Line Your Own Pockets

Michael: 00:00

Hello, everyone. Welcome back to another episode of Line Your Own Pockets. In the last one, we talked a little bit we fought a little bit, I guess, on a listener's question about just the the concepts and the theory behind multiple strategies and and potentially what to look for and and what to build on that. We went for forty five minutes just on on the theory behind it. So if you missed that one, definitely go back and listen to the one that's just preceding this one.

Michael: 00:27

But this one, we're gonna sit a little bit more in kind of the nuts and bolts of if you are in a situation where you are looking for strategy two to get into, what to look for, you know, some actual practical kind of takeaways of how to get started to hopefully set you guys down the road of, you know, what I think is the the closest thing we'll ever get to a holy grail of trading, and that's just multiple multiple different strategies to trade.

Dave: 00:55

Yeah. So this is a very good question again from Emmett. So I'll read the whole thing this time. What is the best way to approach this transition from a single strategy to portfolio strategies? Do you try to develop variations of that strategy because you know what fund of money works?

Dave: 01:11

Do you create a complementary strategy? Do you create a short strategy? And this discussion we had last week was really great because it it I really wanted to nail down something that had been in the back of my mind, but it really came very clear in that episode where I'm I think at first, the most fertile thing for a new trader to be able to do that's got some a strategy that's working is to go deep into that that strategy that is working. And I wanna talk about some specific ways they can do that. And it's that's a little bit and it is different than finding something in a completely new space that you're not familiar with.

Dave: 02:00

So yeah.

Michael: 02:02

Alright. Well So

Dave: 02:03

what do you think?

Michael: 02:04

So let's start let yeah. Let's start there with a hypothetical. And when we'll we'll talk about because I think where the disagreement was last week is the when to kinda split off to to what you're doing, the when But we'll we'll get to that a little bit later, but let's just start with a hypothetical, and let's pretend this user has a strategy that's working well. Right? And not, you know, yacht money well or but they've they've completed their first strategy.

Michael: 02:32

They've been trading it for a couple months. You know, they're they're profitable most of those months, and and things are good. And now they're looking to spin off a bit. So what is kind of what would you say is the first couple things to look at saying, okay. I'm I'm now established, I guess you could say, in some way.

Michael: 02:50

I've got this one strategy. And before we talk about, you know, going wider and getting completely different strategies and different time frames and whatever, what are some strategies for them to take that kind of that existing idea the way the user mentioned and to say, let's let's dig into that?

Dave: 03:07

Okay. So I I think this is a really good thing to talk about. And so when I first started trading, I'm a go go back and tell you exactly what I did. So I started probably in 2000 I think it was 2005. I made my first day trade.

Dave: 03:26

And it was a gapping strategy. So I was looking for for stocks that were gapping up, and I would look for a pattern at in the first half hour. And then I would get along if that pattern occurred, and I would just hold the whole day. This was great. I mean, I had a full time job at the time.

Dave: 03:45

I so I knew I could carve out a half hour and dedicate some time to that and have all my trades in, and they would just play out, and I would just work the rest of the day.

Michael: 03:56

So Which, by the way, just to to tap on that, that's that's the right way to think about. I know and so many people are like, okay. How do I quit my job right away so I have the time to dedicate to trade? Whereas if you just, you know, zoom in on what Dave said there for a second, he's like, I have instead of trying to make a trading style and trying to make his life fit a trading style, he said, I have this period of time. I want to trade, so I'm going to make that time work.

Michael: 04:24

And then kind of look at it as if if I can make a nonzero amount of money and not have to sacrifice or leave my job, well, I've just kind of given myself a secondary kind of side income. And like with most things, over time, hopefully, that grows into a point where you can consider moving or or leaving your job or doing something else that allows you more time for trading. But, yeah, I the amount of people that I hear, they're like, oh, I'd love to trade, but I don't have the time. I'm like, there are strategies where you can wake up before the market's open, set a bunch of limit orders, and and go about your there are ways to do it. You just need to understand that you don't want to get fired from your job because you spent your whole day looking at your phone, looking for trades.

Michael: 05:07

You want to find the the way that you could work so that you have that income and you know what you're able to do and what you have time for and make that work. And then eventually, hopefully, you're making enough money that you can start to explore other options. Right?

Dave: 05:22

Yeah. I totally agree. I mean, at the time, I didn't realize it, but the time constraint was an advantage. Like, I had more time than that, I probably wouldn't have done as well as I did as quickly as I did because of that the time constraint. Just, like, forced me to focus on this one area, not think about all these other ideas, focus on this one thing.

Dave: 05:45

And it did allow me to go deep. And I'll I'll go into the steps I took to to start going deep in this strategy. So the first when I first started trading it, I was trading it off the thirty minute bars. So I would the the pattern yeah. Actually, was probably it was probably an hour that I would look at the market at and and I would could potentially take trades for that hour off the thirty

Michael: 06:14

four hours. So you're looking for a a gap, a candlestick pattern on, like, the first thirty minute candle, and then you would take trades if something happened on the on the following candle kind

Dave: 06:27

of thing. Yeah. So I was this is a pretty I mean, thinking now is pretty slow strategy. So it was something I could follow. And, you know, I would

Michael: 06:39

Mhmm.

Dave: 06:40

It was something I could probably peek at the market as I was doing some other stuff. So I think there were probably some trades that took a little bit beyond that.

Michael: 06:50

Which

Dave: 06:50

But by 11:00, there was no no more initiating trades at this point. Well

Michael: 06:56

and that's probably also good. I know this is off topic for a starting trader where most are trying to when they get into the market, they're like, okay. Give me the craziest thing to scalp on, like, a thirty second chart in or out. But like we've talked about, when you narrow down your time, your execution time, it you're making everything harder when it comes to mess ups and executions and position size, especially back then you were hitting the buttons yourself, and your robot wasn't doing them. So just again, I think this is just good tips for newer people is just look for windows of time where you can focus outside of work and family and all those things.

Michael: 07:36

And then also don't be afraid of a longer time frames when you're getting started because if you had that whole you know, you would probably know the candles that look like they're gonna close in this pattern a little bit before then. Just gives you more time to plan and position size and do all this. Now, obviously, we advocate for you shouldn't be doing any of that. You should have a system to to do it to do all that math and everything for you. But to get started with, yeah, don't be afraid of most people are out there trading off tick charts.

Michael: 08:08

Don't be afraid of I spend a lot of time on, like, fifteen minute, thirty minute charts myself, and and don't be afraid of them.

Dave: 08:15

Yeah. I mean, thinking back, the reason it was such an advantage, I I think, is there was a whole bunch of crap that was going off in the market that other people were looking at that I didn't care about. I was only looking at this one space. I didn't care what was happening. And that kept me from, you know, being sidetracked.

Dave: 08:38

So I was trading this strategy. It worked pretty well right away. I mean, I wasn't crushing it. You know, I didn't feel like I should give up my job, but it was working well. It was enough to keep my interest.

Dave: 08:52

Right? And as I started looking at these and following them and right from the very beginning, I I knew that I had a strategy that I was gonna follow. I didn't know how well it was how good it was or how bad it was. But I knew, okay. Let me just.

Dave: 09:06

It makes sense to me. So I didn't have a back test, but I I there were some people that were trading it that I trusted. I was like, okay. Well, these guys I know these guys aren't fools. Well, I'm gonna have this strategy to do it.

Dave: 09:20

So it it the the the fact that I was had a strategy, I wasn't gonna do anything else. I wasn't gonna pull stops. I knew exactly what I was gonna do, and I was gonna follow it. And that the the period. That's, I think, why I was successful right away.

Dave: 09:39

So and I was journaling right away. Like, I knew I knew, like, all the basics about good trading, was doing right away. And I think that is gonna help a lot of people because, you know, there's a lot of I mean, you and I probably don't even make some of the mistakes that new traders make. We just have done it so long. And we know that the we know you have to keep a journal to do this well.

Dave: 10:08

We know that you have to have a plan before you enter the trade, what you're gonna do after the after you enter the trade. All these things are fundamental things that you have to have in place. And it's important for people to realize that, and that I think that's that was part of what worked well for me right from the beginning. I was just uber prepared before I even made the first trade at all.

Michael: 10:31

Yeah. And that that whole comment about, you know, we probably just, I guess, instinctively, probably not the right word, do things that that save us from some of these new trader issues. It has a lot to do with, you know, we got in the industry, I guess, fairly early and around other traders and things like that. And I noticed it. I actually did a course way back on during the pandemic on the on my YouTube channel.

Michael: 11:00

And so I sat down with my wife who was we were locked in. She's like, I'm gonna learn a little bit about trading anyway. And I remember only after hearing her cut me off all the time and saying, you just said a bunch of words that don't make sense to anyone else. I'm like, oh. Yeah.

Michael: 11:14

So, yeah, that that definitely is something that happens that when you're just spending so much time in it that you're like, oh, these are things that just seem obvious that aren't necessarily obvious that if you just get started. But I think that'd be the same with kind of any any career or any anything like that where eventually you're just you're so into it that there's certain things that you just take for granted that are obvious that aren't actually obvious at all.

Dave: 11:39

Yeah. Alright. So trading the thirty minute bars, And then I was like, okay. Well, let me look at the fifteen minute bars. It's gonna be faster.

Dave: 11:50

But let me look at those. I think there there could be more trades there. And, of course, there are more trades. Like, with this setup, obviously, there's gonna be more trades when you're looking at at smaller time frame.

Michael: 12:01

So

Dave: 12:01

immediately, I went from something that was that traded a certain amount to something that traded that certain amount and more, like more trades in the system. So that was a step forward. I could make more trades. They were as profitable, maybe even more as I started looking into the smaller time periods.

Michael: 12:24

Well, now was I was actually gonna I was gonna cut you off there because you just we just finished saying that sometimes we take things for granted. Some people might not realize that that even if the the second example with more trades, even if those had, like, a a significantly lower win rate than the longer term trades, because even because there are more trades and, you know, just compounding and and spreading out your risk across more trades, it might even be a better a better strategy and probably quite often is even if, say, you're going from a 60% win rate to a 55% win rate. You know, lowering the amount that you're right, but just being able to take way more occurrences on that, the math will just work out in the more wrong long run that it's it's the right thing to do. And that's something that might be counterintuitive to people where they're like, why don't I just take fewer trades that are more high probability? And it's like, well, yeah, that might make you feel better.

Michael: 13:26

But in the long run, the other way will actually not only make you more money, it'll probably smooth out your equity curve because you're just taking a number of incurrences and just spreading out that math a little bit better.

Dave: 13:38

Yeah. Totally. So so around that same time, I can't remember if I started looking short looking for shorts at that time or if I went down smaller time periods before that. But I I I definitely remember realizing, okay, fifteen minutes is is faster. Like, the the candles are the candles are completing at exactly twice the rate that the thirty minute candles are completing.

Dave: 14:03

Right? So there are more candles, more situations for this pattern to occur. And so I was also thinking, okay. Well, there's no reason I shouldn't be able to go short some of these. Like, look for the gap down and go short.

Dave: 14:18

I was looking for gap up and going long. So I could potentially double the number of trades that I'm making. But, you know, I had to think about, okay. What is this short thing? I've never I mean, I kinda get the concept, but I've it sounds kinda scary.

Dave: 14:34

What does it really do? Is it un American? Yeah. I was going through all this sort of, mindset way back then.

Michael: 14:43

Just see. The un American thing is funny because there are most people that listen to this will probably think that's insane, but there are people that do believe they have moral quandaries with shorting a stock, and it just I just laugh because it never made any sense to me. Right? You reward the good ones. You punish the bad ones.

Michael: 15:01

To me, that seems like the and I'm Canadian. That seems like the most American thing. Right? Is it that's capitalism. Right?

Michael: 15:08

You're punishing people that are doing bad things, and you're rewarding people that are doing good things in the market. That's just seems like capitalism at its finest.

Dave: 15:16

Yeah. So but, you know, I knew it was scary. You know, you got this theoretical infinite risk. Right? Shorting versus going long.

Dave: 15:24

So Yep. I was thinking that through. And it did took me it took me a while to get over that hump, but I did. And gosh, what I realized is the short side was more profitable than the long side in this for this strategy. So here I am, you know, I had the strategy that was working, and now I've continuing to dig deeper into this strategy.

Dave: 15:48

And and I'm not even a a tenth of the way of what I was able to do with this. You know? And I wanna keep going because I think it's people get some ideas about what to do next with the strategy that they're they're trading. So started going long and short on either side. So so go ahead.

Michael: 16:07

Well, well, those and those to me seem natural and seem to be the the way that that makes the most sense anyways. Because all you've done is you've taken the same strategy that thankfully is profitable at the time, And the beauty is you get to ask just some very basic what if questions. And that and that, although might not just like we've we've been talking about, might not be obvious to people out there, that to me is the one that works the best. And the user actually brought that up in their question. They're saying, do you just do variations because you know it works?

Michael: 16:40

That that seems like an absolute 100% yes. And, you know, remember that you're just asking questions. The you know, there's a world where you ran the short side of it, and it was awful, and you go, okay. That's fine. Right?

Michael: 16:51

And you move on. But it it seems almost foolish to me to not ask those questions of what happens if I just did the other side or or what happens if I do a lower time frame or even a higher time frame or you know? And these are on top of things like the basics of how long do I hold and, you know, where to stop placements go or or targets if I use them or or something like that. But yeah. And the the beauty of that is that you already have the data in a lot of these cases.

Michael: 17:21

You know, you already understand well, you you've already programmed the back test, the best way to put it. So you have inside a back tester that says, you know, if it's a hammer candle you buy, it should be fairly easy to go, okay. Let me just reverse the math. So it's a inverted hand or mirror candle, and I sell. And not only are you a you're going inside the same strategy and you're diving deeper, the amount of work required to do that testing should be smaller and smaller and smaller because you've already done the majority of the work with that strategy.

Michael: 17:54

You're just putting some, like, plus signs where minus signs are and and you know? So the actual actual programming act of it, the data collection side of it, that should be easy because it's it's you've already done it. It's already kinda built in there and ready to go.

Dave: 18:09

Yeah. I mean, it's not that big of a leap to go from from longs to shorts to adding shorts to the strategies. And but it's two it's two different strategies. Right? And it's a little bit of a it's it's a little bit of an academic discussion whether that's really another strategy or whether it's the same strategy.

Dave: 18:29

But it's

Michael: 18:31

You don't wanna start debating, like, the ship of Theseus at this point? Are you saying that's not the but well, the argument is it's the I would say it's the same market phenomenon. You're just exploiting it to different lengths of time. Like, it's the same behavioral finance aspect at work. You're just doing you're just doing different parts of it.

Michael: 18:53

And the thing I really like about it, and we'll talk about, you know, getting completely outside your comfort zone later, is that it should be easier mentally, especially for newer traders, to deploy, like, the the the thirty minute to fifteen minute thing. If you've been making money with a thirty minute candle, it should be a much easier, like, mental leap to do the same thing on a fifteen minute basis. Right? Even if, you know, it's a robot doing it, which again, it should be, but it's you're not gonna have to convince yourself it works. Because if it works on a thirty minute time frame, the the mental leap of it working on a fifteen minute time frame is is really, really small.

Michael: 19:32

So you should just be able to go, okay. You get from backtest world to live trading way faster, I think, on that fifteen minute one than you do on the on the thirty minute.

Dave: 19:42

Yeah. So so, you know, went from longs only to long and short. I was going from thirty minute to fifteen minute, and I thought there were a couple of things I noticed about the fifteen minute time period. It was one thing is, like, I initially, I had a couple I remember I had a couple really good trades off the five fifteen minute time period. So I was like, man, this is perfect.

Dave: 20:09

Right? Now what I did at the time, when I took something off the thirty minute bars, I would tag it in my journal with thirty minutes. And when I started taking the fifteen minute ones, I would track tag those as fifteen minutes. So all of a sudden, have two different, like, basic same basic strategy in my journal where I could look across all all all of these different setups.

Michael: 20:32

Mhmm.

Dave: 20:32

And but I could look and see which ones were doing better. So I had a couple really good trades off the fifteen minute bars right away. So I was like, yeah, this is great. But then after, like, a month or two, I went back and looked thinking that, okay, the fifteen minute tag is gonna be way better than the thirty minute tag, but it wasn't. I was like, okay.

Dave: 20:56

That sort of stopped me in my tracks because at those first initial trades, was like, man, this is perfect. This is great. This is working well. They had stuck out so heavily in my mind. They were very memorable trades, especially because, you know, I made this decision and it was it worked out.

Dave: 21:11

Right? Hey. I'm a genius.

Michael: 21:12

But then when I back

Dave: 21:13

data, it was not quite that story.

Michael: 21:18

Which, yeah, I was just gonna say, probably stuck out in your mind because you discovered something. Right? You said you you kinda mentioned that before that other strategy was something that you knew that other people were doing, and and so it may have been a little bit less personal than the thing that you're like, oh, I discovered this change to put in so that, you know, makes those ones that work for you just a little bit little bit more personal. It feels like a little bit. So when you make money off those, the dopamine response from your brain would be a little bit higher than when you made your money off your off the other ones.

Dave: 21:51

Mhmm. So so think about the there was also some overlap here. So sometimes you would get a fifteen minute setup that would trigger. And that same stock would also, you know, trigger off the thirty minute bars. So there also I wrestled with, okay.

Dave: 22:15

Do I take both of those trades? Do I just take one of them? Do I just take the first one? So there there was that was also some productive wrestling and thinking about what to do in that situation. So I think that was anytime you're kinda challenged to make those decisions or, like, think through that is, I think, really productive even though there may not be a perfect answer for it.

Dave: 22:42

It's still very productive to think through the ramifications of both of those things. So more trades, both sides. So I've now got two strategies, sort of variations within each of those. So then I was like, okay, I went to fifteen minutes. What if I went to ten or five?

Dave: 23:02

Like, why not go smaller still? I realized progression. Yeah. So I realized, okay. Well, does it really make sense?

Dave: 23:12

Like, are these I mean, would I go why not one minute? Does that even make sense? Like, is this thing is this setup really still valid at that level? Or, like, what about one second? Like, that wouldn't make sense.

Dave: 23:24

So at some point, it falls apart. Where does it fall apart? Where does it stop really making sense? And I also realized, okay, that's gonna be a lot of trades. Right?

Dave: 23:38

There's gonna be way more trades at a smaller time period looking at this, which is good and bad. Right? But and I wanted to see, okay, how can I make this work somehow? So I realized, okay, I've gotta be backtesting these. Like, it makes no sense that I'm not backtesting right now.

Dave: 23:55

So the the and at the time, it was it was kind of interesting because there's kind of a a very well established blogosphere at the time in the in the trading world. And the general attitude toward backtesting is, oh, yeah. It's worthless. It doesn't reflect reality. It's not even worth doing.

Dave: 24:18

It doesn't make sense.

Michael: 24:19

Of that now. I I I still hear that of if you ever go on, like, the algo trading Reddit, which I used to I still just Reddit suggests it to me, so it still pops up. And it's the same thing. Someone like, I worked really hard on this back test. I've done, you know, walk forward.

Michael: 24:33

I've been watching it in real time for a long time. You know, just wanna know what you guys thought about whatever, and then the top comments are just it's crap. Like, what are you doing on the algo trading forum if you're if you're against? You can just tell it's the people who have made something work and are trying to make it better and the people who've never done anything ever just sitting there and and, you know, talk crap the whole time. But, yeah, it's just it's funny that it still exists the same way today.

Dave: 25:00

Yeah. So I I had because of this attitude, I had kind of low expectations for that first backtest. And I was thinking, well, you know, it's probably not gonna pan out to see all these people that seem to know what they're talking about, saying how, you know, how much of a waste of time it is. But it just something resonated about it with me. Was like, okay.

Dave: 25:24

I'm gonna I'm gonna do this. I'll probably learn something. It won't be as good as what I'm doing now, but there maybe there's something I would learn from it. So I started backtesting. And I and I've tried to model the exact strategy I was trading.

Dave: 25:41

Now in in this strategy, there was a little bit of discretion in the strategy. So the the rules were clear very clearly defined, but the discretion was, okay. I'm gonna I'm I'm creating my watch list, and I would do that at, like, nine, like, 09:40. So all the gaps would have come in, and I would I had the gap list, and I would scan through those real fast. And, like, okay.

Dave: 26:05

Yes. This goes on the watch list. No. This doesn't go on the watch list. So there's a bit of discretion there.

Dave: 26:10

And in my mind, I thought, that discretion is so valuable. I've been doing this for so long. Right? It's just there's no way you could quantify this in any way. So magical.

Dave: 26:22

This the first the very first back test was better than what I was doing. Like and I could very clearly see like, I I came up with one rule, basically, with, like, an early version of the cruncher. Yeah. That beat what I was doing. So, you know, this practice basically told me, you suck.

Michael: 26:42

You're you're useless. Yeah. You you're the weakest link. You're the problem. Right?

Michael: 26:48

You should remove yourself from the equation entirely.

Dave: 26:51

Which was good news to hear. Like, it was as difficult as it was, it was like, okay. Well, this is actually a good thing, because I don't need to be stressing out spending mental cycles coming up with this list at 09:40 real fast. I give this a waste of time. So but that that so as much as it sort of hurt my feelings, I realized, okay.

Dave: 27:19

This is a this is really good. This is a very good scenario that just has just happened here. So now that I realized, okay. I I can I can quantify what I'm doing? I know it works because I've backed us in now over a long period of time, not just the experience I had.

Dave: 27:36

And I realized that, okay, there is a way I could trade these smaller time periods and get a lot more trades. But I need I need to automate. Like, I had there's no way I could do this without automating it. So So that's the next step that I took.

Michael: 27:55

So wait. So when when you went lower in time frame, you still found there was benefit. So when you went under 15 now did you ever find that cutoff? Because you were, you know, you're asking yourself the question, right, if thirty minute works and fifteen minutes better, is five minute better, is is one minute? Like, was there ever a it worked until we got, like, super low in time frame, and then it it didn't work as much, or was it kinda linear in some way?

Dave: 28:22

So I've went I tested down to the three minute time period, and that's the one I've been using for fifteen years with this this particular strategy. And what I realized is I could do a couple things. Instead of looking for an hour at the beginning of every day or maybe even a little little bit more, I could only I could I could confine, limit myself to only the first half hour. If but it but I needed to do the three minute or the five minute time period to make it work, and I needed automation. So, like, everything pointed to automating the trades and using a smaller time period.

Dave: 29:08

And there was no real difference. I I think I'm I'm sure I backed this in a one minute time period, but something about it just seemed like this I knew enough about this setup where I thought, it just it doesn't make sense. Like, at some point, it's gonna not make sense. And that felt like it was too small, and it just didn't make sense. It felt like it fall fell apart.

Dave: 29:27

The data probably said it was it was better. But something about it like, it didn't pass the sniff test.

Michael: 29:35

Well and, again, to go back to the the things that make sense to us but might not make sense to others is there is still that unquantifiable thing that we have to deal with sometimes as traders where, you know, if you provide me an amazing looking back test, I am going to ask you how like, what what the mechanic is that you're exploiting. And if you can't articulate that, I'm I'm way less interested in the strategy. So, you know, at the end of the day, that it has to. And and like you talked about with your path to confidence is that you have to have that understanding of, yeah, you know, the numbers might say it a little bit better, but, you know, little things when you get really tight in time frame, it's like, okay. Is it good enough to make up for slippage that would occur and and miss fills and things like that?

Michael: 30:25

Where the the other side of it, little longer time frames can be a little more forgiving on that side. So, you know, and that was a great example of of, you know, going deep on a strategy and and getting getting in there and and flipping it to the short side and all of that. But is that the only reason that made you stop? Is that you kept going lower and lower in time and you hit that natural stopping? Or did you try a bunch of other stuff and eventually you got to the point where you're like, okay.

Michael: 30:55

I think I've gotten enough of the juice out of this strategy that it might be time to kinda look at something else.

Dave: 31:02

Well, I so I thought I I thought I was coming up on that. But I actually by looking at this every day, looking at these setups, I figured out a way to go even deeper. So so so first of all, let me tell you the difference that automation made in this strategy. So I was because I was just going back and look at some at some of my old numbers. I can't remember what year it was, but there was one year that I made, like, 300 trades with this strategy.

Dave: 31:37

And then the next year, I made, like, 3,500. So over a 10 x increase in the number of trades that I made in this strategy.

Michael: 31:47

Yep.

Dave: 31:48

So that comes only from automating it, having a back test for it, you know, going through the process of creating a program that could do this and do it well in a in a way that I could be confident with and and was, you know, resilient and robust and didn't have bugs and, you know

Michael: 32:12

Well, and and just like we talked about, right, is that if because I I hear this sometimes from discretionary traders that, you know, the the better discretionary trader may beat the better systematic trader in, like, analysis or something. But and let's give them that. Let's say that's that is true. But what you found was that even if there was some benefit to your analysis of building your watch list or or whatever, what you found out there wasn't, but say there was a very marginal benefit there. The what you're making what you're what you're compensating that with is kind of brute force.

Michael: 32:50

You're saying, okay. Well, I can make 260% win rate trades a day, or I can make 1055% win rate trades a day. And, you know, it doesn't matter that I have potentially degraded something when it came to execution. Maybe you gotten a couple cents better if you were manually executing it, maybe not. But even, again, even if we give the manual traders that side of it, you make up so much more from the brute force side of things that it would completely offset any edge that you think you may have.

Michael: 33:23

Again, I think both of us would argue that you don't. But it would it would offset that pretty handily just by saying, well, it's better to do a whole bunch of suboptimal things than only a couple optimal things when it comes to trading because it's all about just turning over anything with edge as many times as you can possibly turn it over.

Dave: 33:42

Yeah. I think that's a great way to put it. And, yeah, it was very clear. The other thing to point out is that the the year that I had those 300 trades was a like, the the expectancy on those trades was actually higher than the expectancy on the the 3,500 trades per

Michael: 34:03

trade Mhmm.

Dave: 34:04

On a per trade basis. But I weighed way more money Yeah. That when I went to 3,500 trades. It just makes sense, right? But each individual trade in aggregate wasn't as profitable as the year before.

Dave: 34:17

But it didn't matter. Mean, was making a lot loads more money. So I realized, Okay, I have no ceiling now for the number of trades I can make. Like, I can make like, it didn't matter that all these were coming in in a short amount of time. That didn't matter at all.

Dave: 34:38

Like, I wasn't struggling to keep up, like, you know, on the Isle Of Lucy and the the candy coming down the factory that the famous show and scene. So that allowed me to think about look at my strategy completely differently and think about other ways that I could add more edge and go deeper with this strategy, which I'll I'll tell you the the next phase for the strategy was basically doubling the number of trades again. So and and here's what I did with those. So remember, I'm trading I'm looking for gaps up and going long if the pattern occurs. I'm looking for gaps down and going short for those.

Dave: 35:26

So what I realized is some of the trades that would gap up and I would go long would stop out, and they would, like, crater. And I was like, you'd look at it. You're like, man, I'm glad you had to stop there. Right? I mean, you would lose a lot of money if you didn't have to stop there.

Dave: 35:43

So I was thinking but then some of them would, you know, continue. Like, I'd stop out, they'd keep going. Right? Like, if I would have stayed in it, I would have made money. So it made me think there has to be some strategy I can come up with that where I can add these trades that go up and then go down.

Dave: 36:08

Like, they gap up, but they end up going down for the whole day. So and I realized that there were some of those that I was getting stopped out of, but also some of them that like, if so the way I was invalidating some of this universe during the day is if it dropped below the opening range. So it would go off the list then. And I would so I would for some reason, I started looking at those. I realized, well, they're they're completely off my radar.

Dave: 36:37

Like, if there's some way any any way I could come up with a strategy for those, it's completely additive to what I'm doing. So I realized, okay. There should be some way for me to segment these where a gap up, I could I I would continue to go long some of these, but there ought to be some where I could be looking for a short setup there. And the same for gaps down.

Michael: 37:02

So George stanza trait. Right? Where I remember the episode where he's like, I'm just gonna do the opposite of whatever I normally do. So that's the George Costanza trait where you're saying, well, this one stops out, and it it murders me. Right?

Michael: 37:17

Or or it just keeps going. It would have murdered me if I didn't have a stop, so why don't I just do the opposite? And Yeah. Yeah. It's funny how how much that that comes up as, you know, you you end up, I don't know, buying things that are are oversold over and over again.

Michael: 37:32

You just keep getting killed. You're like, well, what if I just short them when they become oversold? And, again, it seems silly, but it is a natural like, if all of these are stopping out and then they're continuing lower, maybe there's a chance to take my hit, my small hit, and join the side of of everyone else. And then I know sometimes I'm gonna get hit, and then I'm gonna short, and then I'm gonna get hit on the other side. But as long as on aggregate, it makes sense to kinda flip my position.

Michael: 37:58

And that might be harder, I would say, mentally for some people than others because you are now, by definition, just, like, not only having to admit you're wrong, but then to join the other side, which would then be hard if it, you know, if it goes back up, you have to admit you were wrong twice on on a single trade. And that that might be rough for for some people. But, like anything, if the math works, the math math works. Right?

Dave: 38:26

Yeah. And so it it took looking at some of the trades that I was stopped out of and looking at some of the trades that were invalidated before I would even take the trade. Right? So

Michael: 38:40

Mhmm.

Dave: 38:40

And some of those, like I said, would just crater. And it made me think there's has to be something here. And there has to be and specifically because I knew that they were invalidated completely off my radar, that was a really good thing because they could be if I came up with something with that universe, it would be completely additive to what I'm doing. There wouldn't be I wouldn't have to make a decision about, okay, should I would should I be going long or short this one at any point? So I I I knew that there was a way to divvy this up where I could basically maximize the number of trades I took in this universe.

Dave: 39:19

So and the only reason I was able to do that is because at that point, I had automated all the trades, and it was super easy to add a new strategy to the mix. It didn't cost me anything. It didn't you know, I didn't have to be looking closer. I didn't there weren't an increase in mistakes I was making by making trades manually. It was that really unlocked a lot of digging just as deep as I could go into this universe.

Michael: 39:50

Well and I think what that highlights more than anything is the the need to either watch the trades live, which I do think there's a lot of benefit to, or a physical review process as opposed to completely automated review process, which is, you know, the trades that you won and then the trades that you lost, and and you're just looking at the math behind it. But at the very least, taking, you know, ten minutes at the beginning of the day for yesterday's trades or at the end of the day, whatever it is, and going through the trades and saying, you know, there's my entry, here's my exit, and this is what happened after is so important because everything that you've kind of discovered from this was because you were sitting there watching, noticing things, and then testing those those things that you notice. And so I would say for people, even, you know, the people we talked about that, hey, you've got a job, you wanna limit the trades that maybe first or whatever time slot you can allocate to your trading. But make sure you have a process to then later go back, you know, next day, the night, the when I whatever it is, and look at what would have happened to all of those trades because that's how you're gonna start to to discover things.

Michael: 41:08

And it's a lot easier to do that because there's some amount of vested interest in what happened in the trades itself because you were a part of them either, you know, before or after the trade was done, that is gonna be way easier to motivate yourself to sit there and go through all of these trades and look at at what happened as opposed to just saying, look at some arbitrary charts at some arbitrary point in time and try to figure out a trading strategy based off it. As soon as you're like, I bought here and I sold here, then this is what happened. It's gonna be I think the connections are gonna be made easier in your brain.

Dave: 41:43

I totally agree. I mean, just think about and part of it, it was that I was only looking in the a half hour. So imagine, you know, I I put in you put in a trade. Looking to go long, I went long on a trade, then I would go do work. And then I would come back, and I was like, okay.

Dave: 42:00

What happened to these trades? Some of them had stopped out and just like cratered. And they're like, what the heck happened there? I had such hope in this thing. What?

Dave: 42:08

It really is motivating to see it in real time and to see it play out that way. You're you're dead on that it's there's something fundamentally different. It's not just that you're watching the the chart wiggle. Like, you can't go and do a replay after the fact. You know, you have some platforms that'll do this replay.

Dave: 42:28

It's just not the same. Like, you have to have the hope and to have that hope dashed and to see what happens after that and to, you know, go through those emotions in real time. That's an important thing to have happen. And I see you know, there's just there's some level of motivation and some insight that you have that you that you can't recreate outside of that environment. You're you're totally right about that.

Michael: 42:54

Yeah. And, you know, that's the that's the way you discovered all of these going deepers. And I would argue, you know, when we're talking now about how to go and develop new strategies, some of them are gonna be the same thing where maybe you're watching the trades unfold and the trades end, and you're just noticing those stocks, what happened later in the day, and that could create a different strategy. So for example, you know, you had your initial thirty minute candle setup, whatever it was, that that breaks, you take your trade, whatever, and then you're noticing, again, hypothetically, these things go into, like, long bases in the afternoon while everyone's at lunch and then make a move into the close. Well, that could be the second part of this conversation, which is about going wide, where now you're saying, oh, well, I've noticed so much that these these early crazy gappers, they go into these long bases, and then they break out later in the day.

Michael: 43:53

That can same process can now have a completely different setup on roughly the same universe of names, but you can now develop a completely different strategy just by noticing, oh, later in the day, you get these these high probability moves that can occur, and you would only know that through some sort of kind of manual review of of the trades that you took place where you're seeing these or you're saying, oh, into the close. You know, maybe the ones that run all day, they reverse a half hour before the close or something as people take profits or or whatever it is, but you'd only notice that by and then maybe you're using that to say, well, maybe I should exit these trades a half hour earlier. But then also you're saying, well, what if I exit them, and then I go short, and these are a completely different setup to be had there. So, yeah, a lot of it can be done just chasing that same kind of through line as as long as you're you're able to to find something new to do with those.

Dave: 44:48

Yeah. So I I think is this a completely new strategy? Like, are each one of these completely new? No. I mean, it's in the same space.

Dave: 44:59

Right? So so there's so I wanna my whole point here is, in any given strategy, there's so much depth. And there's different ways you can think about it. There's ways to add trades. There's ways to remove trades from a strategy to improve it.

Dave: 45:14

So there's more and some of some of these some of these realizations I had, it was like four or five years into trading the strategy before I thought of it. And here, I mean, I was doing this every day. So it's there's just so much more depth than you realize. And I think it's I just wanna underscore the fact that for most traders who are trading strategy a, Creating variations of strategy a is gonna be the more productive thing.

Michael: 45:54

And See, this is we could have solved, I think, most of a fight in last one because I just disagree with you that those are the same strategy. See that? And that's it's just it's all definitional. I don't think it actually matters. But I would say, specifically, the strategy later in the day, I don't care that it's on the same symbol.

Michael: 46:14

I look at it as it's a different, I guess, cluster of price action, therefore, a different strategy. So then the same thing could be applied to my swing trading. A lot of my swing trading capitalizes off of some sort of change in some sort of fundamental event. There's, you know, in in the last five to ten days, there was a massive spike on a stock. Right?

Michael: 46:35

Some of them might be buying pullbacks in that spike. Some may be waiting for consolidations and then breakouts of that spike. Right? Some may be you know, there's different ways to trade that thing, But just your argument would be like because you're trading the same instruments and the same they've had the same spike that it's kind of going deep, and I just look at it as it's a little bit different where I'm going. I look at them as completely different setups even though they're they're keying off that same initial event.

Michael: 47:03

So I guess that's, you know, a way to kinda bring it back and just saying, well, whether or not you consider it a different strategy or whether or not it's the same strategy is just whether or not you think that, you know, keying off the same initial thing, which in this case was a gap probably caused by earnings or news or an upgrade or something like that. Whether trading that differently is exploiting the same strategy or creating different strategies, and I guess at the end of the day, doesn't really matter. Right? It's just you are they are they are different entry and exit rules, but whether or not they're just variations of the same one. And that's kind of a good way to have you start thinking of everything else with a curious mind.

Michael: 47:47

Because if it is that they're kind of the same strategy in some way, then that's fine if you want to if you want to kinda classify it as that. But then you're just thinking of different rules around the same strategy. If you're thinking of them different, then great. You can think that you have you have different strategies throughout, but it seems like it's more of kind of a framing thing at that point than an actual whether or not it is it is or it isn't.

Dave: 48:13

Yeah. So okay. So why don't next week, let's let's let's take a little bit different approach and but dig into this even further. So we've talked a lot about what I think we both agree now is sort of variations of the same strategy. Maybe it's a different strategy.

Dave: 48:31

Maybe it's the same. Doesn't really matter. Why don't we talk about let's let's go over next week what the like, a really different like, what we would both agree would be a completely different strategy, making that leap. Because I think it's very different from this, and I think it's much I I think it's harder. And I think you have to have the right mindset to be able to do it.

Dave: 48:58

And and but also knowing the fact that the variations of your existing strategy is gonna be easier and likely more productive. But let's let's step back and think about big picture, really truly new universes and new strategies and how to come up with those from, like, what you've done so far and what we've talked about so far.

Michael: 49:24

Good. Well, listen. This user's getting a lot of bang for his buck at this question. But, you know, it just shows that, right, if the question's detailed enough and they can get us kinda at each other's throats just a little bit, then you you get a what is gonna be a two hour plus answer to your your question, which, again, I think is great. It's there's a lot to talk about in this topic, and it's it's an important one because it's hopefully a problem that you're gonna have.

Michael: 49:52

Right? Again, we talked about this in the first one that if you're having this problem, you've already gotten one good strategy, hopefully, and you're looking to expand out. So it's hopefully a problem that all of our listeners will walk into at some point when they've completed that first winning strategy. And, yeah, it's obviously a big topic and a lot to talk about, so that's what we'll go over next week. And as always, I'm Michael Nauss.

Dave: 50:15

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