Line Your Own Pockets

Michael: 00:00

All right, everyone. Welcome to another episode of Line Your Own Pockets. In this episode, we're going to talk about, again, another email that we got just talking about how Want to be perfect in trading, Want to make sure that how do I find the thing, right? The holy grail, the one thing that you know never gives me any pain or any drawdown or any of that kind of stuff. And the email came to Dave, so I'll get Dave to kind of give you the broad summary of it before we get into it.

Dave: 00:28

Yeah, so this is an email I got, I don't know, it's probably been a month or so ago, and it's a pretty common, somewhat common theme. I think a lot of listeners of the show realize that there's no holy grail or at least they would agree with that statement. I do see it's a it's a little bit more subtle, what I see, some traders hanging on to, like the idea of a perfect strategy. And that was the case with this email where smart guy could tell from our interactions just over email that he's a smart guy. You know, he's not not a dumb guy.

Dave: 01:08

And but he has this fixation with he is certain that he can that he's just very close to being able to predict market moves with almost a % certainty. So and, you know, this this this was very specific incarnation of of sort of the same topic, you know, this perfection that's just out of reach. And I see a lot of times it gets in the way of traders doing well.

Michael: 01:51

Yeah. It's it's funny. It's one of those things that regardless of how much you try to, you know, get this into people's heads through different examples, through different everything, I haven't found a way with some people just to show them the light of this whole, you know, perfection is going to is going to come. You know, there's books I'm sure we'll talk about. There's examples you can use from kind of large name traders and hedge funds and institutions out there.

Michael: 02:21

But I think first, it would make sense to talk about what we think the root of this is. So why do we think people are so obsessed with instead of having an overall focus of I'm going to look to make money and then however the math figures out whether it's a high win rate and a low risk reward or, you know, a low win rate and really high risk reward, who cares? It's just at the end of the month, the end of the year, if I've got more money in my pocket, that's good. Why do you think people struggle so hard for that, making things better and better and better to the area of perfect and then the detriment of their own trading?

Dave: 02:57

Yeah. I think that's a great question. And you started asking it, I was like, gosh, that's I don't know. But I think what it boils down to is, you know, people see patterns and they want to be able they it it looks like it should be predictable. Right?

Dave: 03:15

It just you know, a lot of people with mathematical minds or statistical minds think just that they just cling on to this notion that they they can get better and they can predict with certainty because I think that makes people comfortable. If you've got something that you know is certain, there's comfort in that, and that's what people are drawn to. People don't like being wrong routinely, right?

Michael: 03:42

That was gonna be my answer too, pain avoidance, right? Is the, you know, we know that nothing we'll ever do will be able to predict every trade perfectly. But for the first little bit, you kind of think that you do. Some of this might be social media and some of these foo roos and stuff that we did a whole really interesting episode, if you missed that, with a gentleman who did a whole paper on how these FUROOs really don't know anything, Tracked all the data and the statistics. So I think that's probably some of it is, you know, people saying here, well, you know, I saw this guy and he says he makes money every day.

Michael: 04:22

So I think that's some of it, but I really think more than anything, is that pain avoidance, right? People are looking for, you know, every time I make a prediction and it's wrong, that just hurts me. It just hurts my soul, and I don't want that to happen. So a lot of people seem to be way more okay with taking very small winners and huge losers and doing things that are kind of counter to their overall trading. In my opinion, it's all in search of that.

Michael: 04:51

I don't want to feel the pain of what happens when I get stopped out of a position or it exits for a loser.

Dave: 04:58

Yeah, I think that's true and I think it's ingrained from an early age with our educational system. Right? You an a plus is almost a %. You know, you're and a lot of students these days, if they get a b, they go home and cry out to their parents. So Yep.

Dave: 05:18

Which is, you know, 90%. So I think we're ingrained very early on that if you're not really close to perfect, you're a failure. And I think that's you know, just think about we spend the first eighteen plus years of our life many times more with that mindset and we're constantly being graded on that. And if you bring that mindset to the markets, you're gonna have to unlearn a whole bunch of stuff to be able to be successful.

Michael: 05:49

A whole bunch. Yeah, for sure. It's I think that is certainly part of it, right? A lot of I think a lot of it is that when you're right in other aspects of your life, again, feels good, whether it's, you know, you're predicting anything, a trivia game or something, it doesn't feel good to be wrong, right? To say, Oh no, it was that actor in that movie, even something stupid like that.

Michael: 06:12

And then you turn out as wrong. No, was this other actor, and they look exactly the same. So anytime you're wrong, it just doesn't feel good. And I really I do think that that's the overall that's why people search for perfection. Whether or not they know it and they're they're knowledge enough about themselves to admit it, think that's another beast.

Michael: 06:29

But I think that's the overall focus is to say, I to under I want to be right more than everyone else. Right? I want to be that guy who is correct all of the time. And this is why again, you'll see it a lot on social media where every time, you know, when we're recording this, we're in a pretty big drawdown in the market. And I've seen bears come out of the woodwork saying, told you so, even though they've been bearish, you know, the last five years when the market's over doubled, right?

Michael: 06:54

And it's that there's it's all emotions, that feeling of, Oh, I was right. I told you we would go down at some point even though, you know, I was four or five years too early.

Dave: 07:03

Yeah. You know, one thing that I've started doing fairly recently in my life is in conversations, I'm not scared to say I don't know. And a lot of people are that's the last thing they wanna say. And, I mean, there's just so many topics that you can't know about, you don't care about, but still people feel like they have to give an opinion, which I think is sort of counterproductive.

Michael: 07:33

Yeah. And I always say this too when you're talking and you're looking at traders. We talked about building a social media group or at least some sort of trusted trading group. A lot of that will be done nowadays in social media. And, you know, I got a couple of questions in my email box about, you know, how do I know who to follow?

Michael: 07:51

And one of the things that I always tell people is if you see a trader ever speak in absolutes, run. Right? If it's ever the market will go down or the market will go up or, you know, this thing will bounce here or something like that. And I think that's just something you learn as traders over time. They're either and the hope in this episode, we can kinda help some people speed that up.

Michael: 08:12

But eventually, if you do this game long enough, you'll realize that no one knows anything. And we're all just playing a giant game of probabilities and that eventually, right, we're hoping that these probabilities work out. Right? That's at the end of the game, that's at the end of the day, that's it. I kind of compare trading sometimes to, you know, playing a coin flip game where, you know, we flip a coin.

Michael: 08:31

If it hits heads, I'm going give you $2. And if it hits tails, you give me a buck. Like, that's a great game for you. You're going to play that game all the time. But there's gonna be large periods of time where you're just gonna be paying me money because it hit that adverse outcome.

Michael: 08:45

So, now that we've kinda got to the source of it, guess, what are some tips? Like, how do we go down the road? How do we shake people out of this fact that you don't know anything and you could spend your entire life doing this and you still won't know anything, right? You're just trying to play this game of probabilities a little bit better than everyone else.

Dave: 09:05

Yeah, so I have a plan for or this I have sort of a process for asking questions that hopefully lead the trader to the right way of thinking or what I think is the right way of thinking. The first thing I'll say is, okay, what evidence would you need to see to believe that there is not strategy that has a % win rate? And

Michael: 09:33

I just love that question, and it's actually a question that I think you can ask all the time when it comes to dealing with people with politics or people with kind of fringe beliefs of whether or not it's worthwhile even having a conversation. Because if the answer is none, if the answer comes back, No, I think I really got something, then you know, as sad as it is, that person is probably lost, right? If it's, No, no, there's nothing you can show me to say that there's no, you know, I don't have an answer that other people don't, then you go, Okay, have fun sir. Then you're gonna walk away from there I think.

Dave: 10:07

So I did ask this trader that, and I could tell he perked up a little bit, or I I could tell it was a question that he hadn't been asked about or hadn't thought much about. So just you just plant the seed. The other thing I think about is lost my thought there.

Michael: 10:35

That's okay. So, no, we were just talking about how just go how the questions that you ask. Right? So the first one is just talking about how what evidence do you need to see? And if they've got a good answer for that, what's

Dave: 10:47

the Yeah, the second one is, let's say you do find such a strategy. Let's imagine you do. Feel? Like, what would that do to your life? Like, how would that benefit you?

Dave: 11:05

And usually the answer is, Oh, well, you know, I could make a lot of money. You know, I would feel successful and I would have, you know, I would feel content. And my response there is, well, you don't have to find that strategy to achieve those things with trading.

Michael: 11:25

Yeah. Any profitable strategy will do that for you.

Dave: 11:29

Yeah. So you like, you're on this wild goose chase for something that you already can achieve using things that you've already experienced or strategies that are within your reach. Mhmm.

Michael: 11:42

No. I I like that one too, because the rate that people sometimes I think, and I think it's because that emotional stuff that we talked about earlier, is sometimes they lose sight of the goal of I'm just here to make money, right? I'm just here to play this probabilistic game. And at the end of this probabilistic game, have more money in my pocket than than when I started. So yeah, they they that obsession with being right, I think actually ends up really hurting people where, yeah, it's just who cares?

Michael: 12:14

I'll be interested, I've got a bunch of ideas too, but I want to keep going down these questions with you. I think these are really good so Yeah,

Dave: 12:21

so one more, This is actually probably the first thing I tell people, and that's the best way to come up with a great strategy is to come up with an okay one and improve it. That's totally true. Like, there's no reason you need to wait to have something perfect or what in your mind is perfect to start trading. Start trading with something that's good, and there's lots of ways to improve a strategy once you get something working. Mhmm.

Michael: 12:50

No, that makes sense, because it's if they do believe that there's a perfect strategy out there, if they can't build something with any kind of positive expected value, then they can't build a perfect strategy. So that might be another way to the people you really can't convince just to placate them for a bit. Said, while you're working on your perfect strategy, you know, build something that has any amount of positive EV, and that will be a good starting point. And then from there, we can start to, march our way towards perfection on that strategy, and then hopefully somewhere along the way they'll go, Oh, this is probably good enough as is.

Dave: 13:27

And you know you and I talk about this a lot that there's no perfect strategy, but actually we don't really know that. We can't prove that, right? There could be a strategy out there that is perfect that we just don't know about. But let's assume there is. The way to get to that strategy is exactly what I just described.

Dave: 13:52

Start with a good one and improve it. You're not gonna magically come upon this perfect strategy right away. You're gonna build up to it and do use what you learn over time to come to it.

Michael: 14:05

Yes. Now we could get all meta about how, you know, I disagree that we don't know that, and that's just because of the the underlying randomness of overall markets. But you're right, I get where you're going kind of mentally with that, what you're saying, you know, in theory, could exist. And the only way you do that is you go through the process of coming up with an idea, testing that idea, you know, some back tests, if that ends up working, paper trading and recording. So yeah, your process doesn't change whether this holy grail exists or whether it doesn't.

Michael: 14:38

It's just

Dave: 14:38

Exactly.

Michael: 14:39

You do the same thing anyway, and you just hope to hit gold one day. And then if you find some silver along the way, great.

Dave: 14:45

Yeah. Yeah. Totally. I think that's the like, whether you believe it or not is irrelevant for the path you should be on and what you can do now to make money and be successful. So, you know, it reminds me of have you ever heard of the the concept called the monkey trap?

Dave: 15:06

No. So I think I got this from Robin Hanson, who's an economist at George Mason. And it's like a it's a thought exercise where, apparently, you can trap a monkey by putting some, like, some food or something it wants through a hole, you know, on the other side of a hole where his arm could fit through. But when you grab a hold of the thing, you can't it's too big, so you can't pull out your arm and hold the thing. So to get your arm out, you have to let go of the thing.

Michael: 15:52

Rock or

Dave: 15:53

the piece of food. Yep. So all you have to do is let go of the thing, and you could be free. But a monkey, like a greedy monkey, will is just resistant to like, really is resistant to just letting go of this idea of this thing to free himself. So you can actually trap a monkey that way.

Dave: 16:16

So it's just an analogy for lots of things, but I think specifically this quest for perfection. You know, all you have to do is give up the quest for for for true perfection to actually get stuff done and make money.

Michael: 16:35

Well yeah, and that's what, you know, we'll I'll go over some of my ideas to convince people too, but I think that's the kind of ultimate detriment that we're talking about here, is not the fact that the person believes that there's something out there that is a perfect strategy, it's the fact that they will wait and they will spend the time potentially optimizing for the wrong things while they're trying to find that strategy and then disregard potentially a series of good strategies that they could be running on this quest. So it's like, you know, the whole Moby Dick and the White Whale. It's like, okay, you know, you spend your whole day looking for something and trying to get something that you're not going to end up getting, all the things you've just wasted your entire time. But if it's one of those where you're okay and you're finding these okay strategies along the way and you're running them and everything's going fine and you're just continuously grasping for that strategy, I don't really necessarily think that's the worst thing in the world. Again, as long as it's not getting in the way of I found all these okay strategies on the way to the perfect strategy, and I'm gonna trade those, but I still think it's out there and I'm still gonna go go looking.

Michael: 17:44

It's like, just again, don't let it don't wait until you find the perfect strategy. Start trading the okay one and kind of go from there.

Dave: 17:53

Yeah, totally. So do you have thoughts or questions that you might ask somebody who's in this, or do you have any

Michael: 18:00

strategy for So, first of all, I always try to give examples of other people's that exist. One thing that I like to show people sometimes is when Renaissance Technologies posted its returns and we could see that, I show them this as this is the best in the world. So for those who don't know, Renaissance is a pure kind of quantitative firm out there. Hope My Jim Simons, rest in peace. Great book too.

Michael: 18:27

Don't know if you've read that, The Man Who Solved the Market or something. It's a great little book.

Dave: 18:31

Good

Michael: 18:31

book. Shows why geniuses can go mad because of politics. I think the dude just had the keys to the world and then eventually at the end of they spent a lot of their money on weird political stuff and a lot of some of the firm fell apart. But anyway, his purely quantitative, he would only hire PhDs and mathematic. He didn't want anyone with any kind of knowledge in finance at all.

Michael: 18:53

Right? He just wanted to find little inefficiencies about the market and then create a whole bunch of strategies around it. They are the best hedge fund that ever existed. They had to close their doors years ago because they were just getting to everybody wanted to give them money. Then too many people were trying to give them money and they couldn't, you know, you just couldn't.

Michael: 19:12

I can't manage that much money, right? So they closed their doors ages ago and they had, I think, one down year and most years were like 60 something percent plus for all the reported years. Just insane. There was some stat that if you put a thousand dollars with this guy when he opened his fund, it's worth like a hundred and 50,000,000 now just through compounding. Just insane returns.

Michael: 19:31

And then I show them this. I say, okay. They have millions of PhDs, all the smartest guys in the world running around the clock, all the best data. You know, they're spending millions and millions of dollars to get everything, and this is what they can do. Right?

Michael: 19:45

So if you're expecting to meet that or maybe even do a little better, that's fine. But if you think you're going to be able to double or triple or quadruple these guys returns on on a very consistent basis, then again, good luck, right? I find that's a realistic but incredibly high benchmark. I'm not saying, you know, the average return on the market is 8%, try to go for that, but I'm saying these are the best in the world. So that's one kind of thing to potentially achieve on.

Michael: 20:13

But if you think you figured out something that's going to just completely blow all these guys into the water, then, you know, maybe think again, right? These are these are the best in the world and you're trying to get close to them, right?

Dave: 20:28

Alright. So I'm gonna I'm gonna play the role of the person that's desirous as perfect strategy and and come back at you at you with the response to that. Well, Michael, yeah, if you're trading that much money, you're gonna have 60% returns. But if you're trading a smaller amount of money, you could put you have a lot more flexibility to trade a whole bunch of different strategies that they couldn't. So there's gotta be some way, trading a smaller account, to get better returns than that, and even really, really perfect returns.

Michael: 21:03

Well let's say that edge doubles your expected returns, and you're doubling your money every year. Still won't be a perfect strategy, right? And then some of the other examples I give, and this is one I always give to the win rate guys. I know we're not specifically talking about people that want the 100% win rate, but guys Yeah, and I find most of them do, right? Because it's that pain avoidance thing.

Michael: 21:27

I never want to take a loss, I never want to lose. They'll look at every single trade that they make that lost money and try to figure out a way around that and say, I just had a MACD on here, I wouldn't have taken that loss or whatever it is. I point them to the turtle trading books. These guys billions and billions of dollars, and there's some of them Jerry Parker, I always keep forgetting his name, but Jerry Parker is still doing this to this day, a multi billionaire trading them. Sub 30% win rates on most of these strategies, these trend following systems, and again, made billions doing it.

Michael: 22:02

So then trying to show them people who became unfathomably wealthy by doing simple things that are suboptimal is kind of the road I try to push people down to say these are things that are way more achievable. And, you know, not that these guys are smarter than you or anything, but again the turtle trading rules you can see published, exist out there, you can back test them, they still hold up in the same kind of degree today. But sub, you know, 40% win rates at the best of times and making millions. And my hope is that by showing them the other people that are doing things a little bit differently and still doing okay, right, I'm pointing them towards that you can make money without being perfect, and then you got to figure out the brain stuff on your own. I'm not Doctor.

Michael: 22:52

Phil, that's what, at least not yet, maybe the hair will go eventually, but for now that's kind of all I can do.

Dave: 22:59

Yeah, it's it's very easy to fall into a trap of, you know, seeking perfection. And, you know, as as the saying goes, perfect is the enemy of good. Mhmm. And, you know, you don't necessarily have to be looking for a % win rate strategy for this to affect you in smaller ways. You know, just think about it's very easy, especially as as technically minded people, to get obsessed with certain things that turn into rabbit holes.

Dave: 23:35

Right? And and you end up wasting a lot of time. And one other thing as I was thinking about was, you know, from the surface, every rabbit hole looks like a pile of money. Right? So you need to learn to recognize and very quickly determine if this hole you're getting ready to go into is gonna be worth it or it's gonna be a rabbit hole.

Dave: 24:00

So the better you get at determining that, the better off the better off you'll be and the more efficient you'll be. And you'll, you know, you'll learn to recognize opportunities and recognize waste of time.

Michael: 24:12

Well, I think that's part of it too. And I had this conversation on on spaces with a bunch of traders talking about it. I think there's a sunk cost fallacy. These these were discretionary traders in any kind research, right? So for us it might be, you know, you think you have a good idea, dive it in, you're coding it into your back test, or you're back testing it, it comes out not very good, right?

Michael: 24:37

So, you go back in and you're tweaking and you're doing and you're trying to, you know, using machine learning, you're doing all this stuff, try to make the strategy good. There has to be a point in which you just go, okay, I had an idea, that idea didn't work, probably learn something along the way, move on to the next thing. I think that exists for newer traders a lot more than it does for us who have been doing it sometimes, and I think it's one of those things that we got to look at as part of this as well, where if done all this research in the world to build this strategy, it should work like this whole, you know, I've spent an hour and a half watching this really crappy movie. I'm going to sit there and finish it, even though I'm not enjoying myself in any way. And then for discretionary traders, think this kind of exists as I've done all this research on the stock, right?

Michael: 25:28

Maybe I've done my fundamental research, and you know, I think it's a good company, and I've looked into the management, and they're good as well, and all these things are good and pointing to the right direction. So, right, I'm going to buy this stock, and then all of a sudden it moves lower, and then it moves lower. But you're so sunk in the ways, and the reason this conversation came up is, as I talked about while we were recording this, we had this amazing two year bull market, and then we were now down like 10% from highs, in a pretty straight line, a pretty dramatic sell off. And we were talking to all these traders who didn't follow their rules when it came to exiting some of these investments that they had. Right?

Michael: 26:07

And it came down to this same example of this sunk cost fallacy of, right, I've been holding, you know, Palantir for so long and it's made me so much money. There's almost a fear of loss of when I finally sell it out of my portfolio that, you know, this thing that's been with me for some time. So I always wonder your kind of take on that where, I mean, how much of this is I've spent so much time and energy on this thing that I feel like it just has to work even if the data's telling me otherwise.

Dave: 26:36

Yeah. There's a whole lot there. I mean, the first thing I thought is when you're saying that is, man, I'm glad I'm a day trader and not a swing trader. So I don't even have to think about this. Like, this is just another solid month for me.

Dave: 26:53

But a couple more things about what you said. So when you run into a dead end with a strategy, yeah, that that's frustrating, especially for new traders. They put all this work into it. They've done a lot of r and d. It seems like it should pan out for something.

Dave: 27:10

But what you don't realize is that what you've learned there will pay off one day. Even if you learn that it doesn't work, that will pay off because you'll know that, you know, that that idea is a rabbit hole and you'll avoid that in the future. Mhmm. What I tell my traders who run into that is and this is hard because you're you're at a you're at a moment where you don't feel like working on it anymore. You you've given up on it.

Dave: 27:41

Right? You're you're fed up with this idea. But that's really the point where you should do some documentation about, okay, what is my mindset here? What what what obstacle am I running into? You want to give yourself as much documentation about your mindset as possible so that in the future, you can jump right into where you were and with that same mindset.

Dave: 28:10

And that's really hard to do because in that moment, like I said, you're frustrated. It's hard for you to imagine that it wouldn't be easy to get back into that dome of R and D. But, you know, six months from now, you're gonna forget all about it. So it's good to document everything, your thoughts, why thinking what you're thinking, where you're stuck, and come back to that later. Because there will be a point where you'll learn something else about what you think is an unrelated strategy and a light bulb will go off.

Dave: 28:47

And the better you the better your documentation is for this kind of thing, the better you can search through it and and go right back into to that, you know, that zone of R and D and pick back up. And maybe it wasn't a rabbit hole at all that you discover later.

Michael: 29:05

Yeah. It's funny, I laugh because that actually happened to me today. I was at the gym this morning, and go to the gym every day before the market opens, and whatever happens, that whole thing when you're doing something completely else, you get a light bulb moment. Like we talked about in one of our earliest episodes, the ability to record those. I've got my headphones in, I'm like mid set, just something came to me, a strategy that I've been working on for months, and I still believe there's some edge there, but just trying to figure out the mechanics behind it was hard.

Michael: 29:37

And yeah, you get that idea completely out of the blue, so I just write it down, I say, remind me, the reminder should come up when I'm done recording this podcast, and it's like this is an idea you had, you can get back to work. So yeah, just because, and I do think that will help people frame that, is that either you've learned something if you're like me and you're not new at coding, right? Either you learn something from the coding point of view, like I've gone back to some strategies that I was working on and just looked at them and said the strategy still might be great. I just had no idea what I was doing on the actual mechanics of scripting it out. And now that I know a little bit more, and AI is a little bit better, I can go back and take a look at it.

Michael: 30:17

Or, again, like you mentioned, that light bulb moment that just happens completely out of the blue, and you're saying, oh, well what if I used, you know, this as an exit criteria, this as an ranking criteria, or whatever it is, and you get to go back, and that's why again documentation's huge, having that old script that even though it failed, still somewhere that you can just bring that up and make some changes and make a test. And then I find when I go back to it, I'm going to give it that one shot, and if it doesn't work, I'll walk away. So you know, I will know within maybe a half hour of if that idea I had at the gym makes the strategy better or not, because again everything's already built, and I'm frustrated enough with it I'm not going to spend twenty hours going after it anymore.

Dave: 30:57

Yeah, and a lot of those light bulb moments aren't crystal clear. They're, you know, it's not like you have, oh, here's the answer. It's very clear to me. Usually, it's like, wait. Didn't doesn't that imply something else that I've worked on?

Dave: 31:10

I can't really put my hand on it, but I know I've worked on it. It's those kind of frustrating situations where you, you search your files and you can't find it because you were a little bit lazy when you got stuck and you didn't document some things. Yeah, I encourage people to use traders to use GitHub. I know we've talked about that before.

Michael: 31:31

Mhmm.

Dave: 31:32

GitHub and the markdown documentation there, getting good at that is really helpful because, you know, maybe one day you start up a partnership with, like, go back to previous episode where we talked about that. It's very easily shareable, and you can hit the ground running with a trading group and really make good progress as long as you have good documentation for others, but also, you know, mainly for yourself.

Michael: 32:01

Yep. No. I think that's a huge way to get over the whole sunk cost fallacy, is just say, you know, every time spent, as long as it's purposeful and I'm not just, you know, banging my head against the wall, not doing anything worthwhile, as long as it's purposeful, it's something that kind of makes sense. So we got some coverage on what to do if the person's having this problem because of the pain thing. Again, we're not psychologists, so all we can do is either give you examples or ask you questions that kind of point you in the same direction.

Michael: 32:33

And then also the whole sunk cost fallacy of I spent so much time on this, it has to work. Anything else you can think of that would drive people into this, I'm not going to trade good strategies because I'm waiting for perfect strategies.

Dave: 32:47

Yeah, so there's one last thing as we were talking that I remembered. So let's say you find perfect strategy.

Michael: 32:58

Mhmm.

Dave: 32:59

Right? Let's let's say you find something that historically was a % win rate and you're sure of it. How do you know that's gonna continue in the future? There's still even at that point, even if you find something, you won't be able to convince yourself that it's gonna continue in the future for good reason, right? Predicting the future is hard.

Dave: 33:23

Yep. So even if you find it, you're still going to be in the same situation where, like, how much size do you put on? You're not going to be able to put on all the size you want to because you're not gonna have the confidence that it's gonna continue. And if you do have that confidence, that's probably not warranted. I mean, it's definitely not warranted.

Michael: 33:46

Yeah. Well, that's I I never thought of that, but you're % right. Right? I could find you, give me an afternoon, I could find you a back test that's 100% accuracy, and it will look really good on paper, and will go straight up into the left. But then when it comes time to go live, it just means I've curve fitted the hell out of it, I've created a really crazy risk reward ratio, I've just eliminated, gone through and manually eliminated all the bad trades, which you know, is something that I always say all the time that we got to remember the goals of this, right?

Michael: 34:20

And I think that's part of the problem that people spend in back testing land and not so much in paper trading land is that you're obsessed with the whole line go up, right? I want the line to go from the bottom left to the top right, and I don't want any drawdowns in it, I want to and then what happens is the more time you spend doing that, then the more likely that when the time actually comes, that that thing is just going to be an awful strategy, right? And you've kind of made something that made you feel better in the moment, but it will make you feel way worse when there's actually money on the line, even if it's paper money, because now you're wasting days of time while you're watching this thing kind of trade in front of you, as opposed to minutes or hours and times while you're while you're running systems and running backtests.

Dave: 35:05

Yeah. So, you know, you mentioned backtests, which reminds me I think this

Michael: 35:10

is I

Dave: 35:11

think it was just a couple days ago I had this conversation with somebody who's a listener, so I'm not gonna mention their name. I didn't get permission to use his name, so I'm not gonna use it. But he wants to create a back tester, his own custom back tester, and he wants it to be perfect. And this is a sort of a form of that mindset, you know, looking for the perfect strategy, looking for the perfect back tester.

Michael: 35:37

And

Dave: 35:39

he wants to, you know, use a whole bunch of level two data to get the prices just right so it's accurate. And he wants to have he's searching for accuracy first. And that is a I mean, you could take that route, but I encourage people to use the tools that are out there. And if you do wanna create something custom, make sure you think about the trade offs for that accuracy. You're yeah.

Dave: 36:15

You can get it more accurate with but but to, you know, to include level two data, all of a sudden, you're gonna have a mountain of data to go through, your backtest is gonna get slower and slower. So, I mean, talk about rabbit holes. This is definitely one. I I Yeah. I I think it's a perfect example of one where you can just use bid and ask and get plenty of accuracy for what you need.

Dave: 36:40

It's never gonna be perfect. Right? The backtest is never gonna be perfect no matter how much data you ingest and look at. So I think that's a really good example of looking at a cost benefit analysis to figure out, okay, how much data would do do we really need to to digest here? How much is that gonna cost?

Dave: 37:00

And how much is it gonna pay off? Every like I said, from the surface, every rabbit hole looks like a pile of money.

Michael: 37:07

Well, and I think you'd I like the analogy there of just running it like a business because you should run trading like a business. But yeah, that cost benefit analysis of, you know, if I put any value at all on my time, then any rabbit hole I go down to costs, right? It's opportunity costs or something that I could do somewhere else. So yeah, there's the cost of the data and then there's cost of the processing power to do all this. But then there's also the cost for a lot of this stuff of just, you know, not doing the correct thing, right?

Michael: 37:39

And the correct thing is just as much as you can kind of estimating things and getting to the point where you can start making money. And then if you want to start, you know, increasing things slowly, you can go right ahead. And one example, brought this to me of a book that I think everyone should read, it's just called Golf Isn't a Game of Perfect. And it's this whole kind of premise of this where the imaginative extremes that you can go through is first of all, what if you went for a hole in one every single shot, right? Every single shot you're going to drive, you know, right to the tee and try to, you're going to be awful, right?

Michael: 38:13

And this is from someone who's a non golfer, so I'd be awful anyway. But you know, you have to sometimes plan out the whole indifferent, right? I'm not going to go right from here to the T because there's a giant lake in the way, things like that. And it's kind of the same thing with trading is that there's nothing that you can do that is absolutely perfect. If you haven't discovered that applause yourself, can kind of trust me, bro, on this one, right?

Michael: 38:37

Just trust us that it doesn't exist out there. So your question is, how can I get close to close enough to to perfect in order just to get profitable? And then if I want to continue to clean things up and go down the road, there's plenty of work to do. But you got to kind of get started before you get perfect anyway.

Dave: 38:57

Yeah, totally.

Michael: 39:00

Yeah, so I think that was great. Hopefully, you know, we shook, if we did, we shook someone and said, Hey, yeah, I'm having that mistake. I'm looking down that road and you guys helped me at least divert it a little bit. If we did, definitely let us know. I think there's, know, tonnes of topics to be had on this, but it's one of those where I see it all the time.

Michael: 39:22

Every new trader that comes in to my website or talks to me, a lot of them, especially if they're brand new, they look at it and they say, Oh, well, you know, you took a drawdown here. Like, can't you go back to the drawing board and try to figure out how not to? And I go, No. Especially again in this market, Dave doesn't care as a day trader, but as a swing trader, it's a pretty rough market for swing trading. But, the lessons that I'm able to give people help out a lot, because they're like, well, what do you do when the market drops 10% in 10?

Michael: 39:54

You lose money. You continue to trade the strategy, and in the long run you end up doing okay, but it's just going to happen. And you know, just to show we are now in a world where, you know, things are moving incredibly fast based off of tweets and news. So good luck trying to predict that, even if you're able to build a strategy that does it. You know, try to get as as close as you can and then, right, spend more time with the family and less time trying to get perfect.

Dave: 40:21

Yeah. Yeah. It's you know, trading is a game about not being perfect. And in fact, you know, best traders aren't perfect and are ready to admit that and live with that and they know the constraints that they're under. So, yeah, I love that.

Michael: 40:39

Yeah. It's all that coin flip game. Right? Just a slight edge on a game that you can play over and over and over again, that will make a lot of money in the long run. So, spend more time going down that road and less time going down the perfect road.

Michael: 40:54

So, I think that was a great one. Again, every time we get one that comes from a listener or someone on our email list or something like that, I think they're sometimes the best because we know we're at least helping one person, hopefully that listens to this. And then, it's like your teacher always taught you in class that if you've got a question, make sure you ask it because there's probably four or five other people with the same question. They're just not they're not comfortable asking.

Dave: 41:19

Yeah. We've gotten a lot of good comments and feedback. Keep it coming. Yeah. Feel free to rate the show on Spotify or iTunes that that helps other people find the show.

Dave: 41:32

So, yeah, if you like this show and, you know, we've gotten a lot of comments from people that do like it. So, please do that.

Michael: 41:39

Yeah. It's the best thing you can do. We don't do that very much because we know that, no one wants to hear the like, comment and subscribe if you're on YouTube, but it really does. It's all algorithmically driven, right? So the more you do that kind of simple stuff, the better, the better it is for everyone.

Michael: 41:52

So again, another good episode. I'm excited for the next one. And until then, I'm Michael Noss.

Dave: 41:59

And I'm Dave Mabe. We hope you join us next week on Line Your Own Pockets.