailing stops. So today… and I’ve only been trading. I trade two contracts. The way I’m doing it is that, I have two contracts going in and I’ll sell one once I’m up about $25 because, that’s my daily goal. Then after that, I set a trailing stop and just let the other one run, if it can. That’s been working out for me.
Clay: What broker are you using? Before I forget.
Heath: I’m using Trade of Eight.
Clay: Okay. Because I can see people saying, “Okay, well what are commissions?” What are the commissions there? For two contracts? How much does it cost you to buy and then sell two contracts?
Heath: It is twenty-five cents. So it would be fifty cents if you’re buying two, I’m fairly sure. That’s fifty cents and then you got to pay a clearing fee and the NFA fee. They have a few little other fees but it’s basically, to buy one contract and to sell it, it’s going to be about a dollar and some change.
Clay: Okay. So you’re looking at right around, let’s call it sixty cents per contract.
Clay: It’s $1.20. That kind of gives you a reference point. Futures are different than options. Because there’re options contracts, but in the world of futures you’re also trading contracts. But the contracts, they are different. They’re a little different. How long have you been trading with the current thirty minute entry point and then five minute stop loss?
Heath: I’ve been doing that. That’s something brand new that I just started this week. And I actually got into some new indicators I’ve never used before. I’m testing it out and I’m trying to use this new indicators. And so far this week, it’s been working. I’ve been involved with futures for about a month and a half.
Clay: Okay. Let me ask you this. What were you doing? Because, this is a new week. This is the first week you’ve been trying this? Is my understanding, right?
Clay: Okay. So what were you doing last week that you stopped doing?
Heath: Scalping a breakout and then, or a breakdown. I was doing that and it was getting out of hand with just the number of times I was trading. It turned out, I wasn’t being very methodical or strategic with my entries. I was just like, this is going down. I know it’s going down. I’m just going to go ahead and jump in and grab 5 or $7 and get out. Doing it like that. It just wasn’t a real strategy. I was more of going with my gut instinct, which is not really trading.
Clay: Well done to you. My account was going to be… You know Heath, with all due respect, it almost sounds like you were kind of just making it up as you went. You fully confessed that and you were well aware of that… I love the way you know “I got to just trade with my gut.” That’s the voice in your head. Ways for you to rationalize. You just saying that you’re making it up as you go. So if as a listener, if you’re telling yourself, “Why just trade by my gut.” No, that’s translation. You don’t have a strategy. You’re making it up as you go. That’s what trading by your gut means in probably 90% of the situations where people say. I’m sorry I cut you off. What you’re going to say?
Heath: I was just going to say that’s true. And it also gets more squirrely when you’ve been trading for a while and you know that you’ve seen a trade go in your favor and you knew you were going to press the buy button, but you hesitated. And, whichever way you thought it was going to go, and you would have been profitable if you would have just not hesitated. It starts to get a bit more squirrely when that those types of things come into play.
Clay: There’s definitely intuition that you will develop. But in this situation, again, the context, which is fine, you’re still basically brand new to the markets. Usually in that case, it’s like you said, you actually didn’t have a strategy and you were just kind of doing what you thought. In all actuality you really, let me put it this way. If you knew something was going to happen, and I have to tell myself this all the time. If you actually truly knew that well, then you would have bought. You didn’t know that. If you did know it, you would have bought.
Clay: But that’s just like you said, that’s the whole squirrely nature of the human mind is, you sit there and “Oh, I knew that was going to happen.” No, you didn’t. If you knew, then you would’ve made money. Right.
Clay: You know if you don’t look both ways, when you cross the street, you could get steamrolled by a bus. That is why you look both ways every time before you cross the street. Because, you know what’s actually possible. I love your candidness. I love you just shooting straight because, welcome to the wonderful world of the human mind and trading.
Clay: Listeners, this is great stuff. This is the stuff that you need to be aware of because this is just real talk. It exists, it happens out there and it’s maybe not the most pretty thing. Maybe it’s not necessarily the most exciting thing to talk about, but it’s the most important stuff. And that’s also why I think most traders fail, is because they only want to talk about the fun stuff. Which is fine, that makes sense. But in trading, you got to talk about the not so glamorous stuff too.
Clay: I guess you’re using a trailing stop. So my question to you, and I’m just talking out loud is, what happens, are you not able to monitor the trade? Is that why you use a trailing stop?
Heath: I got this new indicator I’ve never used before. I’ve never really been using the indicators to this magnitude, I guess.
Clay: Can I cut you off real quick? First off, can I give you my two cents?
Heath: Yes, go ahead.
Clay: Okay. What you’re doing right now, has it been working this week?
Clay: Okay. So my next question would be, why are you looking to add in new indicators to something that so far is already working?
Heath: Oh, sorry. Just to clarify, I was just using the indicator I’m using now for this week and I’m not, I don’t plan on adding anything else?
Clay: Okay. I was going to say, Hey man, let’s tap the brakes. If it ain’t broke, let’s don’t try to fix anything yet, but, all right. That makes more sense then.
Heath: This does show me where I should be putting a stop. So I’ve been doing that. And then I walk away. I have to stop and then I’ll come back to the computer maybe 15 or 20 minutes later to see what’s happened. And usually, by that time, there’s a new place in my chart where it’s telling me to put the trailing stop. So I go in and I change it, then just keep doing it that way. And today I actually had to work two hours in the morning, so I did put a stop and then I just had to walk away. And then, when I came back today, I was still in the trade and then I actually got stopped out where we were talking. I like it that way cause I can just trade. I get in, I put the stop immediately there. If it works, it works. If it doesn’t, it doesn’t. I’m not sitting here staring at the screen. I feel like the longer I stare at the screen, the more emotional I get.
Clay: Amen brother. Amen. It’s a,
Heath: If I could just walk away and come back. Do something else. Come back up here.
Clay: You’re absolutely right. In many cases that is the solution for quite a few people. Why don’t you just set up these sorts of situations, conditional orders or how you’re doing it, where you’re able to just walk away and go mow the lawn, go shovel the driveway, go watch an episode of Seinfeld. I don’t know what you want to do. Just sometimes the best thing is just to step away because, I love what you said. “The longer I watch the screen, the more emotional I get.” Yes, that is 100% true and something that I can relate to for sure. I realize your goals going forward are to make money. Do you have any sort of specific type of goals, any specific type of metrics that you’re looking to hit over the next several weeks, couple of months?
Heath: I’d like to, as far as the strategy I’m using now. I like to do it for the next few weeks to show profitability and then, I’d like to try to switch over to lie of account with the same exact style and go from there slowly. Hopefully I can slowly build this account, because it’s still a small account. And from there I’m not, I mean if we’re talking maybe five or ten years down the road… I actually do have interest in real estate and I knew that you you’re involved in that. But, that was something that I could maybe turn into another stream of income. That’s what I’m trying to say.
Clay: That’s my kind of talk. I like it. Multiple streams of income. I like where your mindset set and, you said you’re 27, so you got plenty of time. Well, I’m looking forward to hearing how things continue to go with the journey. I appreciate you volunteering. Just shooting straight. Telling us how it is. A great talking point with these micro futures. I think that your journey illustrates something that a lot of people now have access to whereas, literally two years ago, a year and a half ago, what Heath is talking about was, was no choice.
Clay: Sure you could do futures, but futures at that point just based on how they work, it did carry a lot of risk and it wasn’t really applicable to smaller accounts because just the way they work, their smaller account could poof, be gone. But since then, you know these micro futures have really changed the game as far as what is available. In my opinion it’ll be the death of penny stocks as more and more people learn about the micro futures.
Clay: Like Heath said, you can make money when prices go up, you can short and you don’t have to worry about locates or borrows or now I’ve got to go off shore. None of that stuff. So I think they’ll be the death of penny stocks. But like I said, my opinion. So Heath, we’re going to move into the fun questions here. Well, not the fun questions, but I got to ask you about the time machine. If I were to lend you the time machine and you could go back to the start of all this and give yourself one bit of advice, what would that be?
Heath: Something along the lines of maybe not trying to rush into anything. And I say that because I felt like I had. I still have a lot of pressure on myself. To say I’m a trader, to say I make money trading. I think I was a little too focused on that when I first started with the small caps. That was maybe some piece of advice I’d give myself. I don’t know if that’s actual advice or not.
Clay: No, that’s good. That’s really good. Because you’re absolutely right. A lot of people, they feel some sort of pressure. “If I tell people that I’m getting involved in the stock market”, I don’t want to then have to make my next followup statement, “But I’m not making any money in the stock market.” So I better make sure that I can tell them as soon as possible that “Yeah, I got involved in the stock market and I’m making all kinds of money.”
Clay: So that’s actually great advice because that little mental trick that you can play on yourself, it will cause you to rush in and go too fast. That was fantastic advice actually. And that’s great stuff. That’s real, real stuff in that I can totally relate to that. Maybe someone that’s never traded, like “What are you talking about?” But some of this stuff you almost just have to trade to experience it. That’s why I’m begging you, just please listen. These are true stories and there’s stuff that you can learn from.
Clay: Now we’re ready for the fun questions. Heath, what is your favorite movie?
Heath: So I was actually thinking about this because I knew you’d ask me. I really can’t think of one. I will say that the last movie I saw that I was really big fan of was the Boondock Saints.
Clay: Oh, that’s old school. I watched that. I don’t know when. I’ve seen it though, but it’s been a long time. Yeah,
Heath: Its 1989 or 98.
Clay: I remember that being the boon. That movie was, I think it’s almost like a cult classic actually. I don’t know if it made like a big splash in theaters, but I remember, I don’t know, high school or college or something. Everyone was “Oh, Boondock Saints. You got to watch that.” All right. First time that one’s been mentioned. Always good to have a bit of originality here. I mean, do you have any like favorite TV shows or anything?
Heath: You mentioned Seinfeld. That’s a classic.
Clay: That is a classic. As far as I’m concerned, if you don’t like Seinfeld, you can move to North Korea or any communist country of your choice. I’m with you there. That is an American classic. No doubt about that. What about food? What do you like? Actually, where do you live?
Heath: I live in Virginia.
Clay: Okay. So what do you like to eat down in Virginia?
Heath: I’ve been vegetarian for about three and a half years, but I do like tacos and the kind is a soy chorizo taco. They’re pretty good and you could pair that with some chips and guac. And that’s a decent meal for you.
Clay: Nice, nice. I always get intimidated when people start talking about pairing foods. I’m more of the barbaric type where I’m just like, wait, what? But you’re sophisticated gentlemen and I can appreciate that. So I’m sure I could learn.
Clay: Are you big into wine and stuff like that?
Heath: I don’t even know why I said ‘pairing’. No, I don’t even drink or anything.
Clay: All I’m saying is that made you sound very classy. It makes me sound like such a Neanderthal. I’m all for it man. That was good stuff. I did get a little intimidated but, all in good fun. I’m all for a pairing. My type of pairing is, peanut butter pairs very well with jelly. That’s about as sophisticated as I get. I do need to up my game in that department.
Clay: And what do you like to do for hobbies?
Heath: I like to skateboard actually and.
Clay: Like ramps and all that sort of stuff? I know very little about skateboarding. I envision it as either you like doing triple axle three 60’s off ramps or, you’re just like casually strolling down the street. But I have a feeling that’s not really quite how it necessarily works.
Heath: Somewhere in between strolling down the street and whatever you said before.
Clay: Don’t ask me to repeat it because I have no idea what I even said. I think it had something to do with Kristi Yamaguchi in a triple axle? That’s what I’m trying to say.
Heath: I think that’s ice skating, right? Like a triple axle.
Clay: It is, but I don’t know anything skateboard and I got to throw something in. Do you know who Kristi Yamaguchi is?
Heath: There is no ice involved in skateboarding? No, I’ve heard of the name, but no, I don’t know who that is.
Clay: Okay. At least you’ve heard of the name. I was going to say, I’m 36 now, you’re 27 so… at least you’ve heard of the name. That doesn’t make me feel too old then.
Clay: For you listeners out there, I don’t know, get hold of me. Have you heard of Kristi Yamaguchi? Probably not, but I’m getting way too old.
Clay: All right. Last question though. Three words. These three words need to be what you would associate with a successful trader. What would those three words be?
Heath: Everyone says discipline. Which I have to agree with. Timing and… I’m blinking here so I don’t know.
Clay: Patience. Because you said you wish you would have slowed down. So patience. I like timing. That’s really good because that has a lot to do with it. Then discipline, tried and trued. There must be some truth behind that one if everybody like you said seems to say it but, well man this was a good time.
Clay: I had busted your chops a little. I’m proudly. You climbed the insurmountable mountain of me thinking you are a jerk. You are not a jerk. You are actually a very sophisticated gentleman with your food pairings. I had a great time with it. I’d love to have you back at some point in the future so we can, no pun intended, hear how your futures trading is going and get an update on things. So Heath, thank you very much for hanging out.
Heath: Yeah, thanks for having me on.
Clay: Definitely going to have you back. Before we all part ways, for you as listeners, a final few things.
Clay: First off, if you’re listening on iTunes, please leave us a rating and especially, if you leave us a written one, that would really go a long way. Also, subscribe. We are now on Spotify. Look us up there too or, just listen at the site itself. And if you are listening at claytrader.com on the show notes page, then you are more than welcome to reach out to us. There’s a little chat box in the bottom right hand corner. Questions, comments, constructive criticisms, suggestions, whatever you want. We’d love to hear from you. It’s always fun to have somebody start off the conversation with, “Hey, I listened to the podcast.” And then we just have a conversation from there. So any support is always appreciated. So thank you again to listeners. Thank you to Heath.
Clay: We will see you back next week.
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