In this episode of the Trading Justice Podcast, we bring Coach Tyler Craig on for an interview. Tyler is a contributor and coach at Tackle Trading and a frequent guest of the podcast. Tyler writes the Tales of a Technician blog, the Options Theory blog and regularly hosts webinars and creates scouting reports for the Tackle Trading community. Listen in to the discussion between Tim and Tyler about a range of topics from market cycles, how to handle volatility, the proper role of insurance and more.

Video Transcription

Tim: And welcome our guys it is our feature presentation from trading just as podcast and I gotta look up the episode No Tyler I think it’s like 333 and I was trying to think how many podcasts you’ve been on first of all welcome out my friend.

Tyler: Good to see you Timmy. I’m not sure like 300 of them.

Tim: I mean around there. I feel like that sometimes. But I think it might be like four or five maybe six seven eight.

Tyler: Just a handful. Yep. Glad to be here though.

Tim: Always good to have you. You know I wanted to bring you want to just kind of talk to you. Obviously whenever we do a podcast we bring on different gas for different reasons but you’re a contributor. You’re a coach you’re a member of our community you’re a colleague and friend of mine and you’ve been a part of teaching people how to trade. Now that I’ve been apart for like 10 to 12 years. So I do want to talk about markets right now. I got to get right down to business and get right to the heat of it. Markets are selling pretty hard right now. Tyler what are you doing in your own personal trading. Yeah. To handle it.

Tyler: I’m under my desk in the fetal position. You just got me to crawl out for this for this little interview here.

Tim: Yeah. Do you cry yourself to sleep at night as well.

Tyler: You know what. Actually in all seriousness this is a day where you think you’re lucky stars for diversification for proper risk protocols and for having a game plan ahead of time. 

Tim: And that’s preparation. Yeah I mean it’s not lucky stars when you were the one who diversified it. You had a game plan and you had hedges in place right.

Tyler: Yeah I mean look if you’re leaning bullish into a day like today you’re going to lose money. Nobody makes money on a day like today. If you had a bullish portfolio unless you did some insanely expert hedging or something in that case I’d say you got some lucky. So this is part of the game right. You take hits like this every once in a while and and the whole goal is to size correctly so you can live through it. This will pass. We’ve seen this before. We’ll see it again. But yeah it all goes back to risk management. Tim and preparing ahead of time because you don’t want to be asking yourself right now what am I supposed to do now. Should Ask yourself that before the market gets punched in the face like this.

Tim: Yeah. And by the way if you don’t know this Tyler is a mentor for legacy education. He’s been a trader since 2006 and you’re actually the architect of the system we call the bear market Survival Guide. And so you know you’ve studied this stuff in Celebi and we’ve looked at it. We’ve also been around markets now 14 years. Is this happening more frequently than it did you know through the course of history because you’ve gone back and looked at market cycles when they were bullish and bearish in the 20s 30s 40s 50s. You studied the time of it. You put a lot of time into the analytics behind it. Is it different now than it was then or do we just assume things are different because we’re in the thick of it.

Tyler: Well I think and I’d love to see data to the contrary based on what I’ve seen I don’t think it’s any different. Obviously you have different dynamics with with algorithmic trading and everything but you look at 1987. I mean they didn’t have a ton of algorithms back then. Right. You look at 1929 they didn’t have a ton of computers back then. So fear and panic has always been a part of the market. Does it happen faster. I mean maybe but you look at some of the crashes historically and I don’t know. I don’t know that it matters either. Like I don’t know that you would change your techniques in terms of how you would protect yourself. So I don’t spend a lot of time wondering is it different. Are the crashes a little bit quicker. I think the takeaway is we have crashes we have volatility we have bear markets what are you going to do about it.

Tim: Yeah yeah we do. And you’re always going to have bear markets. I think one of the key takeaways from bear markets is that eventually they do end and they come back up. Now when you’re at the start of it at the top I mean that’s not exactly a reason to just put your head in the sand and ignore the price action today. You have to do something with the information in front of you and we’re only about 5 6 percent off the very top of the market. What advice do you give beginners out there when they’re looking at this risk popping in like you said we’re down 4 percent today on the day we’re talking so

Tyler: yeah I mean I would say if this is your first time paying attention welcome to the markets first of all it seems like the market is benign and quiet and slow for long enough to make you forget that sometimes. Oh wait it does go down we do have craziness. So the first thing is if you didn’t have a plan going into today who cares. Let’s have a plan for next time. And so let’s prepare ourselves. Let’s learn how to hedge. Let’s learn how to protect let’s learn proper risk protocols so that next time you know you know what to do and you have a plan ahead of time. I mean if nothing else Tim what happens if you’re an active trader. You get stopped at a trades you lose the amount you expected to lose maybe a little more. Because we get lower and you move on with your life. It’s those that don’t have an exit plan and it gets more painful and more painful and more painful. And then you hit your pain threshold you give up and the market bounces without you. I mean it happens again and again.

Tim: Yeah I agree. And the way that you approach stop losses and training plans if you’re a trader that’s different than if you’re an investor. And I think one of the very first things I have to do whenever I’m mentoring somebody Tyler is get them to separate the mindset of investing and trading you know because both are valuable. Both are important to learn how to do it. But your longer term assets that you’re trying to build into wealth or your retirement you shouldn’t have a stop loss five cents below the intraday low or something like that. Yeah of course. Different way to approach it right. So from a philosophical perspective you know how do you teach trading versus investing. What are the differences between the two.

Tyler: Well part of its time frame when it comes to investing you have a much longer time frame and you have to have a different different risk management rules. Right. So you think about the classic approach is you diversify right. So. So I got a guy mentoring right now and he has a long term retirement account. We say well what’s the traditional metric the traditional metric is in terms of preparing for a bear market is like you don’t put all your money in stocks unless you’re willing to stomach a pretty big draw down you know 30 percent on average typical bear market. And if you’re not willing to do that you’ve got to diversify into things like gold and bonds and whatever. So you have proper asset allocation. But even then if you say Well is there something else I could do. Sure go look at the bear market Survival Guide we talk about buying put options to protect. So a day like today Tim you know insurance most the time you feel like it’s a drag on your portfolio when you if you’ve been owning puts for the last few months. It’s like why do I own this protection. Well today is why you own it. Right. Your portfolio’s getting smoked and your puts her up reducing your loss by 30 40 50 percent. So you could use puts to protect.

Tim: I don’t say it’s a tough thing emotionally and mindset wise though and I think it’s important that you got to reiterate this point because if you stick money into insurance in your new at it you might logically understand why you’re hedging right. You know what I was trained on this from my mentor told me to do it or I understand the reason to bring my numbers down. But when you’re watching the insurance losing and you’re like Whoa man why do I own that insurance. The market’s at the all time high. You kind of don’t have the context until you go through something like this. Right.

Tyler: Yeah. And there’s nothing better today than looking at the account saying OK my stocks are down this much my insurance is up this much. It’s reduced the volatility it’s reduced the pain it’s made it easier for me to live through this and not want to panic and puke up my stocks. The hardest part of being a long term investor is you have to experience this volatility. Any tactic where you can reduce the volatility or reduce the emotions connected to it is a valuable is a valuable tactic. And you do have to see it a couple of times. You know you’ve got to get in there by the put see what happens in normal markets versus a crash. And I think Tim once you go through that cycle once or twice then then it’s embedded in your brain and you have a much better idea of how to manage it.

Tim: I agree. I was down in Orlando about how guys it’s gonna be over a year ago now and I actually had one of our students come out and see me. He took a class from you is name’s Jason. Jason if you’re listening you know who you are. He told a story about his dad you know that I’ll never forget it it reminded me this exact thing right here. He said You know I call my dad and my dad is old school. He just a buy and hold leave. Don’t touch it kind of guy. I said Dad you got to buy put options right. And this was in the middle of 2018. And so his dad you know trust in his son is like All right I’ll do that just because I understand you’ve been doing this for a couple of years you know what you’re doing. I’ll trust you I’ll follow your your lead on this and they delta hedged the longer term portfolio. And his dad kept calling him like every week. Jason these are down. I’m losing money on him. Lose and lose and lose in Intel boom October and the market went straight down. Yeah. And his dad starts calling him every day. Jason what do I do now. They’re making me money. What do I do now. How do I understand that. It’s a new mindset for most people just the idea that you can have a product that you can invest in that will offset some of the losses when these things happen. For most people out there Tyler They are never introduced into that like Jason’s dad you know how do we bridge that. How do we as tackle trading the podcast here mentors. How do we get the public to understand that options are there to remove risk not to add risk.

Tyler: Well you get on a bully pulpit Tim and you hit the table and you tell it. I think that’s the first thing you got to introduce sort of the concept right and buy into the idea. But sometimes this Pandora’s box though Tim you introduce somebody to the idea and they go do it and then they get in that position where they’re making money on it but they really don’t know what to do. It’s like I get it. I’m invested. Now how do I manage this. It’s it’s a bigger conversation that just accepting the idea. And isn’t that why we created something like the bear market survival guide where we walk you step by step through how to manage the thing. So that’s why we have products like that to make it easy and just follow along. And first you buy it and then you go and you participate in trading. Things that we have so you can get all the little details.

Tim: I got a question for you going in several different topics I want to hit on before we’re done here. Number one is this cycle different than other cycles. Traditional business cycle interest rates go up and down and in fact so the way people invest into either different types of assets right. And right now we have lowering interest rates on the Fed but you’re at the top end of a bull market. Are there other circumstances where you’ve seen something similar in your studies of the history.

Tyler: Well the analog that I think people point to is the 90s I think like ninety five they cut rates once one of the reasons why the market threw a temper tantrum is they want. They want the beginning of multiple rate cuts and then maybe you guys are tied of this Jerome Powell says no we’re looking at this as a mid amid cycle adjustment which basically means I mean do you think by the middle of a cycle what is this gonna be like a 20 year maybe. But if they cut rates that they’re viewing this as the economy’s going to continue expanding maybe later only need to raise rates I guess hopefully Tim right. I mean sure if the economy keeps humming along and you can support that but Anyways my point is the 90s I believe they cut rates like ninety five ninety four once maybe twice and the economy continued to expand and later they had to raise rates again. So I think there is some historical precedents as to whether it’s different this time. The phrase that I like is it’s it’s different every time. Right. You have recurring themes but every every kind of cycle is a little bit unique in terms of the dynamics and that’s what makes it hard is you can study prior cycles and know like typically how it played out but every time it’s a little bit it’s a little bit hard to apply it real time and know your timing wise. Is this going to be the beginning of a big easing cycle. Will we be a year from now and the economy is back on track and they’re hiking rates again. It would be easier time if this was it. Right now it’s like OK. They’ve rung the bell. They’re done raising rates. They’re not lowering rates. We’re going to get five or six rate cuts we’re gonna get a recession we’re gonna get a reset. A big bear market. And then we start the game again. Yeah sure follow that script. But the problem is it’s messy sometimes.

Tim: Yeah yeah it is very very messy and by the way a full on bear market is 25 percent or more correct.

Tyler: Technically 20 percent 

Tim: 20 percent or more. So we had a bear market in October through December of 2018. That did have a bear market with no recession. We had precipitous selling in February of 2018 with trade war and then we also had selling here this May and now we’re a little bit now that we’re starting from the top but we don’t know where this can end but we’re down 4 percent on it on a day here. Obviously there’s risk going on right now. Yeah. When you’re studying some of these differences do you notice anything in the difference between those 10 percent sell offs and the ones that escalate into the 20 30 40 50. Was there some other catalyst outside of the news what have you seen a study in the history of.

Tyler: I’ve seen it’s friggin hard dude. Yeah. I wish they told you like which 5 percent drop was gonna become a 30 percent crash and which one was just a garden variety pullback or retracement and then we go right back up to it. I think this is where what’s the phrase. It’s like the more you learn about something that stupid or you feel right because you become more aware as to the actual difficulty of a topic. So the phrase I like is that the foolish man thinks he is wise but the wise man knows himself to be a fool. Right. So I think sometimes the more you study something the closer the closer you get just to the realization that like I really don’t think right.

Tim: Well there’s a lot of randomness in the market. You’re right. I mean the difference between this is I guess where I’m going with it as well I love where you’re headed. I’ve studied this and watched these 10 percent sell offs just go straight back up. And I’ve also seen these 5 10 percent sell off spin into something very precipitous like the 2008 crash. Some of the volatility we saw in August 2012 and other areas where it just starts going straight down as well. The difference between the two. I don’t think any real person knows if one is going to happen or the other when you start into this tailspin right degree which is where an asset allocation position sizing diversification holdings into different kinds of products and just hedging the damn thing is the appropriate approach. If you are a veteran and trained trader because we don’t know the future I mean Tyler next month the market could be at an all time high. We’re talking about the Fed cutting again because they capitulated to this stuff and markets got their wish right. Or next month we can be talking about continued selling.

Tyler: So you have to have I think I think I think you have to be satisfied with knowing that you don’t really know which is going to be the big one. And just coming up with a plan as to how to deal with it. Recognizing sometimes you know you’re going to protect and you’re going to be like the gentleman you talked about where you feel like why do I own protection. Why am I diversified. But it always comes back to being a smart idea. When things like this happen where do you think you’re like your stars you’re not 100 percent in stocks unprotected. So I don’t think there is a right answer. I think the key is to find a path that allows you to invest in the markets comfortably. Having a plan for the crazy volatility that it comes because if your success is dependent on you predicting which 5 percent drop is going to become a major bear market I don’t think you’ll be successful.

Tim: And that gets back to the old investor versus trader discussion right. The mindset of an investor if you know what you’re doing you understand the cycles you’re willing to take on that risk and then hedge it through diversification allocation and hedging and it’s just part of it.

Tyler: You know you’re kind of just worked through it. In fact I’ve said this to people before and if you ask me what product I’m the new investor and I’m still going to invest in the stock market you know even with the risk even with the crashing potential and even with all the volatility and I’ll tell you why what else you’re gonna get the returns out of maybe gold but I invest in gold as well. Maybe some of the other assets. Sure. Real estate property you name it. But am I going to put my money in savings and get 2 percent you know a year when Inflation’s at two and a half three percent and that’s if we believe what those numbers are. I’m going to put it into bonds where those rates are coming down those yields are coming down. There are some equities that pay good dividends that might be nice. But even with the market volatility and risk as an investor Tyler not as a trader because after you do a different I still see these see stocks as an attractive asset to accumulate over the long haul. You know how do you bridge that well.

Tyler: And I have I had a conversation with Susan the other day and he had talked about there’s a lot of people that are doom and gloom ers and they they talk about I think Jim records was one of the books he was talking about. And the problem I have sometimes with people who who pooh pooh different asset classes is it’s like what it’s like. So stocks stock bond stock real estate’s going down. Don’t push your money in the dollar. It’s like so pretty much you’re saying why like where am I supposed to put my money. But money’s got to go somewhere right. I have capital I want some type of return I’m not the only person. There are billions of people like that. So I think it’s a very hard argument to make to just bash every single asset class because they all have tradeoffs. They all have pros and cons and very smart people very wealthy people invest in the stock market and have invest in the stock market for decades and decades and decades. And so it’s like what do you do then. I mean you got money you’ve got to put it somewhere correct.

Tim: And I think actually what you’re talking about in terms of the progression of understanding that you don’t know everything at some point you get over that learning curve that intimidation of Oh my God I don’t know the future I don’t know everything. Look at how much information is out there. You then get to the confidence to realize that’s okay then you can still invest with confidence because you know the data. I’m a numbers guy. Tyler and I’m going to tell you. Knowing how bear markets reacted you know what my expected returns are what the month by month volatility in the stock market is. These are all things these are all data points that help my brain because then when it’s happening in front of you it doesn’t shock as. You know and as a veteran it’s easy to say that but if you’re out there and your new one of the best recommendations I would give you is to study the history of price action you know have conversations with mentors like Tyler’s so you realize yeah you can invest in stocks and take a 30 percent hit if you’re not prepared for that mentally. You haven’t studied the history right. 

Tyler: Well and that was one of the goals of the bear market Survival Guide is to give you all the context right because you’re right the market will surprise you and surprise you and surprise you but it should get to the point where it doesn’t surprise me anymore right. We’re like Dude I’ve seen this movie before. And if nothing else getting comfortable with the context and what’s typical it does prevent you from panicking right you think about your behavior on a day like today. If this was the very first time you see the stock market sell off four percent in one day you’re like freaking out. It’s like I’ve seen this before like I know how this movie plays out. I know the plot twists maybe this one’s a little different. But when you when you know the any ending before you sit down or start watching the movie it’s not as exciting which which is surprising which is a good thing when you’re talking about real money. So. And the thing is is that with the bear market survival guide like I would love at the end to say OK you look at this this this and this and then you know exactly what’s going to happen. Right yeah. But the interesting thing is we do these monthly mastermind group meetings and the objective. So this is for those that have the system and we meet once a month to talk about current market conditions. And it’s interesting because we lay out. Themes or signals that have seen we’ve seen historically that maybe signal work at the late stage of the economic expansion when you start to look at this real time month a month a month. You actually start to more fully appreciate the difficulty and the challenge of trying to type it. It’s like historically you see one two and three and it doesn’t bode well. But what does that mean for next week. I’m not sure. I wish I knew but it gives us better contextual awareness as to where we may be better able to anticipate potential scenarios. So I think like you said context is really the biggest advantage to studying that history.

Tim: Well here’s one of the most beautiful things about hedging. If you know how to do it is when you start seeing risks. One risk to risk three maybe you add a little bit different hedge right. So add a couple of lead put options on the spy relative to your beta weight and you bring that Delta down just a little bit. Now if you don’t know those terms you’ll learn those terms right. Understanding what your risk is relative to your insurance position or maybe if you’re brand new just realize you get insurance in the first place is pretty powerful. And when you see certain risk pop up Tyler maybe you back off the Delta a little bit and find a balance that you’re comfortable with with confidence because that’s all investing really is.

Tyler: Well and then you then you know what to do right. It’s like so if you see this this and this. Most people don’t like what I saw that I’ve no idea what to do right. So I’m just going to go hide in my bunker while the whole idea the education is if you see these things if you want to reduce risk to yourself right. Yes you can. You can quantify how much exposure you have here so you can reduce that risk and then come what may you at least have defined how much you’re going to lose.

Tim: You know we’ve been talking to Tyler Craig here and Tyler is a blogger. He’s a coach. She does. He did the option report last weekend great report Tyler and I make sure you go check that out if you’re a pro member. But one of my favorite things that you do in those blogs you do Tyler the tales of a technician in the options theory blog here in the month of August on options theory you’re going to be blogging about the concept of theta. You know and how you can measure theta how you can use theta. Out of all the stuff you do. What’s your favorite thing that you that you do. Is it the webinars Is it the blogging the writing the reports the mentorship the coaching.

Tyler: I think it changed. It depends. I mean every mentor student I’ve ever had is just top notch. But sometimes you know you get some and it’s like this is probably not my favorite use since I right now. I think I think anything that caused me to become more creative. We tend to do. It’s like any work or any any type of job or do the same thing again and again and again sometimes it’s hard to get the same satisfaction. I really like being creative and on the blogging side I probably get the most opportunity there. Coming up with new ways of explaining things. Coming up with new analogies 

Tim: I know you well though if that’s all you could do you’d be screaming Get me back into him into a weapon. I write you know I like variation like you all the variation. Yeah I’m with you.

Tyler: But I do think webinars you get a lot of people on a webinar that are asking good questions. You know what challenges your ability to to come up with great answers and stuff. I think webinars are fun.

Tim: You know miss the right answer by the way. The answer was I’m with you on the podcast that’s right. 

Tyler: Oh my favorite thing to do is to be on here with you Tim right. You should have. 

Tim: Yeah that was a softball. I could’ve just I just threw it to you.

Tyler: I’m not on my leg today but I was slow on the uptake but I eventually got there.

Tim: That’s the way it is. Tyler great job today appreciate your insight. And guys I go and check out Tyler’s content on tackle trading dot com. And if you are a member that bear market Survival Guide The one thing I’ll tell you. Go back and revisit it. You know even if you watched it last year maybe it’s a good refresher course to go back and check out and make sure you’re attending the mastermind groups each and every month that Tyler does. Good job kid. We’ll be back right after this live read from Coach Mark.

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