Line Your Own Pockets

Michael: 00:00

Hello, everyone, and welcome to another episode of Line Your Own Pockets. It's gonna be interesting. This one might actually Dave wanted my take on something when it came to swing trading. So I guess you got a question about the difference between backtesting a day or a swing trading strategy as opposed to a day trading strategy. And I kind of, I think, like hand waved it to to begin.

Michael: 00:23

So that's just same thing but longer, but you think there's a little bit more to it, and I guess you had a pretty pretty detailed question. So why don't we start with that about what was the what was the listener slash user asking?

Dave: 00:37

Yeah. So I I don't wanna mention names here, because it's some detail about strategy, but I want to this is sort of a common thing now that I think about it, but it was an interesting way that he asked this. So because you're right. At first, would think, okay. Well, they're basically the same.

Dave: 00:58

Like, if they're one is just a different hold time.

Michael: 01:02

But

Dave: 01:04

alright. So the way he was thinking about it, he's swing trading, so he's holding for a specific amount of time, but then trailing a significant piece beyond that time.

Michael: 01:20

Mhmm.

Dave: 01:20

Right? So the question is, what's the best way to test a strategy like that? And I had some thoughts. I never really thought about it quite in those terms, but so I so I gave him an answer which I think is probably a pretty good answer, but I wanted to get your take on that. So do you have strategies where you're you're keeping a piece and trailing it maybe forever?

Michael: 01:53

Yeah. Yeah.

Dave: 01:54

And then how do you think about backtesting that part? That gets way more complicated to me, the forever part.

Michael: 02:02

Well, it can't it can't be forever. You know what I mean? It it can't be there always has to be an endpoint, or you're just literally taking a pool of your capital just off the table. Right? You're just reducing your the the amount of capital allocated for for some time.

Michael: 02:19

And and I get why you said this would be a little bit interesting knowing that because I guess you're talking between, say, finite and continuous time. Right? I guess everything that you do from a day trading point of view has an end a reset date and an end date. And then, you know, there's some things that are are more continuous. And that's actually something that I came across as well, where I used to have essentially every strategy last week, essentially, you know.

Michael: 02:52

So I'm I'm opening trades throughout the week, and then I'm I'm resetting them on Monday morning, and then I'm I'm going again. So think of my week was like your trading day. And that that's simple as well, because you have this finite period of time in which you go back to cash, and then you and then you come back out again. When you're doing it continuously, it becomes just a it's very important then, I guess, the like the first step is to make sure your back tester is able to to do that. And this is where I think a lot of people have problems when they try to do the whole I want I'm just gonna let Python do it for me instead.

Michael: 03:29

I think that's that's a huge problem because it's it's much more complicated to say, okay, you started with a $100,000. Well, now you're utilizing, you know, $20,000 on this forever position. How much do you have left to buy buy further positions? But you you have to come up with some sort of end date. And what ends up generally happening with real tests and probably with most back testers is they assume when you're when you're testing for what the p and l is, it's the end of the testing window always assumes that that's your your closed price.

Michael: 04:02

So it's like a mark to market type of thing. Yeah. Right? So whatever it is at the time of of testing, it assumes that's gonna be roughly whatever the closed price is. But, yeah, this is super common for me, so I'll be interested to get in to know more.

Michael: 04:14

I have one strategy that trails below the 200 day moving average, which I know just made Dave just like cringe. Because in theory, it could it could go on for years, you know, for for a potential trade, and I've got some wicked trades out of that. But yeah, you're sitting in them for for long periods of time.

Dave: 04:33

Yeah. I mean, I get the appeal, but what I'm interested in is how do you backtest that? And if you to do that the quote unquote right way, you're gonna have like, you very quickly get rid of your sample size because some of these trades, potentially, you're gonna hold for years, like months, years, then that means the most recent trades you can have in your backtest or, like like, your window, like, most recent trades is gonna be a long time ago.

Michael: 05:09

Not necessarily. Right? Because if you're using something that's like some sort of trailing stop, most of them, just the way the market works, most of them are still gonna be pretty quick. So if you think about it, if you if you took a trade example, I'm gonna buy I'm gonna buy every time a stock hits a new all time high, and I'm gonna trail below a twenty day moving average or something like that. Well, you could imagine if you included the entire universe of stocks, just like we talked about, you go really you allow your your backtest to hold everything that's making a new 52 week highs and below the twenty day moving average.

Michael: 05:46

And because you're using daily bars, it's gonna be very easy to go back thirty years doing it. It'd very easy to get ten, twenty thousand, 30,000 trades in in something like that. If if it was even more specific, like or or or more broad, I'm gonna buy every fifty two week high, and I'm gonna go back. Well, there's, what, 6,000 tradable stocks in the in the universe. So each one of those at some point is gonna end up new fifty two week high throughout a year, likely.

Michael: 06:16

Right? Unless it's literally going down for the entire year. So that's 6,000, and it may happen multiple times. So 10,000 a year, multiplied by 20 somewhat years, you can easily get hundreds of thousands of trades, instance, in that that backtest.

Dave: 06:31

Okay. So I guess the question for me comes down to how much is the trailing part of the strategy contributing toward the P and L?

Michael: 06:45

Yes. Yep.

Dave: 06:47

So how much is it? Like, is that the point of the strategy, or is the point of the strategy the first part? Is the trail like, why are you trailing?

Michael: 06:58

Well, what you're sacrificing is is compounding versus like home run hitting. So I'll talk a little bit about this strategy. I don't wanna talk about all of it, but it's it's an IPO based strategy. And the idea is that, most IPO suck. Right?

Michael: 07:17

Most companies IPO, and and they take I think the stats like 80% of companies undercut their IPO price in the first year ish. But the ones that don't, and the ones that recover can be really really interesting. So this year, well, and I I showed Dave a a big milestone that happened to my account this year. And that was a lot because of this particular strategy, and in the what the the DRAM stocks, they call it, the sand disks and and whatever, these things are just thousand percent gains in a year. And that's the idea behind it, is that I don't do what he does where it's some of scalp out quickly, some of trail.

Michael: 08:00

It's just a pure you buy it and and you just trail it. I find we I think we've talked about this before. As soon as you start splitting up your exits, you are increasing complexity broader than I think is necessary. But the game the the return metrics of this is essentially a lot of very quick trades. The ones that don't work, don't work right away, and they're very quick trades.

Michael: 08:23

And those quick trades have, you know, maybe a week, maybe less in or out, maybe a month for some good ones. And it's a a break even strategy that periodically just cracks one out and you get a 10 x. Right? You don't need many 10 x's throughout your career to to, you know, accumulate wealth. So I would say it is the it is the putting yourself in the right place to get lucky.

Michael: 08:51

That's kind of the the aspect behind this. And it's it's doing so with a brain that's different from day trading in which, yes, you still have that, but you always have this finite clock that is going to close a position. So, you know, yes, it's possible to every now and then you get, you know, like these weird Chinese low floats that, you know, go nuts. But you are always saying, I am going to, regardless of what's happening in the world, I'm going to close this trade because a clock in New York has hit a certain time. Whereas with the trailing stop, what you're doing is you're saying, as long as this thing is making money for me, I'm just gonna stick with it, and and doing less isn't necessarily a bad thing.

Michael: 09:32

And, you know, like, the the argument fun argument me and Dave always have back and forth, so I always say, why not both? Right. This isn't a strategy I would ever use margin on, because there could be a point in which that thing that has gone up a 100 x gets cut in half, and it's still a great trade. But by the time I got out, it got cut in half from its its high. With the right amount of margin applied, that could be deadly.

Michael: 09:56

So margin for me is something for day trading or or short term swing trading, like scalping kind of in and out. But then it's it's why not hold, you know, 30% of my account value in some of these home run type plays that have this long term potential rip and backtest to them. Yeah. Left tail, I guess, would be a right tail strategy.

Dave: 10:21

Yeah. It seems I mean, I think you said something like, put yourself in a position to get lucky. That's how you describe the strategy?

Michael: 10:31

Kind of. Right? And I Yeah. That that actually comes from I should explain, that comes from a strategy where or that comes from one of my old trading mentors who kind of mentioned that trading, you know, in a whole, he described it as as a whole is he always just kept telling me over and over again, your job is to stay alive long enough to get lucky. And he just kind of meant, right, you know, keep protecting yourself, keep getting out of things that aren't working right away.

Michael: 10:56

Eventually, just through, you know, sheer bullshit luck, eventually, you'll end up it's the whole cut your losers short, let your let your winners run thing that we're just told over and over again.

Dave: 11:07

Yeah. It seems I don't know. It's just saying it strikes me as a lot of discretion or a lot of faith that you can't really nail down in a backtest, like the strategies I trade. It just feels a little bit Well, there's no reckless.

Michael: 11:26

There's no discretion. Right? It's it's a purely systematic trade. It's a it's actually a strategy. I've I've given enough out that people, if they look, have could have found that this thing, this strategy was published thirty years ago and has been traded essentially ever since.

Michael: 11:43

There's periods of time in which it's really really hot. There's periods of time that it's it's not because IPO based. We know there's periods of time where IPOs are are very successful and IPOs aren't. But it's it has existed for again, it was published thirty years ago, and at that point, they were backtesting twenty, thirty years plus of data. And ever since then, that where their study cuts off is where my study begins Mhmm.

Michael: 12:07

Using roughly the same principles. You're So talking sixty years worth of data and thousands and thousands of instance. It's just low win rate. And in a lot of long term, if you're using a wide stop and you're using if you're using any sort of trailing stop, I have always found your win rate tanks. But, again, what you're what you're trading win rate for for, you know, these this these kind of right tail insane type of events, And then you're generally coupling that, most people do, I do as well, with the complete opposite.

Michael: 12:43

I've got some strategies that are right 75 plus percent of the time, but they have one to one or negative risk rewards. So you you take the high frequency trades, and then you you put them with the low frequency trades, and then the two combined together, like wouldn't you do with most strategies end up being way better than the the sum of the parts.

Dave: 13:04

Yeah. I believe that it's systematic, but but I think I I think the reason I'm not gonna drop everything I'm doing and trade that one is that I can't it's hard for me to imagine getting confident enough in that strategy to really put a lot of money behind it. Because

Michael: 13:26

But wait. But wait. You're you're specifically not putting a lot of money behind it. Right? Because you you understand the distribution of returns is a lot of sitting like, the equity curve essentially looks flat, and then huge spike, and then flat, and then huge spike.

Michael: 13:44

So you're very intentionally not putting a lot of money behind it, and not dropping what you're doing to do it. It is the same argument that I always give you, Dave, in which you are sitting entirely on unutilized capital for the large vast majority of your life. Right? You are spending most of your time. If you did a pie chart of your time, it is capital utilized versus capital unutilized, and you're spending most of your time capital unutilized.

Michael: 14:09

So I use these strategies the same way I use I have a ETF rotational strategy that I throw, like, you know, the the kids college fund into. That's just always it just cycles between, you know, like, queues and gold and and TLT and things like this. It's not that's not the point of it is not like an income type strategy. The point is that growth strategy and the fact that it is only utilizing a small percentage of of my account and not hindering those more high frequency income making strategy. That's the whole point.

Michael: 14:49

It it's Okay.

Dave: 14:50

So it's

Michael: 14:50

utilizing extra buying power, I guess.

Dave: 14:53

Okay. So so you wouldn't have this as your primary

Michael: 14:57

No. Strategy? Absolutely not. No. No.

Michael: 14:59

I always look at primary strategies are generally higher frequency in nature. Right? The market and for a lot of what I do is the market tanks, I'm busy. Right? Because I'm I'm I'm doing a lot of mean reverting and buying these high frequencies things that I'm just gonna scalp out on on kind of the next bounce.

Michael: 15:17

But there is a section of the portfolio that's not necessarily written off. The way it works is that if this signal comes through and there is extra buying power sitting around, then it will utilize some percentage of that that extra buying power when the time comes. But these are, you know, these are are different strategies. Like, I even have seasonal strategies. Like, I'm along a bunch of gold right now because Diwali's coming up.

Michael: 15:44

Like, you know, but these aren't these aren't strategies that would ever be, like, backbone strategies. I'm not gonna make a living because I buy gold once a year because it generally goes up in front of Diwali. But it's like one of those, why not own that, as opposed to going to bed every night owning nothing. Yeah. You know?

Dave: 16:09

Alright. So see, I don't wanna I don't want this to devolve into another debate about swing trading or or day trading, but Oh, why not? Well, I I think I I think we've talked about that a ton, and I get the point. But what I wanna go back to though is, what's the so I think the more interesting thing about this is how to actually backtest something like this.

Michael: 16:36

Mhmm.

Dave: 16:37

Or, like, it's got two phases. The way I think about it, it's got two phases. You got, like, a regular phase where it's like the meat of the strategy, and then you've got this trail phase that could go on forever.

Michael: 16:51

Mhmm.

Dave: 16:52

And like, what's the best way to think about that when, when you know, by definition, the the ones that are trailing are probably gonna be contributing a lot of p and l, like, maybe most of it, All of

Michael: 17:07

it. Right? Yeah. So so

Dave: 17:11

And I think I think the trail part is just so theoretical, and I I I just it it's and and more difficult to test. So so

Michael: 17:19

why is it why is it either of those things? Now, let let's do let's do and when I always when I always think of these things, just so people know my brain work figured out right now, I always and this is my, I think, debate experience, is I always first go to the extremes. Right? So let's say it's not daily bars, which is where I think you might be getting caught up as a long period of time. Let's say these are one minute bars.

Michael: 17:44

But we live in a world, which is coming, like, immediately, where there's twenty four hour trading. Right? Are you still going to exit at an imaginary time in a place that you don't live has hit 04:00, therefore you're going to exit the position? Or is there a world, I'm just trying to pull Dave into a world, into a world in which you're just going to use a trailing stop to exit that position because there's no longer this fictitious, like, hand has ticked to a certain amount, therefore, I have to exit my trades. Then we're doing it on one minute bars, where you could essentially trail a stop that in theory could go up forever.

Michael: 18:23

But you know it's absolutely not going to on one minute bars. At some point, it's gonna come back to get you. Because I'm I agree with you and I'm with you that for intraday trading right now, I have never found a use for trailing stops. I've never found that as as a a better than hold till the end of the day, sell it at the end of the day for the long run. However, when the end of the day vanishes, which is if it's not next year, it's ten years from now, is there a world in which you go, I bought the trade as opposed to using the concept of time as my exit.

Michael: 18:56

I'm going to use the concept of prices my exit, and trail it that way.

Dave: 19:01

Yeah. I I think that you underestimate the value and persistence of the open and the close.

Michael: 19:12

Hypothetical. They're not going away. Just just join me in this in this hypothetical. Live in a world

Dave: 19:18

Oh, okay.

Michael: 19:19

In which okay. Let's put it the other ways. The equity market implodes, and there's no such thing as the equity market, and you have to make a living trading crypto, in which there is no open and there is no close that trades twenty four seven, three sixty five. In that scenario, or let's just say, I convince you that it makes sense that equities isn't the only thing on planet Earth, and there are other things to trade, And you end up going into the cryptocurrency because there is now tokenized versions of the entire S and P 500 that's plenty liquid that you can trade. So you could be trading, you just choose not to.

Michael: 19:54

You could be trading all of these things on the weekend when there's, you know, war and all of these crazy events. They have plenty of volatility, plenty of liquidity, you just don't wanna trade them. But let's say, you have to. Everything is tokenized now. So everything is just the whole guts of the market are completely different.

Michael: 20:11

It's all essentially crypto. Could you see a world in which trailing a stop is the most the highest EV way to place a trade?

Dave: 20:21

Probably not, because and and here's why. I'm turning over my account way more often by having short term trades. And the the the longer you hold a trade, the more it's like investing. And

Michael: 20:39

Yeah. But we're talking one minute bars. So I'm saying, instead of saying I'm going to sell in five minutes, because I've I've calculated that's the optimal hold time, I am going to put a trailing stop behind a short term moving average on a one minute candle. You know that sometime in the next day, that thing's gonna trigger out. Likely.

Michael: 20:59

And if it doesn't, awesome. Right? If if if it goes because it's the way moving average is calculated. If you're in that thing for a week, that means on a one minute bar, that means it's gone straight up for an entire week straight, especially exponential moving averages. Right?

Michael: 21:16

Things that very closely follow price. So you're saying you do not see a world where mathematically, in a twenty four hour 365 market, that utilizing some something that moves behind price is superior than something that just says, sell at a certain time.

Dave: 21:36

I'm not comfortable relying on, you know, putting myself in a position to get lucky. And my sense is, I want something that's more predictive, that each trade has a more a higher chance of having edge than one that, you know, I take it and then, you know, pray that it's gonna be the one that is a 10 bagger. Like, I'd rather have a 101 We're more

Michael: 22:10

not we're not you gotta come with me here. You gotta come with me on this on this hypothetical, so we're not there anymore. You're now trading a opening range break strategy on low float junky penny stocks. Right? All these things are going to go to zero eventually.

Michael: 22:27

But right now, your strategy says, buy it on the opening range break, put a stop out, and sell it at the close. Right? And then in the future, the close doesn't exist. So you you I'm just saying, is there a world where you say, I'm gonna use and I've even heard these be popular, bar by bar exits. I'm gonna keep moving my stop above a five minute bar, and the first one to break the first five minute bar, that's how I'm gonna get out on.

Michael: 22:50

Or I'll get out in a week if if whatever it ends up getting and you you have tested that strategy and that strategy ends up working. You just move that stop up below each five minute bar. So who cares if you're in it for a week, If every single five minute bar for a week was higher than the five minute bar before it, then great. And but that's not in your testing. And there's a way if you're worried that the outliers are making up the entire profit, you know that that's a super easy problem to deal with.

Dave: 23:18

Well, so the reason that wouldn't want to hold for a week is for efficient use of buying power. That's not an efficient use of buying power. Okay. And like you said yourself, you're not losing margin for these longer holds.

Michael: 23:34

Yeah. But even so you're saying even something that's going up every single five minutes for an entire week straight is not an efficient use of buying power?

Dave: 23:42

Well, you're talking about this hypothetical perfect trade that is happening. I'm saying, yeah, yeah, if if we could identify the perfect things and only take those, but that you're not gonna be able to find an edge like that.

Michael: 23:54

Right. But okay, so now okay. Now that I've gotten you you are awful debate partner here. Okay. So now that I've gotten you one step closer, you're saying, okay.

Michael: 24:02

Time isn't the only construct in which to exit trades. You're saying there is a universe out there that exists where using some sort of trailing stop could be better. Right? And whether it's really tight or whether some you know, if every star in the universe has to align to happen, there is a mathematical world where using a trailing stop is better than just saying I'm gonna exit as a sir at a certain time.

Dave: 24:25

Yeah. Okay. I'm not sure what your point's gonna be, but let's say

Michael: 24:28

let's say that I give

Dave: 24:29

you this point.

Michael: 24:30

Follow me with this one. So if you're utilizing that as a case, then it's no different from daily bars. Right? If this guy is saying every single day that I'm up money, I'm going to hold the trade. Right?

Michael: 24:44

There's very other few strategies where you can make money on every single day. And if this just happens sporadically and ends up taking a big chunk of his buying power, why is that any worse than going into every day fresh knowing that there is maybe a 60% chance that that day he's gonna make money if he's continuously making money on on every single day as the thing drifts higher? That's generally the premise behind holding these things for a long time. So like some of these trades, you're not saying that you're holding all of the trades like this. And again, the losers, you're gonna be out really, really quickly.

Michael: 25:22

So you're never going to be in a trade that's not making you money at least most days in this kind of thing. So that's what you're doing is you're you're cutting off anything that's not being profitable for you right away, and then periodically, you're getting something that is making you money pretty much every day or every week or every month. And as long as it is, you're you're sticking with it.

Dave: 25:45

Yeah. But if you mark to market, you're not gonna be making money every day. Like, you're just gonna have this position that's profitable because you've been holding it for two years. Well, it better be profitable if you're holding it that long. So

Michael: 25:58

Well, yeah. But it's not it's not unprofitable, and then on year two, it's profitable. Right? Because, again, depending on how the person's using the trailing stop, and I think that's an important thing to go off of. There are like trailing stops that, you know, let's ignore the traditional trailing stop that only trails up as the price trails up and then stops when the price this is why I keep using, like, saying moving averages.

Michael: 26:21

Because even if the price stops moving up, eventually, the moving average comes across it, and you're exited the position anyway. So moving averages utilize time and price as opposed to just time or price. So, yes, in that scenario, the only way that this works is if price increases with you over time. So you're seeing, maybe not every day, but you're seeing most days your account increase in size. And, yes, that might not be as good as a rapid compounding, but it's still it's going up every day.

Michael: 26:53

Right? So something that goes up 10 x in your face, yeah, you didn't compound your strategy every day, but especially if the person's in a place where he doesn't have a strategy that's going to compound his account at 10 x in a year, it's still good to have the thing that goes up every day or most days. Right?

Dave: 27:10

Well, I I I still think this is like a weird hypothetical where this fictitious trade is going up every day, and you're marking to market, and it's magically going up every day, that day?

Michael: 27:22

No. It's I'd say it's not going magically going up every day, because I have strategies, for example, that use that utilize that bar by bar stop on daily daily charts. So the the stop is the low of the prior day. Right? So if that next day is higher, then I'm still in the trade.

Michael: 27:39

If the net the first day that breaks a prior day's low, I'm out. And what happens periodically with this one, this one isn't like a super long term hold, this is more of a v bottom kind of scalp type thing, Is there some of them that I'm in or out in a day or two. If it fails, I'm out the next day. If it continues, I've been in some of them, I think, the most that I'm in for it's been like a week or two. So it's not the same extremes, but it's just for a week, every single day, this stock was unable to break the low of the day before it.

Michael: 28:09

So as opposed to going out there and finding a completely separate trade to place this particular amount of buying power in, that I may not even have needed anyway, if I'm not maxing out my buying power in every instance, well, it just went up today. So let's move the stop up. Right? And Yeah. And deal with it that way.

Dave: 28:28

Yeah. I I think it just strikes me as a to to capture enough of these fictitious 10 baggers to make a difference, you're gonna have to use a lot of buying power to, you know, cast a really wide net. The the to to get in enough trades to get the the 10 bagger. Just seems like a very inefficient use of buying power. I don't know.

Dave: 28:58

But I I don't wanna I don't wanna get stuck on this bizarre hypothetical But but

Michael: 29:05

Well, but wouldn't the solution there just be to backtest it?

Dave: 29:08

If you if you Let's have the strategy go back to the backtest, because that's what I wanna talk about.

Michael: 29:13

Yeah.

Dave: 29:13

So how do we backtest a strategy like this? And this is the way that I suggested. Because the the the trailing stop is, the least predictable thing, and the real edge is gonna come from when you take the trade. Like, you still have to decide which trades to take, and that's gonna come from your smaller window. So I think the right way to test something like this is to pick your pick a timed exit at which maybe you trail some after that, but for the purposes of your backtest, create a backtest where there is a timed exit, assuming you're gonna get out a 100% of it, just for the purposes of this the first phase of the test.

Dave: 30:04

Mhmm. Figure out

Michael: 30:05

Well, and and now we're back to agreeing. So, yeah, I'll I'll agree. That that that is how I will say for people who are just wondering my process of backtesting. That is always the first and I think easiest premise for swing trading backtesting. If if I came up with a generally, what I do, and this is really easy to do in real tests, because they have just this optimization.

Michael: 30:26

It's probably the same in Amity Broker, where I I put a whole days from say, 1 to 252, or whatever it is. And then you say, okay, I'm going to backtest this particular setup, right, this IPO breakout type setup, and I'm just gonna run that across that optimization gambit. What ends up outputting is a histogram. And then you have a general, is there any edge in doing this over, you know, a day, a week, a month, six months, nine months, a year. And you get to see that data outlay.

Michael: 30:59

And if there is, great. Then you end up going in and you start tweaking, you know, x parameters and and things like that. But but step one, is there some, like, optimal universe to get started? Because if all of those scenarios are negative, then it's the act of trailing, what I think what you're thinking of, the thing of getting lucky is actually outputting. But if I can tell you on sixty percent of chances, on sixty percent of cases off 10,000 cases, a month from now we're up, Well, that gives you the confidence to say, okay, there is some predictive power here.

Michael: 31:34

Now, let me find the optimal setup to make sure that I'm getting out most of them around that time that makes sense. And then some of them, that that right tailed type of event.

Dave: 31:47

Yeah. So I think for the purposes of a backtest, focus on that first phase, and that and and even if you think that most of the edge is gonna come from the trail, which maybe maybe it does, still focus on that first phase as the meat of the strategy. And and then at that point, you've got a strategy that hopefully is profitable for this phase. I mean, hopefully is good for that phase. And then the trail is sort of bolted on at the end.

Dave: 32:27

And for the trail, I think you could test it by using the beginning of that trail as if it was, sort like, of like a separate strategy, where you're using the entries from this first phase and creating basically a second strategy, which does the trail part. And I think that it seems to me that if I were to do this, that seems like that's the way that I would do it. It seems like the best way to do it.

Michael: 32:57

Yeah. The splitting strategies, I think you're you're right. I don't I don't do that myself. I I I like all in, all out, you know, we've talked with this. Think when you're when you're splitting entries.

Michael: 33:09

But the other thing that you could also look at is different entry criteria. And I've done this somewhat where, you know, you're just using a simple if statement. So I'm gonna buy this, and if I'm not positive in the first two, three days, get out the position. But if I am, then apply a trailing stop to it. And I've got some strategies that kind of that work like that.

Michael: 33:33

And I've got some strategies that work the inverse of that. It's like the first day I'm positive, get out. And then sometimes you're in a position for three or four days underwater, and then it it finally flips. And that creates a kind of the exact opposite equity curve that we just talked about, where you're just, you know, small winner after small winner, 70% of the time, and then every now and then, you've gotta hold something for a week or so to to to get your money back. But, yeah, just don't think of them binary like that.

Dave: 34:00

Okay. So so you got all these positions that you're trailing. There's gonna be a lot of overlap. You're not using margin. I mean, your buying power's gonna get slurped up and used up super fast.

Michael: 34:17

You can cap the amount of buying power utilized for that strategy. Right? That's a Well, sure. But like

Dave: 34:23

but you're capping the returns.

Michael: 34:26

Yeah. But then you're capping the amount of buying power that's that's utilized in it. Right? This is this person, hopefully, if he's trading a strategy like this, unless he just wants to invest, which I don't think there's anything wrong with either. This isn't his only strategy.

Michael: 34:40

There's multiple strategies that are associated with it. Right? So it's very easy, and this is again, and this I I guess this does explain why there's so much of a different outlay to not like just going to cash every night and not having to worry about this. And it could explain some of the other arguments we've had throughout the the pod as well, is that this buying power management aspect becomes huge when you're swing trading. Because this is where I'm like thinking of

Dave: 35:10

a he it's like the biggest bottleneck ever.

Michael: 35:13

Well, it's the biggest bottleneck, but it's also the biggest problem. Just like so if you think about it, say you had a $100,000, and you start with a $100,000, what you leverage up to say 400,000, depending on where you live. I think our our rules might be different. But anyway, so you start with $400,000 at the beginning of the day, and then you waste that $100,000 overnight, and then you have 400,000 at the beginning of day, you waste that 100,000 overnight. A swing trader may look at it as, I have a $100,000 to always, like, never waste, and then I have $300,000 to use intraday, and then I go back to a $100,000 that I'm utilizing overnight, then I have 300,000 intraday.

Michael: 35:54

So we are dealing with, I guess, kind of both problems. One is, I have that extra margin, and that is my my day trading margin. That fluctuates in the same manner that yours does. But that piece that you also bring the cash overnight, and then bring back into the market every day, that remains invested in some other strategies. So the question, the trade off that you have to ask yourself is is the strategies that you have that are always utilizing that core $100,000, are they going to make more or less than the day trading strategies that kind of fluctuate in and out?

Michael: 36:37

And are they gonna end is absolute gains your your goal? Because the other thing to look at it is that they're gonna create that $100,000 is gonna create a a different source of returns than the 300,000 that's utilized for day trading. So, you know, it this is this is a kind of a personal question as well, where absolute returns may not be your your outlay. You may want differentiating source of returns, in which case it makes sense to utilize this $100,000 for things that have upward drift, things that have a different return characteristic. And this $300,000 is that utilized kind of intraday buying power that kinda comes comes in and out.

Dave: 37:22

Yeah. I mean, I can see that. It's just hard for me to imagine, you know, it's like trying to fit a whole bunch of stuff into a really tiny bag and

Michael: 37:37

Buy bags 25% less in this in this scenario. It's 25% smaller than your

Dave: 37:43

bag. But you've got multiple positions and they're

Michael: 37:47

I'm not dealing with them.

Dave: 37:48

Right, but they're in the hope and pray that you get lucky bucket. So it's gotta be several of

Michael: 37:55

Some of them. Usually two to three at a time. Yeah.

Dave: 38:00

I just it just it just seems like a it just seems buying power inefficient to me compared to the trades that I do. I don't know.

Michael: 38:12

Well, and I mean,

Dave: 38:13

I'm completely wrong, but that that's

Michael: 38:15

But you also hit the nail nail on the head is the trades that you do. Right? Yeah. What if this person doesn't have that large of an intraday edge? Or what if they don't want that large of Yeah.

Michael: 38:26

An intraday edge, you know? There is it is a a completely different return structure. Now I don't know this person's methodology, but maybe they are totally okay with owning a bunch of stocks and trailing it in a bull market. And then in a bear market where this strategy would probably perform less, utilizing some some different strategies. But, well, you know, let's go back to the $100,000 example.

Michael: 38:51

I probably have 25,000 associated to this strategy. If I hit one ten bagger a year, that's $250,000 from this one edge. The other $75,000 could be more frequent strategies where I'm looking to, you know, buy momentum continuation or mean reversion or any of these numbers of outlays that exist, and that's a more frequent turnover that just exists outside of your your time horizon. And then the $300,000 is intraday trading. Right?

Michael: 39:26

So where you're looking at is you're that me utilizing this $100,000 to hold things overnight is buying power inefficient. And where I'm coming at you is I'm saying, doing absolutely nothing with a $100,000 for most of your life is also very buying power inefficient. Right? If you had a non zero return that you could make with that $100,000 that's just not doing nothing, that's also buying you're also being buying power inefficient.

Dave: 39:55

Yeah. But it's it's gonna pale in comparison to what I'm doing intraday. It's like it's like Or maybe

Michael: 40:00

you haven't found it yet.

Dave: 40:02

It's it's not I can tell you, it's just not gonna be

Michael: 40:06

so I mean, I I

Dave: 40:09

wouldn't turn my nose up at it if, you know, if I find some edge there, but it's it's just different, like, edges seem different, and it seems seems very buying power and efficient. That's that's that's just how I'll leave it.

Michael: 40:23

Well, and the last last hypothetical I'll bring you on. So say you find something, because you exit everything, at the end of the day, it's time to exit. Right? But you also have some pre market strategies, I'm sure. Yeah.

Michael: 40:36

You probably have some post market strategies, I'm sure. Mhmm. So you see how you you see how you're getting there? Right? Eventually, right, you'll I'm sure you're gonna have some overnight strategies as well.

Michael: 40:46

Right? So eventually, it should get to the point where I think the goal for everybody, and I I'm sure you'll agree with me on this one, is the utilization of all your buying power. So if you're to the point where, say, you have great intraday strategy, but just doesn't utilize all your buying power all the time. Well, why not hold some stuff that goes for a longer period of time? And then when the time comes, where if the time comes where you end up competing for buying power, you make the decision then.

Michael: 41:16

So sometimes, and for some people, it might be a better opportunity to just find something that has some sort of edge for a long term hold to have that then margin that you're playing with intraday and and go from there. Because you've been and I'm I'm sure your edge started purely during between 09:30 and four. And then probably you found an edge that existed before 09:30, and then maybe you found an edge that existed after four, and then, you know, so you've expanded out, which is one way to do it. Another way to do it might be to, you know, narrow in. Find an edge that exists over time, and then try to try to shrink that edge as as opposed to what you're doing, which is trying to expand it out in time.

Dave: 42:02

Yeah. Yeah. It's it's interesting to think about. I can see I can see the argument that you're, you know, trading pre market, trading post market's getting a little bit toward, you know, a little bit in the direction of, a little bit in the spirit of Mhmm. Holding overnight.

Michael: 42:25

Yeah. Well, and and you're not gonna wake up tomorrow and everything is gonna be twenty four seven. But it's gonna the question is, in my mind, is it, you know, five years out or is it twenty years out? It's just not, you know, we now have options that are opening up earlier. We have a pre market for options for the first time ever, which never existed before that's gonna change the auction mechanics.

Michael: 42:49

You know? So the way I just look at it is that any moment that I'm not utilizing buying power is upsetting to me. Right? So at and and like we talked about, I think, in the in the prior episode, there's people out there, most people have a, like, a negative edge. So if you have a a positive edge in anything, utilize your buying power for that positive edge in anything, and then use that as your springboard to find more.

Michael: 43:17

But if you're ever sitting there and your stuff's a 100% in cash, well, that's not unless you want to get into the inflation argument. Right? You're at a zero to negative edge if your cash is ever is ever sitting idle. So explore you know, you using that as a fail point for your trading strategy, and say, well, I'm gonna I'm gonna focus on that period of time where I know I have buying power that's not doing anything, that could be doing something, even if that something is is like a very small edge, fine. You wouldn't you wouldn't, you know, sacrifice something out there that has a huge edge if you had to make the buying power decision.

Michael: 43:59

But if it's sitting there doing nothing, you should do something with it. Like, I don't know, put it in t bills or something at that point. Right?

Dave: 44:06

Yeah. I am yeah. I I will I'm gonna explore this. I'll be the first one to admit that you're if I do straight a strategy like this, I'll I'll come back and say, hey, Michael, this is what I've done. Here, what do you think?

Dave: 44:27

But, yeah, it's hard for me to imagine doing that, because specifically because, you know, I don't wanna create another edge that's gonna be small, that's gonna even if it's slightly additional, because I don't like, I wanna focus on what is really bringing in the profits, and and I feel like that it would be a distraction to me to to to focus on something like this.

Michael: 45:02

Why? But but why? So, you know, I that's one thing, especially the the the reason that that shocked me is from you in particular. Right? I could see that from a discretionary trader, even someone who's just not as as amazing as programming and building shit as you.

Michael: 45:22

Shouldn't you, if you have something that that utilizes a system like that, shouldn't it be, like, next to no additional work at all? Like, the the reconciliation becomes automated, the the trailing of the stop becomes automated, the like, shouldn't it just be completely, you know, divorced from anything that you'd have to do once it's built?

Dave: 45:43

Yeah. Well, I I think it's I think it's just opportunity cost. You know, I've got lots of different ideas intraday that I still need to test. And if you were to do if you were to compare those to these, there wouldn't be a comparison. Like, which one should I work on?

Dave: 45:59

Well, the answer data ideas are gonna bring in way more money than this one. Like, there's just no question. And if I run out of ideas, okay, yeah, let's we'll go to the next best idea, but I just don't feel like I'm to that point yet. Maybe that's a luxury, maybe that's maybe our brain is just wired that way, and that's how I think, but I think there is so remember we I've mentioned the quote before by John Arnold, that he's not trying to go an inch wide or an inch deep and a mile wide, he's trying to go a mile deep and an inch wide. Mhmm.

Dave: 46:42

And I think I feel like to do to trade a strategy like you're talking about, would me would be me going a mile wide, starting toward going a mile wide when I got more depth to go to.

Michael: 47:00

I I could I could agree with that if that was your only strategy. And I think the most agreements we have is that you're just not wired like that. Because I I do think I'll get you one day. I do think, which I'm owed because I think I've given you a lot of your rights on this podcast already. So I think I'm owed I'm owed a couple.

Michael: 47:24

But but I I do wanna hammer in on that where at the end of the day, we always got to remember that we we are human. So even if even if I win this debate one day intellectually, but it just doesn't sit well with you, and you wouldn't have that path to confidence to trade it, even if the math told you it was there Yeah. You still shouldn't trade it. Yeah. You know what I mean?

Michael: 47:46

You you still should go, okay, I just don't. And I I know I know people on on both sides of the fence. I know people who don't like, you know, I remember always, one of the original trading rooms that I was in, this guy was exactly like you, was a day trader, he didn't even hold any investments, he didn't, you know, do whatever. And the joke he'd always make is I don't even hold my wife overnight. It's like I he just he was out everything by the end of the day, always 100% of the time.

Michael: 48:13

And I know people that are are the complete opposite of that. They want they want that upward drift that seems to come, generally speaking, with with owning assets anyway. So, you know, there's the extreme of, you know, I'm never gonna pay off my house because I think I can make more money than the interest rates are gonna charge me anyway, versus I wanna pay off my house right away and and have an asset that is, you know, somewhat stable in nature, and some of it is just gonna be, you know, pure psyche, right, than anything. Yeah. Well,

Dave: 48:49

lots to think about. I'm interested to hear what people think. I know that I'm a 100% sure that I'm gonna hear from at least a dozen people about this conversation. So this this will be really I'm very interested to hear what people how people react to this.

Michael: 49:08

I I'm sure I'm sure I'll hear from a bunch of people as as well, which is which is the fun of these ones. I we don't have them very odd. We agree too much, so I am glad when we disagree. But

Dave: 49:18

Yeah. This is good.

Michael: 49:20

Yeah. Definitely make sure you're you're letting Dave know how wrong he is in the comments. Please. And and how I'm right, or vice versa, of course. This is all all in good fun.

Michael: 49:34

But yeah, again, I love these, you know, let us know what you think. And as always, I'm Michael Nauss.

Dave: 49:39

And I'm Dave Mabe. Talk to you next week on Line Your Own Pockets.