228: Lance Breitstein – The Ultimate Day Trader, Pt. 1

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Ladies, gents, I get the feeling this episode is about to be a new favorite for some of you. Welcome to episode 228 featuring Lance Breitstein. Lance was a senior trader at proprietary trading firm Trillium and manager of the Chicago office, a secondary location from its headquarters in New York. He has trained, mentored, and refined dozens of top discretionary intraday traders, while arguably being Trillium's best trader in the firm's history.

This episode was recorded in 2019 prior to Lance going on to set the firm's all-time PL record. with landslide wins as top trader in both twenty twenty and twenty twenty one, after consecutive eight figure years. At the beginning of this year though, 2022, Lance resigned from Trillium so he could better focus on alternative growth opportunities and philanthropy. His resignation also means that we are now able to release this interview after having withheld it at the firm's request.

So it's important to note that this podcast solely reflects the views of Lance and is not representative of Trillium's views. Now before pressing record on this interview I asked Lance how long did I have him for? He told me he had blocked out about two and a half hours, and I laughed, as I was sure that we wouldn't need that long. But sure enough, without any trouble, we went on to speak for over two hours.

Therefore, I've decided to split our conversation into two parts here. This is of course part one, and part two will be released in the coming weeks. So please make sure you subscribe to Chatwith Traders wherever you're listening now. That way you won't miss it when it drops. And follow me on Twitter too for updates at ChatWithTraders.

You may also like to note there will be a part three at some point in the near future, as Lance and I have already planned to do another episode to fill the gap between when we recorded this to now. So in this first part you'll hear Lance speak about his slow start and early development. And one bit that I found particularly interesting was hearing about how he seriously considered giving up on trading.

He also goes on to speak about trading around capitulations. Now although Lance trades various strategies and plays, he's become very good at understanding this market phenomenon. There's also plenty more packed in, but we're gonna get right to it. This man is an absolute weapon and I'm certain this episode will motivate you to do better. Clear any distractions, get in the zone, listen from beginning to end. Here is Lance Breitstein.

Obviously I know you as the trader you are today, but I know you had quite a long learning curve. So I'm very interested to sort of find out more about that. Just before we go into that too far, just to put some perspective around this, how long have you been trading for today? Sure. So I believe this is I believe we're into my ninth year at this point. Okay, nine years. And it's all been uh short term equity trading.

Okay, so you never experimented with any other products or any other styles. That's just the first thing you came across. Yeah, may maybe in college I've I've fooled around with options here and there. I've done some futures on my own and and definitely tinkered here and there, but um as far as professional career. It's it's been all focused on just discretionary uh short-term equity trading.

Okay. And those nine years, have they been as a prop trader or were there a couple years uh prior to going into prop trading where you were um just trading a retail account? So all all prop trading, all with trillium where I'm I'm one of those rare people where in in college, probably even maybe by my sophomore junior year, I I had never known anything about stocks, but I somehow s uh started to read about it and the more I read, the more I was like, wow, this is this is

really what I wanna do, kind of the qualities that allows you to excel. I think I have this and kind of the the ethos of the job really lined up for me. And so pretty much right out of right out of college I worked for Trillium and I've been there ever since, which I think becomes more and more rare these days when people tend to really hop around a lot with with careers of all kinds.

Did you have like going into professional trading, was that something you had intended on doing while you were at college? Or did you have something else in mind? And this just sort of came up. I I think originally going to school I knew I wanted to do business for n for probably no special reason other than it sounded interesting and exciting and Maybe the beginning years I would have been open to entrepreneurship or maybe accounting or maybe finance or maybe this or that.

it it was some I can't even tell you the name of the book. It was maybe it was something the little book to stock market investing, something like that. I I picked up some book. n knowing pretty much nothing about the stock market, I'm like, whoa, this this sounds kinda cool. Like

how can how can you take money and just compound it into more money? That seems that seems, you know, if if you're gonna learn a good skill, that seems like the skill to know. And the more I read, I just became a a vacuum where

I it just got me more and more interested and more and more passionate that what the career offered was something I was I was interested in. And so probably even by my junior and senior year, I was I was very, very gung ho, like this is this is what I want. This is what I'm gonna go for.

Okay, well maybe we should talk about your first twelve months um once you were crewed out of college uh and you started at the firm. What did that look like? Sure. So and I think this is interesting enough. even how I started the way I started is we had a little satellite office in Princeton, New Jersey. And the main office, the main trading floor to this day is in New York City. We've got over a hundred traders on that floor. I'd imagine it's one of the largest prop trading floors. Um

out there just because the industry is pretty small at this point. And Our top trader at the time, who had been top trader for probably ten years, uh he had kids and he was tired of the city life. So he opened this little satellite office. And fresh out of school, almost everybody wants to work in New York City. They want the big apple, they want the excitement, they want Wall Street. And so our top trader is out in Princeton and he was willing to take on and train two guys that year.

And to me, in my mind, the opportunity to train under the best trader at the firm and the most winningest I mean, to this day from from even ten years later or so, knowing the industry, he still might be one of the most winningest day traders m I've I've ever met, probably by even a long shot still.

And so for me to know that that opportunity existed, it was no questions asked. I want to apply to work in that office. I want to work under this guy. I don't care about this the city. I don't care about the social life. All I wanna do is give myself the best shot at this job and Incredibly to me, not that many people had applied. Everybody wanted to be in Manhattan. And so from the very start, I had that that one-track mindset where it was, I don't care about that stuff. I don't care about

um the the the the glamour of of Wall Street. I just care about making it. And so I started at this small It was just it was almost like a cupboard of an office, the exact opposite of what you think of is this huge glamorous trading floor. It was just meme, another guy that started with me and uh and our boss training us. And Essentially I was living in Princeton, New Jersey. I knew nobody down there.

it's not much of a party town. Like, yes, they have the college, but it is if you're a young professional, it's you're just alone out there. It's a lot of families. And most people probably would have been driven nuts by it, but For me, that was even even more perfect because that just meant I had no distractions. I wasn't distracted by going out

Um, drinking on the weekends. I wasn't distracted by the appeal of trying new restaurants and bars and all sorts of things. For me, it was just that one track. um obsession of like, let me sacrifice and do everything I can for these these first couple years just to try and make it over that learning curve.

How helpful was that? Obviously, everyone, as soon as they hear that you were able to train under this guy who you still consider to this day to be um just an incredible day trader and maybe one of the best who you've you've ever met. How much were you able to take on from that and how helpful was that exercise? That's something I think a lot, think about a lot, is what would I have been like under a different trainer? And the truth is you you never know. Um and and really what I attribute

Certainly what I attribute to him really comes down to two things. First of all, at least at our firm, you get really close mentorship with that. that trainer setup. So he was the person essentially sharing his system with me, why he did what he did. And he was largely essentially just a technical trader. Pure technical analysis and the level of attention and detail that he put into the job because he he learned from scratch. He had

he learned within the firm, but he had no mentor like like like he was himself to me. So much that he was trading through and his system was developed through his own own hard work. And I I I remember even He would just have notebooks upon notebooks upon notebooks of printed out charts.

And these charts would be dissected to the smallest detail. What what the first bar you know, he would number all the bars and he would write up the details and the implications of of all these nuances. And So at the least I have him to thank for a lot of the the basics of of my lens. Because to today I do all sorts of trading, but it's all from the lens of of technical analysis as well. And all my trades are structured that way. And I view that as essentially the the psychology of what

what the market is saying about a stock. And so that was beneficial in that I was learning from a a big time Michael Jordan. Um I was just learning his system and seeing it firsthand. But then I think also maybe even more important because the reality is within within Trillium, everybody has has Edge and tons of other trainers have Edge. But w what was very unique was I was essentially sitting next to

one of the largest day traders, you know, that that in the industry. And you could see the traits that made him so great. And even simple basic things like if you were if you were up $2,000, you weren't up two thousand. You were just up two. If you had fifty thousand shares, you weren't it wasn't fifty thousand. It was just fifty. You know, we were thinking in thousands. You know, he would he would really make sure to train the mind.

without those limiting beliefs. He had the mindset, if if somebody else can do it, why can't you? Why why can't you get this this size? Why can't you be the whale in the market? And and even all those I think probably by the time I started training under him, he must have been maybe maybe ten, ten years in or so himself, I guess about where I am now. And he still just had That

that respect for the market, that passion and and was still trying to just say to himself, okay, what can I do better? What can I what can I do with with downtime and when it's slow? How can I how can I better things? And that Most Just seeing a freedom of limiting beliefs and seeing the person next to you get size and

being able to see somebody make as much money as he did and just say, Hey, why can't I be like that? That is almost the most valuable aspect, I think, to a lot of training and and the the benefit of having that mentorship type training.

Do you put it down to like this experience? um and and working under this trader. Is that where because I know you as a person today, uh you're very focused on improvement, growth mindset, getting better and better each day. Did you have that mentality to some degree before uh mentoring under this trader, or is he largely responsible for for pushing that onto you?

I think I always had that mindset to some degree. I was always And and especially as I've been doing this for a while, I I definitely like trading in stocks, but I think my my ultimate passion might actually be just self-improvement and kind of optimizing and refining the system that is your own life.

And right now, really, all you know, I spend so much free free time just constantly reading the latest books, the latest literature. It's it's kind of been like my lifelong obsession. So I would say it it always was there, but he definitely applied a lot of it to the to the realm of the stock market and and just knowing like the way he would he would systemize different things where if if you were to take different plays, he would really systemize what is one extreme look like

Just just very basic systemizations. For example, obviously like Liquidity is way better than illiquidity as far as trading goes. And if If you're trying to get size in something You know, a large market cap more liquid stock is obviously going to be more safe than a lower market cap illiquid stock. And the same way of using these extremes to really apply to to different trades and different chart patterns.

Um he he definitely had dissected a lot of that um pretty well. So it was really seeing taking that interest and I guess seeing how it can get applied so well to to stocks and just trading in general.

And I guess the question I was trying to ask you before, but I um couldn't really get it out properly, is Those first twelve months or however long it was, uh were you Were you profitable fairly quickly because you had access to this particular trader? Like his trading ability did that rub off on you? Ah, so that's yeah, that's a good question. So I

was one of the slowest learners in my class. I was not I did not have a profitable month for my whole first year of trading. Um not even close, I don't think. And incredibly enough, despite having access to to this learning environment, Um for for various reasons I was I was a slow learner. I think in I think naturally I'm much more of a a thinker and more reflective. I'm not good at quick decision making, which is essentially the opposite of

Of day trading and certainly the stuff I do now. And I think it just took me so long to really refine and also learning under him. was also in a way just just drinking out of a fire hose, where here was some guy that it was doing so many strategies and processing so many factors and so many nuances.

That in order to build up profitable edge at those strategies and incorporate all that, it just took a lot of time. And What was interesting along that that path was And I'm sure much of this was to his frustration, but I was I intellectually understood everything. The psychology of what he was teaching me made sense. The technical analysis of it all made sense. But

actually executing in real time w it just it it was just the endless struggle for me. And where I think I took things from a learning perspective the next level. And where I think my kind of uniqueness is, is whereas he had systemized trading, I kind of became an expert in in almost like meta-learning and how to go about learning. And I really took his system and broke down, hey, what's the most effective way for me to learn all this?

And once I started systemizing the learning process and thinking about, okay, what's the easiest money out there? Not necessarily the biggest, not necessarily the the the the best money, but what's the easiest layup? What's the most replicable pattern? What's the most replicable play that I've seen a couple of times? Where can I really build my chops on something very, very easy?

And once I started systemizing how to go about learning and improving, that's when I really, really took off and things got pretty parabolic for me pretty quickly.

Okay. And how far into your trading career do you think that was? So let me think. So I I probably w so I was negative every single month for the first year. I then had a couple positive months. over the next six months. But then going into that second year milestone, so around the twenty-four month mark, that's where things started to pick up and I hit my hundred K milestone. So in our firm,

the hundred K milestone, which is Net P and L, is when they really kind of say, Hey, you're you know, you're no longer a rookie, you're all grown up in our eyes. You're you're now a man. Little boy became a man. And uh so it took me two years for that.

Now here's the crazy part. If it took me two hundred sorry, two years to hit that hundred K within within probably two or three months after that, I hit my two hundred K. And even I think by the end of that calendar year, I was I was probably putting up hundred K months, um, where it really just did scale so quickly for me because I I almost equate it to to the poker table where if you have the the fundamentals down and if you've kind of gained edge and you're doing things well.

with that edge, adding size and scaling can actually be one of the easiest and fastest parts as as long as you kinda stay consistent with with strategy. And and so for me it was It was one of those things where once I built that confidence and got that positive feedback loop, you know, I just I just took off from there and and I never stopped working and I never looked back.

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Would you contribute some of that? that rapid growth and PL to your own confidence as well. Like as soon as you hit that hundred K, it was almost like, uh, or maybe not as soon as you hit the hundred K like on that day, but as things started to build up, you feel like you became more confident in your own trading ability, was that did that play a factor in it or not so much?

Oh, a hundred percent. And I think a lot of people always ask, was there some magic moment or was there some turning point? And Some people do have that moment, but it it wasn't for me. I think for me it was each day when you try and improve each day and be that little bit better.

You make some small changes. So maybe on one day you avoid that little loss you would have taken. And maybe that that next day you're like, oh, I recognize this. You know, last time I made a hundred bucks in this. Now I'm gonna try to make two hundred or three hundred. And it That the aggregation of all those small little changes you make over time that eventually lead to, hey, rather than having a negative one hundred dollar day, I made three hundred dollars today.

And that positive feedback then compounds, where then you say to yourself, hey, like I remember this this pattern and this setup. I made 200 bucks last time. Like this was great. This was killer. You know what? Like I'm feeling ballsy today. I'm gonna make I'm gonna try to size it and really try to make 300 bucks. Once you get that confidence it

And I mean I I've I've I think it's true to almost any domain that when you build through small wins, it it really does snowball. And then the beauty of sitting next to my trainer was you might be getting 200 shares, then the next time you get 400. But then once you start doing it consistently and doing it well, you're looking at the guy right next to you. And when you're when you're puffing your chest out because you have 500 shares.

The guy next to you is one of the biggest traders on the street and he has fifty thousand shares and you say to yourself, like, fuck, like I've got so much room to go, like I should have really had a thousand.

And that really just catapulted things so much quicker when you're sitting next to something like that. And and you just see the the depth and and how how far you can take things um to the extreme and And you know, again at that you know, even with online poker, if you start winning it at the at the one dollar, two dollar table, go into the five ten, then the ten twenty and the fifty one hundred, you can you can really do that ramp so quickly, is especially in trading because the

The players don't really get any better. You're playing against the same players, but you're just adding more size. So it's almost easier than in poker to uh to ramp that up. You know, accounting for a slippage and whatnot. That's the only factor. Mm-hmm.

Now I feel like we might be getting a little bit away from this, but I just want to go back a step because When uh we had spoken prior to uh this conversation we're having right now, uh you had mentioned to me that there was a point where you had considered quitting and giving up on becoming a trader. Um can you tell us about that moment? Yeah, that was yeah, I definitely skirted over that and So essentially for me, um

Back then at at our firm the salary was a measly twenty six grand, which is uh, you know, barely enough to keep the roof over your head. I had student loans, I didn't really have other sources of of money to help fund my living. And I think after a certain amount of time you start to ask yourself, like, hey, like I really love this job, but I'm putting all this effort into it and I'm not really seeing

The light at the end of the tunnel. And you start to have that doubt and start to question yourself and ask, can I do this? Do I have what it takes? And it gets a little bit scary because you don't know if you're gonna make it out the other side. And that's especially with retail traders, I think that's what can be so dangerous and so tough is how much time and money do you invest into

into your passion. And the reality is life has an opportunity cost. I turn down a job at a at a bulge bracket, a top bulge bracket bank, sales and trading, I would have been in New York City earning, you know, six figures a year right out of school. Like life life would've been great and there I was just alone in Princeton, just

just blood, sweat and tears, putting every hour of every day and and just every breath and thought into trading. And after a year, when you're at the back of the class and you're saying to yourself, Man, like may maybe like my heart's in the right place, but I just don't have what it takes. And I think I think it's a rational, real conversation. You know, you you gotta be a you gotta be a nut job at some point to just

not question things when when you don't see any results and when you put s I've I've never worked like that before and I've never I've never struggled like I did. School came easy to me. Any struggles in school, if I just studied a bit I'd I'd I'd ace all the exams and if I uh w whatever the case may be, I had never really

hit a brick wall like that where I was just towards the back of the class at something. And so sure enough, I was reaching out to my contacts and and I was interviewing at other places. Um I think I interviewed a at like D. E. Shaw and some some other firm, I don't I don't remember and and thank God those places didn't g give me a job. Yeah, thank God I botched the interview somewhere, um, because that would have been the worst mistake of my life had I left. And

So many people do ask, like, when do you give up? And I think the big differentiator with with myself was even though I was not making PL. I I intellectually understood things and I was still making progress. I was just making progress at a slow pace. And as one of my favorite books, Atomic Habits would say, it's like that boiling pot of water. You might be applying all this energy and all this heat, and that water is heating up.

Um, but it's only until it really reaches that breaking point where it starts to boil and you you can't really see that underneath the surface.

Um, so I think sometimes you just need to go by the fact of is is this what I love and do I at least see enough progress and set very small discrete goals. And it was one of those things where as I was interviewing in in the spring of that that next year, I I had I was speaking to some of the other guys in my group, um, some of my other friends, I was like, what do you what do you think?

And a couple guys were like, trust me, just stick with it. I can tell you get it. I can tell you get it. It's gonna be a big mistake if you leave. Like maybe just set some some time stops. Hey, maybe I'm gonna if I don't do X by the second year, I'm gonna be out. Or if I don't have

a couple positive months by two years in, I'm gonna be out. And so I think somewhere I I started to I was in I was definitely on the ledge where I was interviewing and I was setting that stop where it's like, hey, if two years in I don't have some positive months and some glimmers.

I I as it's much as much as it will break my heart, I I gotta go. And sure enough in that spring while I was interviewing, um, there is this there is this technical pattern that that my boss just loves. It's it's kinda like It was just essentially an exhaustion gap. And he's super nuanced about which ones he gets involved in. And this was one of those like just once a year, twice a year plays where the pattern was so perfect and

pretty much it was something I had seen a couple of times and I just I just piggybacked with with with my boss and and I understood the pattern. I saw the pattern and that was the first time where I really executed for size. And I think a normal day for me, a a good day, a good day was probably one grand.

And I think I maybe put up like 11 grand that day and I just said, holy shit, like I can do this. Like I really can do this. Even if this only happens a couple times a year, I can add size to this and I can replicate and do this. And that if there was any turning moment for me, I guess it was that trade where It was good enough and it was slow enough that I could process and I could connect the dots, and I just knew like this.

This is a really good setup. And I just put the size behind it. And I just knew, like, Lance, you might not have that much time left. Like this might be one of the best things you see in in your limited months left. And if you love this, like now is the time to just just swing hard and and that really did buy me a lot of breathing room for sure.

Do you think if those two years had come and you hadn't uh put up a few positive months, as you mentioned, that you would have left? Yeah, I th I think I would have had to because I love trading, but you can also scratch that itch at other jobs. And I think there was the very real fear where you you have retail traders or other traders or all sorts of people.

and in on or even entrepreneur is because I was also interested in entrepreneurship where you see people with massive opportunity costs sinking in their their time and money And you need a stop, much like any trade. A a trade is a decision of of risk and reward and It's a very dynamic calculation, right? The the r the risk is always changing, your opportunity cost is always changing, that that re potential reward. But most importantly, the probability of success is always changing.

And so when I started that job, my probability of success Uh you know, it's it's it's it's biased. Every single person when we start with the class of twenty-five people, every single one of them knows the odds of success and every single one of them thinks by definition of them being there, they're gonna be the one

uh that succeeds. But mathematically it's it's impossible. And so I was one of those people too that said, Oh look, yeah, I know everyone fails, but I'm different. I'm gonna work harder. I'm gonna be more competitive. I'm gonna I'm I'm as smart as anybody. And it was one of those things where I over time, when you have zero positive months.

That your internally assessed probability of success has gotta be going down. And I think I was definitely getting close to that point where, hey, my probability of success is so low that I don't think the risk outweighs the rewards. And like there was there was a huge social cost, um, in that uh you know, I was just sacrificing all my time and energy. I I wasn't

having fun outside of work. I wasn't making friends. I wasn't living in a city. Um I had student loan debt. You know, I had my my family definitely needed money and and needed help. Um so I was yeah, I was probably as close to pulling the trigger as as you could have been. And um

Yeah, it's it's just honestly a miracle that uh things panned out well enough to to go from from where I was to where I am now. Yeah, luck call it luck, hard work, the mixture of the above, but yeah, it was things worked out well for how they did.

It's very interesting to hear about this because it's it's something we don't really talk about much, actually. And I'm I'm just thinking back to previous episodes and I can't even really think about when we've talked about you know, when is it the right decision to give up on trading?

Because often, you know, we think about throwing in the towers often like, you know, accepting failure, accepting defeat, walking away. So uh it it's interesting to hear how how you dealt with these thoughts and um how you managed it.

Yeah, and I think it's a huge issue that um whether it's entrepreneurship or trading, you just have such major selection bias. By definition, anybody on your podcast is one of the point one percent that has succeeded at one of the most competitive, difficult industries in existence. And the voices that aren't heard. uh whether in this or in entrepreneurship are the other nine hundred ninety-nine out of a thousand people that might have

you know, blown their savings or might have wasted years upon years or might have gone into debt chasing after w their entrepreneurship dream or their trading dream. And I don't know if most people are aware of how that selection bias, how real it is. Um, it was something I definitely was aware of as as being somebody that just loves behavioral psychology. And took the behavioral psychology classes in school and stuff, I knew that like one of the most basic biases is.

People themselves don't think they're affected by biases. You know, if you ask somebody, did you overestimate your probability of success? At t equals zero, everybody will be like, hell no, of course I'm not overestimating my chance of success. Like this is this is truly what I think. And But like I said, if if say four out of twenty five might make it, you have twenty five people saying that they're gonna be those four.

Um so it's it's always something to be mindful of that that our our weak, feeble human minds just aren't good at at at processing. And I think the other thing that's interesting is with the length of the learning curve, you can tell a candidate, now that I'm kind of inner you know, I interview and I oversee and I train people, you can tell a candidate. So explicitly, the learning curve will be 18 to 24 months. You can say the learning the the failure rate will be X, the learning curve will be Y.

And no matter how many times they say, Oh yeah, got it, totally, totally, understood. Yeah, totally. I'm gonna give it two years, perfect. When people are in the trenches and and not having positive months and they're frustrated and they're losing and they're making the same mistake and you you get that jerk off lens being like, come on man, like that's the same mistake. Like we we gotta improve. Like how can we do better with this?

and and you're putting in that effort and you're not seeing that improvement. that two year learning curve seemed so intangible and so far off. But when you're in the trenches, at month nine or month twelve or month thirteen, you you start banging your head against the wall and you start saying, like, holy shit, like I know what I signed up for, but man, I didn't think it would be like this just because it is so intangible to to see

what frustration can can build over that time and nobody truly grasps that they're gonna be that person struggling. They're gonna be even if you win and even if you make it, it's gonna be a struggle. Trading is never easy. No matter who you are, it's never easy. You mentioned biases there, and it just made me think of this episode I did uh quite a while ago. Must have been a couple years back.

And it was called You Don't Know How Wrong You Are. And it was all about different biases which um our human minds and uh can be vulnerable to. So if someone is interested in that, um I'll put a link to that in the show notes. Yeah, there's also been what's her name? I think Annie Annie Dukes is her name. She was like the poker player and and she wrote Thinking and Bet. Yes. That's another really great book that that touches on on the same subject. Okay, okay. Yeah I've not read that.

Yeah, that's that's a good one. I mean, that behavioral finance stuff is and just just behavioral psychology is is so fascinating to me.

Now Lance, we have a mutual friend and whenever your name comes up, it's normally followed by uh the capitulation trader. So I've become to know you as uh this gun trader who goes after capitulations and uh does a great job of uh making money from them. So I'd love to just sort of dig into this a little bit and uh find out a bit more.

First thing, how did you come to discover you had a talent for trading capitulations? And and also, what is a capitulation? Just for anyone who might not be aware of the terminology. Sure. So I would I would define capitulation just just as a real flush out or like a panic or or vice versa, to the upside, a real euphoric. You can have a you can have an upside or a downside capitulation. It's just anything that really flushes out one way or the other. So a lot of my

Strategy in this came, of course, just just from my trainer. And it was something he specialized in. And so what makes capitulation so so interesting is And this will get a little bit conceptual, but It's very hard to necessarily know what what will trend because there's essentially two things. You can either go with the trend or you can go and do mean reversion.

In my view, as far as the prop world, if you're not making markets, you're not doing some some some weird quant strategy, if you're essentially a a discretionary human day trader, you either need to be going with the trend. and systemizing w why do trends occur, where do they occur, how do you structure the trade, how do you um identify these patterns? Or the other option

And I I know this is simplifying. It's not just these two areas, but trend following or then um mean reversion, when things aren't trending but are reverting back towards some form of previous equilibrium. And It's very, very hard to know with any asset class what might trend. Um, you need to be very proactive to identify that. But a capitulation, when something really panics or really, really flushes out, you don't need to be figuring out ahead of time what's what that's gonna happen.

So for example, like if you asked me when Bitcoin was sitting around three hundred, four hundred bucks for all those years, if you asked me is this gonna trend to twenty thousand dollars twenty thousand dollars per Bitcoin or whatever it did. I would have had no frickin' clue. And I don't think anybody would have had any clue. And yeah, people might have had a view, but to tell you that they can be confident that this was gonna trend to twenty thousand dollars.

uh th they're just they're just lying. And so trends are hard to identify ahead of time with with high confidence. But when that started to go euphoric,

Um or even taking the dot-com bubble or or any of these bubbles or even any of these crashes, a lot of the beauty of capitulation is you have a lot of qualities that are all the same and So capitulation will be an extremely rapid exponential change in price over over time. Capitulation will have huge volume and huge turnover. There will be a huge recycling of Of just who the you know where the average price is. If the average price for many years in Bitcoin had been three hundred dollars.

when all of a sudden we go so euphoric and everyday Bitcoin's everywhere and every single person on the street, people that have never had any interest are trying to figure out how to buy Bitcoin All of a sudden you have the original believers that own it from 300 doing massive, massive, massive volume turnover at twenty two thousand or twenty thousand or whatever it was. And now all of a sudden the average price of the weak hands, it it isn't

$300 anymore, or a thousand dollars, or three thousand, or five thousand. All of a sudden you get such a massive volume turnover that the average price is twenty thousand dollars per Bitcoin and it's all in weak hands. It's people that aren't true believers. It's people like like your seventy four year old, you know, grandmother uh to selling her home to buy bitcoin.

thinking, oh, I'm gonna become a Bitcoin billionaire by the age of seventy-six. And so while it's hard to pred no but and it's just a fact, nobody could have predicted that that was going to occur with certainty. But when it does occur, you can identify those qualities and be reactive. You know, I didn't need to predict that Bitcoin would would go euphoric, but I can then spot those qualities as it's happening.

Um so that's what I think uh the beauty of of capitulation is, is whether it's the dot com bubble or a panic in an individual stock or a sector, you can be reactive and go to where the puck is. Um, you know, I don't need to

I don't need to know what the trend will be or w or what the asset class or what the ticker or what the sector is gonna trend or panic and then flush out, but when it does, you can move there. And That is why I think especially having our tech like technical analysis lens, it makes us so effective because we can apply our system and our lens of viewing price action and price over time and apply it to virtually anything.

If there is a chart of Bitcoin or there's a chart of oil or there's a chart for XYZ widget company or Apple or Gold or Silver, if those capitulate and have a huge volume flush out, I can jump to that and trade it in the same way in the same system because the technical analysis is simply just a way of showing that psychology and and price over time is such just a very powerful um It's just such a very powerful measure. You know, if if if you spend weeks or months with investors or day traders.

paying one price for this, then with no fundamental change, all of a sudden they're paying a a grossly different price. Yeah, it's it's probably worth paying some attention to. And I think what made me

So good at it was especially now bringing this all in back to stock specifics, is again going back to a lot of the nuances. And And I guess not really probably hiding anything too secret, but like, or at least exposing anything too secret, but obviously the more boring something is, the more appealing that is.

Yeah, Bitcoin, nobody really knows what the price of a Bitcoin should be. Um it's it's it's essentially a social construct. I can't tell you what what the intrinsic value is. But for example, if something like Let let's move into something like oil. Oil at least has an intrinsic use. So yeah, the market might disagree on the price of oil, but at the end of the day, there's still a physical purpose for oil where refiners need to buy it and there are end products.

that will eventually tie that in some way to the intrinsic price. And so when you move too far away from that price and then go too quickly, The more boring, the more the less the volatility of an instrument normally is, the more you can kind of say with confidence, hey, like this move is a little bit crazy. You know, imagine. Or take that even to to some of the the volatility in in

in 30 year treasuries this year. And even maybe it was in March or April or something. Like, you know, that was definitely a a very capitulatory-esque move to the upside, uh, where everybody all of a sudden was was afraid of deflation and

slowing economy and everybody all of a sudden was buying bonds. And a bond is something where you can calculate the value. It's much more intrinsic. You know at the end of those thirty years you're gonna be getting your your hundred dollar principal back, your thousand dollar principal. And so really systemizing those nuances and being able to say like Okay, something more boring that's panicking is better. Or being able to say, like, hey, Apple is a much more safe panic than this.

stage one biotech that nobody knows anything about. If Apple say at$200 per share were to go to$100 per share, I'd imagine Uncle Buffett would be uh sitting there on the bid. So if I buy at$100, he'd be willing to buy at$120,$130,$140,$150. And That can't be said for that sketchy, illiquid stage one biotech. And so that thinking and that systemization of taking those extremes is a lot of how we kind of build any of our plays or any of our strategies by using.

just that systemization of of all those nuances. And that can even be applied to what is the best stock chart, you know, what is the best intraday chart look like, what is the best daily chart look like? What is the best Capitulation on the level two box look like. So all those factors are ways you can start to really systemize these plays.

So these few examples which you've referred to here from its it sounds as though most of these are on like sort of zooming out, looking at the overall bigger picture of where this this stock or this uh product is traded, uh maybe on a daily or even a a weekly chart, these things might be identifiable. Um, but the the capitulation trades which you're going after, are these mostly happening on an intraday time frame? Yes. So that's the also the beauty of technical analysis is essentially every

All the concepts apply across all timeframes, in in my personal opinion. And So the same way that Apple most likely will be less volatile over the course of a year, it should also be less volatile on a monthly chart or a daily chart or an intraday chart. And so what we do is we'll apply all these t uh concepts at the intraday level.

I guess you may have already kind of gone over this, but just so we're clear And and maybe on on an intraday basis, how do you differentiate a seal down versus a capitulation? Like what do you need to see to separate the two? Sure. And so I probably won't want to go into to too much detail, but I think cer certainly like The more signs of just pure Just pure panic, the better, right? Because essentially when you're doing mean reversion or when when you're buying into any panic.

Um you're essentially assuming hey, people are scared and that emotion or that maybe people are forced to liquidate or maybe maybe people are panicking or maybe stops are going off. All these factors. Can contribute to the severity of a panic. And obviously, something, if Apple goes from two hundred to one ninety nine over the course of a day, that's not much of a panic.

But if Apple goes from say three hundred dollars to two hundred ninety-five dollars or two ninety dollars in the course of Five minutes or six minutes, and a trillion dollar company essentially loses four percent its its its enterprise value in a few minutes. That's more what we're talking about. And the question is then, when you get, how can you start to find indicators and measures and systemize and structure how you judge the severity of that move?

And then of course you not only need to identify like, whoa, this is capitulatory, like this is a huge flush out, you know, whether it's volume or price over time. Um regardless of all those variables, you still need to know how to structure it safely in your system. Because if you might if you buy Apple at two ninety, thinking, oh my God, Apple just moved three percent, uh, you know, Uncle Buffett, come bail me out, baby.

And all of a sudden, next minute later, Apple's at 280, you might be the one capitulating next because it's so far past your stop. So I think the question is how do you identify these traits and these qualities that signal to you an inefficient price and a panic and emotion and whatnot. But then also how do you structure that within a system that works for you?

Obviously, I don't want to pry too much. I understand you're already sharing a lot with us. I guess one of the the interesting things about these types of plays is that. y what you're really doing is you're standing up in front of a lot of aggressive selling and having the confidence to buy something. I mean, where does that confidence come from? How are you able to to step up? What's the point where you are willing to get involved?

Sure, and th so that's actually a great question. And that also times into when do you know you're wrong and when do you know you need to get out? And so probably one of probably my trainer's biggest weakness was there were also times where he didn't leave flexibility to be wrong. You know, where sometimes when you're the whale you don't have

You know, if you're the whale and you're wrong, then you're about to get run over. And that's when risk management needs to come into play. And so that I think implicit in that question is almost where the edge comes from. Because Most of the amateurs in these moves, most of these people are panicking and it is scary. And that effectively is the emotional edge. That emotional fortitude to say, no, this is crazy. This is a little bit nuts.

That is exactly where the edge comes from. So with enough training and enough experience, when you've gone through these. And I I can't stress enough the importance of repetition. And so much of what I do to get better at anything is get the reps in and process everything, you know, because you can prepare for almost anything in life.

Yeah, any given situation will have different nuances. It will be a different ticker, a different intraday, a different daily chart, a different box. So it will always be differences, but it will always rhyme as well. And there will always be analogies you can make. And by seeing enough reps, you start to have the training and override your emotions. When you're six months into the the job or a year into the job, when you when you buy into that panic, you have that

that knot in your stomach and your P and L is going down and even then it's only you're only down a hundred bucks, down two hundred bucks. It's nothing back then.

And you feel it in your stomach and you say, holy shit, like what did I do? I'm s you know, I'm I'm wrong, is what's going on? And With enough training though, you build that confidence where you know when you feel that in your stomach, you start when you feel that knot in your stomach, you start licking your lips because you know, hey. If I'm the whale in this and if I feel that knot and I'm scared to death, guess what? That average fund manager, that average chump on the street.

They are shitting their pants right now, and that's going to be really, really good for me. And so I think implicit in that scariness. is the opportunity that can make you so, so confident. The bigger and more severe the panic or the euphoria, whether it's dot-com bubble or Bitcoin or whatever you want to call it.

If you have the experience to to back your action and you know this is actually crazy and this is irrational, that's how you have that confidence. And that's how you and obviously you start small, but over time.

you can use those indicators and even emotional indicators. Unlike a computer, in a computer can't feel fear. And sometimes feeling that fear is a huge advantage because when when when you know yourself as a professional with Especially as you build more experience and more reps than than other people on the street, you know that hey, like I'm I'm happy. Experience I enjoy this feeling. I enjoy this panic because I know uh that's what's giving me this edge, because everyone else is.

If I'm scared, they're more scared, so I'm I'm gonna I'm gonna like this a lot in the end. Um, of course that all also always needs to overlap with with the proper risk management. But getting those reps in and understanding, even just understanding conceptually. That buying into that panic, that that essentially is your edge, gives you the confidence to know like, this isn't supposed to feel good. This isn't supposed to feel right. And by the nature

of the job, that's almost what makes you the professional, is you know that, hey, this doesn't feel comfortable for anybody, but I'm the pro and I'm going to uh perform in in this situation as a result. Does that kind of like address that?

Yeah, a hundred percent. Absolutely. That that was a brilliant answer. Uh do you feel as though this is Uh would you consider this to be a high risk trade? Considering some of the other opportunities that a reasonably professional day trader may go after, standing up in front of uh capitulations is that

Would that seem would you categorize that as a high risk type of trade? Because I presume Often in situations like this, liquidity, especially like bids behind you, if you um if there's a capitulation to the downside, uh often thin out, um, which extends these capitulations and the the rapidness of these moves. You're stepping in buying a lot of size. You know, if if you don't time this right and you're getting in at the wrong point

And you have to bail on that position, that's just going to extend this move even further to the downside. I know that plays in with the risk management and that type of thing, but yeah, do you consider this to be a a high risk type of play? So I'm going to answer that with a great quote from from my trainer. Sometimes it is safest to be risky. And I think that is a very, very powerful saying.

Something is so, so, so scary that nobody wants to step in front of it. I would argue that stepping in front of it is one of the safest things you can ever do, potentially.

I mean take for example, I'm sh not that I was trading during the height of of the panic, but there's times and we'll see this in the market today. There can be times when there's a very boring security and maybe even it's a it's a debt s you know preferred debt type security with with even a calculatable value or maybe it's a closed end fund.

A closed-down fund with a set net asset value, where in theory they could liquidate themselves, get that asset value, and distribute it to the shareholder. Some of these things might panic. And so I would turn that question back to you and let's say Let's say the price of the not the price, but the intrinsic value of of of a stock is ten dollars. The intrinsic value, not the price. And that stock goes from ten dollars to nine. Then so your reward is a dollar.

Now let's take the extreme and say it goes to five dollars. You know, oh my God, is this going bankrupt? But the intrinsic value, people are just panicking. Intrinsic value is still ten dollars. At five dollars, your reward is actually a whopping one hundred percent. You can make five dollars while risking Also five dollars if it goes to zero.

But now let's say this and this is all just hypothetical of course, but let's say this is a rip your face off panic. Holy crap, I bought it at five. Oh my God, it's still going down. I must be wrong. Maybe this thing is going to zero after all. So all of a sudden you can now buy the same security at one dollar. A lot of people will define buying at$1 as extremely risky because it's so volatile.

The stock price went from 10 to 9 to 5. Now we're at 1. Oh my God, it's so volatile. It's so risky. Oh no, oh no. But actually buying at$1 is the safest investment you could ever make. Your potential reward is now nine dollars. You can make nine hundred percent return and your risk is only one dollar. So at at the peak of that panic, when things are truly capitulating. Risk is actually the least.

Your reward is highest at peak panic, and your risk of there being an incremental seller at peak panic is so low. And the probability of at least some type of bounce approaches nearly 100% eventually. And so Volatility is actually maximized, but I would argue that risk is actually minimized and it's actually the safest thing you can do, if if that kind of makes sense. And I think that's almost

One of the ultimate paradoxes of some of this stuff. And I think that's why some of the true value investors, like a Howard Mark. or a Warren Buffett, the most famous wealth compounders of our of our time really, I think that's why they're so great, is because Yeah, they're on a different time frame. They're not an intraday trader. They're they're obviously long term value investors, but they recognize that at peak panics when everyone's scared and things are most volatile.

It's true that volatility is is peaked, but that's when they want to buy. That's the safest time. You know, it's not safe to buy things that are just sitting at elevated levels. It's not safe to buy in 2007. It's not safe to buy in 2008. it's safe to buy at the peak of the, you know, fall two thousand eight when when things are going for pennies on a dollar and you have

uh secured debt trading for pennies on a dollar and you have stuff not even related to the financial sector trading for pennies on a dollar. So everything's capitulating, but that's the safest opportunity to buy anything of the last uh you know, two decades essentially. If if that really gets to the heart of it, I think.

Just in your example then, y you spoke about intrinsic value of a stock. W I mean, where does that intrinsic value actually come from? Sure. So let's even bring that back to day trading world because I guess that's what what we really care about. Yeah. And Intrinsic value, we'll never know. As a day trader, I'm the last person ever from being an analyst. I don't care much about any fundamental analysis whatsoever. I'll try to know the basics, but I'm I'm only an inch deep on A mile wide and

It's not so important to know the intrinsic value because nobody really knows the intrinsic value of much of anything. But in day trading world, what there can be or in any trading world is there can be equilibrium and consolidation and Acceptance of price. And so let's take the market for Corvettes. If if all of a sudden

You know, Corvettes trade for fifty thousand dollars, fifty thousand dollars. And for the last seven days, Corvettes have sold for fifty thousand dollars and we have a ten thousand data points. You can graph that on a chart and essentially you have an equilibrium. So if all of a sudden I'm able to buy a Corvette with nothing wrong with it and all of a sudden there's no fundamental news about the Corvette I'm buying.

then if I can get it for forty five thousand dollars or forty three thousand dollars That's it that's at a discount and I want to do that. And I don't know the true intrinsic value, but I do know where the market's agreed upon for a long while. And the same way where Warren Buffett himself can't give you a value of Apple. But if Apple's traded At three hundred dollars for for the last five hours or five days or five months.

Then all of a sudden, two minutes later, I can buy Apple at two ninety five. Guess what? I'm buying Apple at a percent and a half discount, all things being held equal, and we have a very clear equ equilibrium. So that's the type of thing that will interest me.

Okay. Gotcha. Gotcha. Lance, I think a good question to ask you uh around these trades, just uh before we move on to something else, would be What have you intentionally done to get better at these trades? Obviously these trades I'm sure make up a big percentage of your PL at the end of the year. And it's something that you've really tried to develop and and improve on. What are the things you've intentionally done to get there?

Sure. And I think this kind of goes back to my obsession with with meta-learning, the the just the art of how can I go about efficiently getting better. And I think a lot of What the literature tells us is you really want to have deliberate practice, deliberate reflection.

and systematically go about each part of the job building reps. So If there's the example I always give my trainees is there's gonna be the person that You know, if you take two traders, one trader sits in the seat during market hours and say that during the course of the week they put in fifty hours. You can have another trader that puts in 50 hours, but it's not just about the hours, right? It's about the quality of those.

Who's the person that's just sitting brainless typing up tickers all day, you know, looking at charts but not really doing any deep reflection? That's gonna be way, way, way different from the trader spending those same hours but is going to the right stock selection and is studying those stocks in depth and writing them up in depth. And those couple great plays a day, you need to really systemize those. And maybe you need to rewatch uh tape or you maybe you need to

Systemize the pros of the trade, systemize the cons of the trade, um, find analogies to what else what other trades it reminds you of. It's gonna be such a different different learning factor when you're the person doing all those factors and incorporating all those different types of learning versus the person that's just the body in the chair. So I think with anything, the the best example is if you were to take

two people trying to learn basketball and have and they've done this this these studies before and you'd have them take ten free throw shots. The person that takes ten shots and doesn't reflect, he doesn't really get

that much better that quickly. But if you have somebody take 10 shots and after each shot, he writes down how he missed. Oh, I went left or oh I was a little bit short. I went right. Um the person that writes down where their shot missed, And then tries to make corrective action with the next shot, the rate of learning is

Is just exponentially higher. And so those same concepts I try to apply to learning the trades. And even with my trainees, I try to make their their learning as optimal which as possible, which really comes down to studying the best opportunities, the easiest opportunities, making it as realistic for them to practice them again and again and again. If it's a slow week, for example, you might only get maybe three or four good plays to study.

If you build a database of great plays that have occurred in the past, you you don't need to be limited limited to those three or four plays per week. You can re-study and even visualize and re-mentally and mentally rehearse trading. 40 or 50 plays, and you're effectively getting 10 times the reps per week as somebody else. So I'm one of those people where with my trainees,

It's not about just your time at the seat. Time in the seat counts, but we want to be as productive as possible, making, getting the most reps on the most important plays. And that's something that I think is applicable to really any. area of of proficiency that you're trying to d to develop.

Maybe we can go into this a little more because uh the basketball analogy was interesting, but I think in markets You've reached the end of this episode of Chat with Traders, but rest assured there are more And zero