Line Your Own Pockets

Michael: 00:00

Hello, everyone, and welcome to another episode of Line Your Own Pockets. Got another user question today, and one that was really detailed. I think we spent, what, two weeks just thinking about kind of how we're gonna different ways to split this up and how we're gonna tackle it, and it's a a question that was near and dear to my heart when it comes to multiple strategies. But why don't you get a little bit more into the details of it, and we'll we'll get started tackling it.

Dave: 00:26

Yeah. It's it's a really good question. This comes from Emmett h, who emailed me this question as as a suggestion for the podcast. So he says, what is the best way to approach the transition from a single strategy to a portfolio of strategies? Do you try to develop variations of that strategy because you know it fundamentally works?

Dave: 00:48

Do you create a complementary strategy? Do you create a short strategy to work opposite your long strategy, etcetera? So he goes on a little bit more, but I wanna stop there because it's I know this is a good question. I immediately added it to our topic list.

Michael: 01:06

Yeah.

Dave: 01:06

But the more I go back and look at it, the more there is here and that it brought back so many memories of when I first started trading and like a very important fundamental phase that I got through that I really didn't even realize was a problem when I was in the middle of it.

Michael: 01:27

Well, and I think, like, you know, when you read that short strategy for your long one, like, that's a that's a podcast in and of itself. So we'll try to get through some of these, but I think it's always first important to realize that a lot of people a, this is a really good problem to have right off the bat. You know? Because if if you were thinking of creating a second strategy, hopefully, and by definition, it means you have one good strategy to begin with. Right?

Michael: 01:56

You shouldn't be trying to create a second strategy if your first strategy sucks or if it's just not, you know, a great thing to trade or or something like that. So, you know, first of you won't wanna start an answer like that with congratulations. And hopefully, you're not if you're starting to think about this and you don't have strategy one, you know, down packed and and making some money and you're happy the way it's performing, then I'd say don't even bother thinking about this right now. You're just you're you're not there yet. But if you are, you should just take a second and go, oh, good.

Michael: 02:27

And understand that you have probably some sort of process that allowed you to arrive at this strategy that you should also be happy with. And then, right, take a breath and say, okay. What's next? But, right, just wanted to put that caveat out there that, you know, some people I noticed, they they talk a lot about multiple strategies, and they might might not even have one yet. So if you're there, you're just you're just not there yet, and you've, you know, you've gotta you gotta go and and figure that out, and then we can start talking with different multiple strategies after that.

Dave: 02:58

Yeah. So as you've probably heard me say a bunch of times, the only thing harder than going from zero to one strategy is going from one to two. And here's what I mean by that. I and I like the way you phrase that about somebody getting started here and making this decision. So and and I'm assuming that this person is somebody that does have a strategy that works.

Dave: 03:28

So they're not thinking, oh, okay. Well, my one strategy doesn't work. But if I get a whole bunch together, then the the aggregate's gonna work. Right? So which I think is a little bit different.

Dave: 03:41

But, alright, so so imagine, you know, people that get into trading, there's so much BS out there. There's so much snake oil. Just to get into trading at all, you should have a skeptical mindset. So somehow you've been able to see through that and think, okay. I think I can do this.

Dave: 03:59

Right? And you've gone through some trials and tribulations. You've gone through some you've learned a lot of the lessons that you should have learned before you tried and Mhmm. You had to learn for yourself. Right?

Dave: 04:17

You've you've pulled your stops, and, of course, that didn't work out. So you've gone through a lot of things to get that first strategy working. Now when you get to that point, you're in a rare, small group of people that has been able to do that. There's probably nobody in your hometown that you live in that is doing the same thing. So you feel kinda lonely.

Dave: 04:41

Yep. So but also you feel like, man, I've got I've swear to god, I figured this out. You're really proud of something that you've created here. This is making you money. Right?

Dave: 04:56

It's like a money machine you've created for yourself. So you feel like you've got this secret. You feel like in some, on some level, maybe you're the only person that's doing it this way and you've kind of figured it out. And which is great. And that's that's the mindset that is very natural

Michael: 05:15

to

Dave: 05:16

have. But the problem is when you get into that mindset, you don't even realize it, but you kinda get calcified in the way you think about how trading works. I see this time and time again, with small small cap, low float shorting traders that, you know, they've got this really good strategy that works. They're kinda printing money with it. They think that's how trading works.

Dave: 05:47

So

Michael: 05:48

Yes.

Dave: 05:48

And they don't even realize it, but they're in this rut where they're not even gonna recognize other opportunities, other strategies that can work and be very profitable, but in a different way. Like, they're gonna have to change the way they think about what they think trading is.

Michael: 06:05

Well and it's the old saying. Right? If all you have is a hammer, everything looks like a nail. Right? You have you have carved out.

Michael: 06:11

This is and then some people, it's even they've made it like an identity. Like, I I short small cap junky stocks. That's what I do. And that's great. And there'll be periods of time that works well, and they'll you know, hopefully, you're making a ton of money doing it.

Michael: 06:29

There are probably size constraints and liquidity constraints and and borrow like, there's limits that you you hit when you do something like that. And then there's the one option to, you know, try to figure out a way past those limits. Another option, like we talked about, to find different strategies out there that you can allocate, hopefully, a growing pool of of capital too. And, yeah, I I was thinking of those people exactly when you were when you were saying that is that, yeah, there's people who get pigeonholed, and they say this is this is what I do. As opposed to looking at it as a, okay, I've got, you know, like a base strategy that is working for me, and it's, you know, helping pay bills and things like that, and that has given me the freedom, the time to go do, you know, this next one, two, or three things that I can do.

Michael: 07:19

And, yeah, that's gonna be the hardest part is because you're kind of trying to step back outside of a box after spending so much time building a box around yourself that has you know, it's very comfortable and it does well, and then having to go outside of that and say, well, what about different different ways of doing it? But in the long run, it's going to be the easiest ways to get around any sort of constraints that you're seeing inside of your trading is just to go look at what someone else completely unrelated. And we talked a little bit about, you know, the in a prior podcast talking about the correlation between strategies. Well, the best way to deal with that without having to know the math behind it is just look to see if a strategy is just completely unrelated. You know?

Michael: 08:04

If you are strategy a is shorting low float penny stocks and strategy b is, you know, buying the dip on on, S and P 500 names, well, you're gonna know that you are so diametrically opposed that there there's not gonna be you're not just upping your correlation there without even needing to know the math. You just kind of intuitively know that that's the case.

Dave: 08:25

Yeah. I think for systematic traders, it's especially hard coming from the small cap, low float space because the backtest in that space, they look really good.

Michael: 08:41

Mhmm.

Dave: 08:42

They're they're you know, it's a really it's a solid strategy, and there are lots of different variations. But when you go to to back test something kind of in a different universe, it's not gonna look as good at that as the as small cap some of the small cap back tests. So you're gonna immediately dismiss it prematurely. And I see it time and time again where people that are in that rut and they they don't realize they're in that rut. And and the danger is, you know, maybe they've had some drawdowns, but they've come out of them.

Dave: 09:32

I mean, this is exact exact situation that happened to me. So I was although I wasn't trading small caps at the time, I had this my own strategy that was working really well. And I remember I had a drawdown one year that was pretty gnarly, but I came out of it. Right? And ended up making plenty of money that year.

Dave: 09:55

The next year, I had a a bigger drawdown. And I had thought, like, when I went and analyzed the the drawdown from the year before, I took away exactly the wrong lesson, which was if I had just kept my size without sizing back during that drawdown, I would have made a lot more money than I did that year. So when I was in this drawdown the following year, was maybe a couple years later, same basic strategy. It was a much worse drawdown, And I really resisted the urge to size down. And I was just I had just made this huge hole for myself.

Dave: 10:38

And when you do that, it when you do that and and that's the strategy you trade, like, don't have any other strategies that like, you what you described about being my your identity, that was totally me. I'd Yep. Yeah. I I had put my girls through college with this strategy, and here it wasn't working. Like and I didn't have anything else.

Dave: 11:00

I mean, what a dead end it felt like. I I felt like I mean, I didn't know what to do. So the fact that and I was just forced. And what I realized the lesson from that first drawdown, the one I should have taken from that is not, okay, well, was a drawdown. Well, that was bad.

Dave: 11:22

But at least I made money that year. I really should have taken that and really figured out other strategies to add to my arsenal that would be better than the one I was trading. And that should have been the goal, but I was because I came out of the drawdown sort of unscathed, and I felt like I could see a path forward, I I didn't I didn't learn the right lesson that I should have learned at that point.

Michael: 11:52

And that, you know, that I think is the why. Right? And that's what you gotta ask yourself. I think step one, when you're creating a new strategy is is why are you creating a new strategy? Right?

Michael: 12:04

It shouldn't just be because we told you it's important. But, you know, like you kinda mentioned where you said, when you go from the show shorting low float stocks, everything else, the backtest isn't gonna look as good, But that's if you're doing the backtest by itself. Right? So what you're looking for when you're building new strategy is that the combined backtest looks even better. So, you know, the drawdowns of one aren't very correlated with the drawdowns of the other.

Michael: 12:31

And that, you know, like you just mentioned, that was your why to create new strategies because, hopefully, you have something that when your main strategy is in drawdown, it's helping, you know, pick up some of the slack. It's helping to reduce and diversify that drawdown just a little bit. And that, I think, has gotta be step one when you're looking to build a new strategy is you just take a step back and you say, okay. Well, what is this strategy looking to accomplish? Am I just hedging for when this strategy I'm running doesn't work anymore, the edge is gone in the market or something?

Michael: 13:04

Or is there a is there a hole in my buying power where I'm not utilizing capital for a certain time like Dave overnight? You know, should I should I shore up something there? Is you know? So, like, with most things, step one should start with the goal. Is what is the goal?

Michael: 13:21

What is on what is it that I'm trying to accomplish with the second strategy? And then from there, that might actually answer some of these questions for you when you get that when you get that answer of of why. Now, you know, you listen to us. I think we're all in agreement here that more strategies is just if they're at all uncorrelated and if they have at all edge, more strategies are always just gonna be better. But instead of just hearing that when it comes to strategy two, I think it's really okay.

Michael: 13:50

What role am I trying to fill here? What hole am I looking to plug in my trading that I think this strategy is gonna gonna help me with?

Dave: 13:59

Well, let me play devil's advocate here a bit and ask you a question that I I would assume that a lot of people are thinking. And so the way you put it was, like, what are you trying to accomplish with the second strategy? Michael, we're trying to make money here. I wanna make money with the second strategy. I wanna make a bunch of

Michael: 14:18

money

Dave: 14:18

with the second strategy. Why? I mean, what are you talking about? What am I trying to accomplish? Of course, that's the goal.

Michael: 14:23

Well, the the goal is more where is that first strategy lacking? So, you know, for example, say I've got a strategy that scalps the open thirty minutes, which is amazing. It makes a whole bunch of money. That my goal may be, okay. Well, I should look for something that trades in the afternoon or on the close because if I'm just scalping the open, I probably have a bunch of capital sitting there not doing anything.

Michael: 14:46

That is gonna be a different problem from I have a strategy that does really well to the short side, but when, you know, markets are ripping and and animal spirits are on fire, which is, you know, what's kinda happening right now in the market, I'm just getting completely killed. So if it's too it's a different is it a different time? Is it a different time frame? Is it a different side, long or short? Is there you know, I noticed that my strategy only works three days a week, and I'm looking to find something that works the other two or or whatever it is.

Michael: 15:19

You know, it's just kind of like saying, okay. Well, I'm I'm I'm gonna go to the gym because I wanna get stronger. It's like, yeah. But you need to know a little bit more about yourself than that. Like, where are you right now?

Michael: 15:29

You know, is is is it a certain body part or a goal that you're training towards? And just taking a couple seconds to write that down and to formalize. Right? My opening trading is fine, but I've got nothing for the afternoon. Well, that just ticked a bunch of those questions we read at the beginning of the show off the list.

Michael: 15:47

You know, what is it that you're looking for? Doesn't necessarily matter if it's long or short at that point. It just matters that it triggers through this time frame and and not necessarily this time frame when you're sitting on a bunch of completely unused capital.

Dave: 16:01

Yeah. So one of the things I just thought about as you were talking, do we really How important is it that strategies are really uncorrelated? What if they what if you just come up with a strategy that is correlated and still prints money? Do you care?

Michael: 16:23

Yeah. Because you would just take the better of the two. Right? It's like saying if if I if I had the best asset, if I had four assets that are a 100% correlated, I'm not going to spread my money across the four of them. I'm gonna pick one.

Michael: 16:40

I'm gonna put in because why bother doing multiple things because it's correlated. So if I have two I would have correlated

Dave: 16:48

So what if it's 90% correlated or 80% correlated? Or

Michael: 16:52

Well, then it's not correlated. Right? Like

Dave: 16:54

So it's gotta be either a 100% or nothing?

Michael: 16:58

No. I would say if it's near a 100%, then it wouldn't make sense to do either of them at all. If it's, like, 90% correlated, you still just probably pick the better one. But when you start to get into the 70% or below, which is like loosely correlated or a near zero, which is not correlated at all, well, now you've got some sort of real strategy diversification benefits. Right?

Michael: 17:21

The only you know, and the reason for it is because you just have a finite amount of buying power. So if the strategy is is a 100% correlated, that means it's probably triggering roughly the same assets at the same time, you know, for for the same hold period, that type of thing. That's what you would need to be because, like, basically, I could see a world where you could take the exact same strategy, and it could be uncorrelated with itself. So, like, say one of them is you're buying an opening range break, and you're selling five minutes later. The other ones you're buying the same opening range break, and you're closing it at the end of the day.

Michael: 17:53

It is the same strategy, but it's certainly not gonna have the same correlation of returns because it just it holds for for longer. So, you know, when I mean lack of correlation, I I mean just that. It's not tying up your same amount pool of buying power at the same time for roughly the same results because why bother? Just trade the best one at that point.

Dave: 18:15

Okay. I'm gonna take a little different approach, I think. So the way I think about it I I don't really think about it quite that way. But and I think

Michael: 18:28

the I way didn't think we were gonna fight this one. I like this. Bring it on. I've got I've got a Monster Energy drink on my desk if and all afternoon if we want if we wanna go.

Dave: 18:37

Yeah. I hate for it to come back to the day trade

Michael: 18:40

versus swing trade

Dave: 18:40

thing again, which you brought up earlier on this. So Yeah.

Michael: 18:45

Any little jab I can I can I can do, I'm gonna

Dave: 18:48

Oh, I know? So the way I think about this is maybe it's a little bit different. And the way I suggest other traders think about it so here's one question that people ask me. New traders are just getting into this. Dave, is this strategy is like, they'll show me a back test they did.

Dave: 19:10

Is this good enough? Like, is this good enough to go live with? And if I came across that strategy, me, myself, right now knowing what I know, knowing the strategy I trade now, the answer might be, well, now I probably wouldn't trade that one. But for this person and for the person I was ten years ago, I think it's they should go with it. Like, there's a lot they're gonna be able to learn by putting that strategy, even though it's not perfect, into play.

Dave: 19:45

And because I think and and now let's say that that person already has a strategy and they come up come with a second one, then they're saying, Dave, do you what what about this one? I think you wanna compare and be calibrated within yourself. Like, it's almost a little pointless asking me if this is a good enough strategy. So I usually shift that right back to them and say, Okay, how does this compare to the other strategies you have? How does it compare to other back tests you've done, like the best back tests, like the the most, the one that you feel the best about?

Dave: 20:23

That's what you should be comparing yourself against. And that puts you in this feedback loop of, okay. Here's the best one I've got so far. Let me see if I can beat that somehow in my process. How can I make my process better?

Dave: 20:38

Come up with a strategy to beat that one. So I think I I don't correlation doesn't really come into that yet. So I think maybe it's probably a little bit of swing trading mindset where that is gonna be more important. No.

Michael: 21:00

No. It's it's a difference in I I I don't agree disagree with anything you said. I gotta put my monster back down. I was getting ready for a fight here. But no.

Michael: 21:09

It's it's correlation of returns only matter when they're competing for the same resources. Right? That's the only time that you you really care. Right? So if you have you know?

Michael: 21:21

And it's kind of like how at the end of the day, you have to do some sort of ranking in your strategy. If there's, you know, five symbols that came through at, say, roughly the right time at the same time, I know that would never actually happen in practice, but you would have to look at them and say, based off some metric, I've gotta decide which ones to take. Right? If, you know, you had a strategy in the exact same moment, you know, five symbols came through at the end of the day, you're gonna have to decide which orders go out. Right?

Michael: 21:50

And it's the same thing is that if you have two strategies and they're not competing with each other and they both have edge, then trade them both. But the problem is and the thing the time that you have to look at the correlation between them is when, you know, say you have a $100,000 worth of buying power and strategy a is eating up all of it, and then strategy b is is trying to trigger off, but it's you're out of buying power. Well, you have to ask yourself one of two questions. Does it make sense to take strategy a smaller to allow some trades from strategy b or or not? And if they are perfectly correlated or very well correlated, then who cares?

Michael: 22:27

Just take whatever trades come through first. If they are uncorrelated in nature, then you could say, okay. Let's lighten up on a to allow b to trade more because I know over time that's going to smooth returns. Right? And this is the reason I probably think of this more is because on the open as a swing trader, I have these are the stocks that I'm going to buy, and I have to do some sort of allocation of them.

Michael: 22:51

So, you know, if I've got 10 trades to make and I only have the buying power for five trades, I've gotta decide of of which ones am I gonna allow through. So I do a lot of time looking at my strategies and making sure that I'm doing some trend following and some mean reversion and some kind of exploitative type type systems and things like that because that limited buying power. But that's the only time you need to look at it. If you still have buying power to place trades, then, yeah, just anything that you find that has edge, trade it. When that buying power becomes the limiting factor, that's when you have to take a step back and look and say, okay, how do I divvy this up?

Michael: 23:30

And that just might be a a future problem for this user. Maybe that's not after strategy two. The only time it would be for strategy two, again, is if, like, they're all triggering, like, you know, you're doing a five minute opening range break. Well, there could be times where many times where you're trying to take way more trades than you have buying power for, and then you have to figure out, okay, how much do I allow for this strategy versus that one?

Dave: 23:55

Yeah. I think I suspect that most traders that are listening to this aren't at the point where they're using all their buying power. And, like, the I think that's a it's it it has to be more common in the swing trading space just because you have less of it. With the same amount of money, you have less buying power by definition. So you're gonna be running out of it quicker.

Dave: 24:27

And you're always pretty much or a lot a lot of strategists are gonna be entering on the open and exiting on the open. Mhmm. You know? So they're not entering throughout the day normally. So I think most day traders, I'm imagining, I believe, are on a path to trying to muster up the courage, get you know, have the strategy prove it to themselves to be to scale up to the point where they can run out of buying power, and they do run into the the issues that you're talking about of correlation, like where correlation will even matter that much.

Dave: 25:10

So I think it it's probably a more advanced trader that is thinking about correlation in exactly the way you're thinking about it.

Michael: 25:19

Yeah. You know, so some of that for for swing trading, I'll push back on. Like, 90% of what I do is limit orders, right, stop limits, things like that that are set earlier in the day. So they're not not a lot of market on open and and market on closed stuff. Some of it, but but not a lot.

Michael: 25:37

So most of them there is limits that exist out there. We obviously can use margin. Right? I I do sometimes. We don't do as much, but still get four to one margin on on my swing trades overnight.

Michael: 25:49

Again, that's that's gonna be size of your account and all that kind of stuff. Right? Different privileges for different people in in the the trading world. But so all of that is is certainly some of it's true. Right?

Michael: 26:02

Some of it isn't. But, again, I think the main thing is just looking at what resources are you competing for. And, you know, if you're not utilizing your buying power, I think you kinda have to ask why. Right? What is do you not like your strategy enough?

Michael: 26:16

Do you are you taking too much risk per individual trade? Because that in and of itself could be an excuse for another strategy. You know? Say the say you have a strategy that has a great return, a great CAGR, right, you're making 30% a year or whatever, but you're looking at the max drawdown, and it periodically goes into 30% drawdowns on your portfolio if you were to apply all your your capital to it, you just say, well, that's not enough. That's another reason to look at a strategy that hopefully, when it experiences a drawdown is different than when the other one experiences a drawdown, or all you're doing is you're kind of amplifying those those drawdowns.

Michael: 26:56

So, you know, again, it's it's all about are we step one, are you utilizing your entire buying power? If not, then if the strategy has edge, just just keep trading it. If it's if it's gonna be perfectly correlated, you basically just sized up strategy a, but if it makes you feel better, you're you're you're you're doing a different strategy. If you are utilizing all your buying power, which could just be at specific points of the day, like, I'm I'm harping on the open because I think probably most people take most of their trades around the open. If you find that you're hitting that buying power restriction right away, then, yeah, you you need to find some way to to split or to rank or to do something.

Michael: 27:38

If it's to the point where you have a completely unused hole of buying power, like you find that near, you know, the the middle of the day or the end of the day, maybe some of your losers have stopped out and you're only holding the ones that are winning or something like that, well, then you could specifically just utilize a strategy for that that time frame, something that looks for news events or breakouts or something during the middle of the day, knowing that you're just gonna always have buying power to do it, and it's gonna be uncorrelated enough without you having to to sit there and actually run the back test together and and crunch that math.

Dave: 28:11

Yeah. I mean, I think it's I mean, the reason I I'm kinda harping on this is when you the best path for somebody who has a strategy that is working for them to get to strategy two is often and assuming strategy two is in a different universe. Right? Is often to figure out how they can improve strategy one in some way or take an alteration of strategy one. Like, create a strategy that's very adjacent and probably very correlated to strategy one.

Dave: 28:54

And, like, figuring out how to get more trades into strategy one. Figuring out another entry tactic for strategy one besides getting on the open like something else. I'm figuring out how to trade them in the opposite way. Like, there's and the reason that's important is because they're already very, very familiar with that universe that Strategy One trades. So there's often you know, when you when you start looking at a completely different universe, I don't care how good a trader you are.

Dave: 29:33

There's gonna be a learning curve there. It just it's just understanding the universe, and that's gonna take some time for you to get to the point where you can really create a strategy that works well with that universe. So often, the more fertile way to improve is to kinda stay in strategy one's space where you're looking at strategies that are pretty correlated with it. So I think

Michael: 30:04

that's gonna

Dave: 30:07

what do you think?

Michael: 30:07

So I guess it's a whether I agree or not is, I guess, whether how long the trader is on the journey. Because I think the if it's just your second strategy, I think that's great. If you're still going to the well for your tenth strategy and you're still looking to short low float penny stocks over and over and over again, then you haven't done what we've talked what we talked about at the beginning of the show, which was step outside of that box and look for different things to work on. So if I'm just constantly tweaking in the same universe, in the same direction, you know, looking for overextended penny stocks to shorten them, I'm just doing that for five, six strategies. It's like at some point, you know, why not just grab, like, maybe two really wicked ones and just use those and keep the other ones maybe in the background for if those, excuse me, if those strategies fail.

Michael: 31:04

But so the way I look at it is that you should spend some time doing that. But as soon as you have, you know, the the PLAY DOH principle, as soon as you've kind of felt like you've melt most of the edge out of that, like 80% of the edge, and you're gonna spend your next, you know, six months banging your head to get a little bit more edge out of the shorting shorting low flow penny stocks, are you missing a incredibly easy, you know, base hit somewhere else of trading gaps or something like that that you haven't stepped outside of that wheelhouse on. So I think there's you know, for the second strategy, maybe, but I think there's just that point where you were just trying to squeeze, you know, everything over and over again, and you get to this diminishing marginal return where it's like, hey, would have been way better if you spent a week and just bought like a swing trading mean reversion system that would just totally complement, and you know, you could have done that in a week, and and it would have been good to go because it wouldn't compete in that same kind of buying power arena and everything as as before.

Dave: 32:10

Well, I'm gonna disagree because there's I I think there's I think there's so much depth in a lot of these strategies and a lot of these universes that the really, the best traders get so much juice out of the lime that they're trying to squeeze. Like, I was talking to a trader yesterday. This guy I've been working with for a long time. He makes between 500 and a thousand percent a year off this strategy. And he's got multiple variations.

Dave: 32:50

So and that that and now I know a lot of people aren't gonna believe that, but it's true. And when we started working together, he wasn't doing that well, but he was like, he had he is still very much in this one universe, and he's just got multiple variations. And it's working very well for him. And so I I I think there's I think in general, there's more depth in a lot of these areas than people realize. Like, we had so I I know that we talked about a podcast with John Arnold.

Dave: 33:31

And I I remember the quote he said, he's not looking to go an inch deep and a mile wide. He's looking to go an inch wide and a mile deep. He's like one of the best natural gas traders ever. And I think there is more depth than a lot of people and a lot of traders realize in a lot of these universes.

Michael: 33:55

I would agree, right, for the the average person, but you I hope you'd actually agree that eventually the question is when? Eventually, there is you've tapped all of the potential or at least, you know, most of it in a way that there's that diminishing marginal utility. And that's what I wanna make sure people so we just keep and we're just using examples. That's why we keep saying the low flow pennies thing. But there's something going on right now.

Michael: 34:22

I've been reading a lot on Twitter where locates have kinda gone through the roof. And there's some people who have seen their edge completely destroyed, not because their strategy is bad, just because there's this fundamental change in the market right now in which that, you know, this style has potentially gotten so popular that the Edge is just has just ripped out. So I kind of think of that person and say, well, if they had spent their entire life learning to short these things and becoming so amazingly great at it, and something happens that just completely sweeps that away, you know, the argument to be made if you're really really good at this, the locate fee probably doesn't doesn't matter anyway. But for those people, if they had just employed a little bit of time in a in a kind of other strategy out there, then it might not be as panicky as they are now to help fix it. Like, so say they had something to the long side and that was making some amount of money, so they were still green each month.

Michael: 35:26

They were still, you know, putting money in their pocket. They're still feeding their kids. I read one thing from a a guy who's, you know, pretty prominent. I won't mention names, but has a decently sized substack and stuff. And he's like, I'm gonna get a job because his strategy was just just deployed that much.

Michael: 35:42

Well, imagine if that same person had a couple of these other strategies that we're using, you know, utilizing maybe even in the same low float penny stock space, but to the long side, and those were actually performing somewhat well at the moment. Yeah. He's taking a huge pay cut to his life, but it might be enough for him to skate by long enough to figure out a way around this and and to move on. So that's my worry more than anything about people going too deep on something. Like, you're you're a natural gas trader.

Michael: 36:16

What if, and this happened for oil, if natural gas just doesn't move for two years? Doesn't doesn't do shit like oil until the whole Iran war. I know a guy who was an oil trader, and in the oil sands that we have up in Alberta, he was an energy trader, and he was just having a rough couple years because oil just literally did not move for, like, a two year a two year period. So, yeah, I just worry again, this just it might be unfounded fears for me. I just worry if I get too niche into one area and something comes along to pop that along, it's all well and good if you've had so much success that you can, you know, coast on interest interest on your on your money for a while or something like that, but it it just comes from a absolute coming back from zero as opposed to having this completely uncorrelated style of trading that's just different from everything.

Michael: 37:07

You go, okay. I can live off that for a little bit while I figure out how to fix, you know, the thing that that got broken by some external event.

Dave: 37:15

Yeah. I think it's I think it's tricky because you to to get really good at this, you do have to go deep. But then at some point, you do need to start going essentially wide or coming up with new ideas. So I I think it's an interesting thing to think about.

Michael: 37:35

Well, and I think I think what our disagreement highlights more than anything is that it's it's personal. Right? There's someone out there who wants to go so deep because they wanna make a thousand percent a year, and they're okay going all in on one strategy to hopefully hit it big and make a a shit ton of money and, you know, buy a yacht and retire. Right? And then there and it might just be stages of your life, and then there's someone like when I'm testing accounts now or I'm testing strategies now, I'm thinking more about drawdown than ever because, you know, my accounts have just gotten to a certain point where it's like I'm looking at it.

Michael: 38:11

Okay. I need to the amount of risk I need to take, the amount of return I need to potentially make has altered from someone else. Like, we started you know, we talked about growing a small account. If you got $10 to your name and you're, like, just out of college and you're a young professional, just have at it. Right?

Michael: 38:29

You should be able to be fine with a 30% drawdown in your account. It's $3. Right? Go nuts. If you have a $10,000,000 account and you are 50 and you have three kids, you're not going to want to do a 30.

Michael: 38:43

Right? You're not gonna wanna draw down 4 or $5,000,000 on your account because you're probably not gonna live to c 60 at that point with the, you know, the stress on everything. So, you know, it could just be a you know, this could just be personal to someone who is more or less risk averse and and depending on what their goals are. Is it to make as much money as possible, or is it to have as smooth of an equity curve as possible? Those are two completely separate Yeah.

Michael: 39:12

Things to optimize for. Right?

Dave: 39:14

No question about it. It it it's it's important to figure out what you're optimizing on. And, yeah, those are two very different situations and different things. So, yeah, I think that's I I think it's super interesting to think about that. And I I love talking with and working with really good traders.

Dave: 39:38

I mean, that's why I started this whole thing is to attract and work with the best traders that are and and probably actually not the best traders, but the ones that will be the best soon. And and to help them make that transition, that is I I just I really enjoy helping somebody at that level because it's really there's so much improvement that they can do. And they often there's, like, nobody in the world that can really talk the language that they're like, knows where they've been and what they're trying to do. Yeah, I think their attitude toward risk is an important thing. And there's often a mindset that's different than just good traders or just traders that are successful.

Dave: 40:35

Thinking about it in the right way and is a is a skill, and it's not something that comes naturally to a lot of people.

Michael: 40:43

No. And and I've and I'm sure you've seen the same thing from you'll have one guy that you'll be talking to as a trader, and you'll have to basically talk him into making a trade. Like, you gotta go, okay. You've been backtesting now for six months. Just go pardon my French.

Michael: 41:02

Go make a fucking trade. If it's if it's like a $100 trade, go make a trade. Go put money in. And then the other guy who's like, you know, he's done no paper trading with it. He hasn't even, like, looked through the results.

Michael: 41:15

He's got a equity line that looks great, and he's like, alright. I'm gonna dump a $100 into it and see what happens. And it's just there there are just a wide spectrum of people out there. And when it comes to risk and, you know, like with most things, probably the best is somewhere in the middle. Right?

Michael: 41:31

Somebody who respects risk, but is understands that if you don't take it, you don't make money. We're we are rewarded for taking risk. But, yeah, it just shows that, again, just such a wildly personal thing that you could not take. And I think that's why even with AI and with all this stuff, these edges are gonna consider continue to exist in the market because of people's different risk profile. Like, I I know a guy who he does this kind of strategy that's always interesting where he's selling put options in earnings calls.

Michael: 42:04

He's got a some optimized ways to do it, but the idea is that a lot of people are buying put options in earnings calls because they're hedging the risk. So he's essentially an insurance salesman at that point. He is selling the insurance to other people, and he's making a healthy premium off doing it. And he understands that he's right 90% of the time, and every now and then he gets slapped in the face just like every now and then a house burns down and the company's gotta pay out the insurance. And that's the kind of thing that, you know, describing it to some people, they're like, oh, that's great.

Michael: 42:35

I'd be fine making a, you know, a small amount every now and then just having to pay out a bunch. And then some people would look at that and say that's just ridiculous. It's such an a completely flipped kind of asymmetric risk reward that there's no way I would do it. And, again, I think that's why it works. Someone wants to buy the put options and earnings.

Michael: 42:52

Some other guy wants to sell the put options and earnings, and that's what that's what makes what we do is so cool is because that's what creates the market.

Dave: 42:59

Yeah. Yeah. Alright. Well, I think this is good. I think maybe next episode, let let's go into I'd like to go into exactly the strategies I've started with and then went through, like, things I tried in the same strategy space and then what I sort of graduated into into, I think it'd be useful.

Dave: 43:26

Like, basically, some some some things concrete things you could take away that I think people will be able to start thinking about strategy two, three, four, or different variations of strategies they're trading now.

Michael: 43:43

Alright. So are we gonna argue for this one? Am I gonna need another monster, or do you think we're gonna we're gonna get along for the next one?

Dave: 43:50

You might I don't know. You might need a monster. Bring it just in case.

Michael: 43:55

Awesome. Well, a and this is just shows, one of the things that I love the audience for this this podcast because we're you can tell the sophistication of the the questions tells what kind of person is is is paying attention to it. Right? I I have yet to get an email of, oh, I heard your guys' podcast. What's the next semiconductor that's gonna triple in price?

Michael: 44:17

Yeah. It's not the questions that we're getting. So it just shows that that, you know, we we found a little niche of audience of people who actually think about this stuff. And, you know, that's kind of the whole point. It's probably the people who are gonna be around for some time doing it.

Michael: 44:32

So again, congratulations. If you're getting to the point where you're asking questions like this, I think you're already you have to take a second and say, oh, well, I'm already better than what 90% of plus of people who who enter the market just because I'm at this point.

Dave: 44:46

Yeah. I agree.

Michael: 44:48

Alright. Well, continuation next time. As always, I'm Michael Nauss.

Dave: 44:53

And I'm Dave Mabe. Talk to you next week online, your own Pockets.