Line Your Own Pockets

Michael: 00:00

Okay, everyone. Welcome to another episode of Line Your Own Pockets. This is actually a fun one. We talked about this last week that we were gonna do behind the scenes, and I actually got excited because this actually came from just an offhanded comment in one of our podcasts at one point that someone reached out to Dave about after and we said, okay, this is definitely a whole topic. This is a whole rabbit hole we can go into.

Michael: 00:24

So we didn't we didn't wanna wanna do it offline. We wanted to turn on the the cameras and the audio and do it with you guys. So take it away, Dave.

Dave: 00:32

Yeah. So at one point I don't even remember which episode. We'll go back and find it and link it to the show notes. We mentioned that moving your stop to break even is probably a mistake. We just sort of glossed over.

Dave: 00:47

We just mentioned it very briefly. So I got an email from Emmett, Emmett H. He's on my mailing list. And he's like, Wait, did I hear you correctly that you think moving your stock to break even is a mistake? So yeah, I'm sure there's lots of people that, like, are your ears perked up a little bit when we said it.

Dave: 01:11

But, yeah, I've Well, I think it's mostly a mistake, but let's let's talk about it.

Michael: 01:19

Yeah. And let's firstly talk about why, right? Because I I think that's the the main thing where it seems like it's just one of those things that if you've ever taken a trading course or watched a video or talked to whatever, you hear the saying of, oh, wait, you take off half to cover your risk and then you move yourself to breakeven. It's just like like like saying eat your vegetables, like saying it's just this kind of saying in trading. And that's why I think most people, not only have heard about it, but maybe raise their ears just a little bit when we say it because I think it's one of the it's just, like, so ingrained that, like, a lot of things, you don't stop and actually sit back and and think about and and kind of ponder about to see if it's actually true because it's just you enter trading and someone says, oh, you buy the stock.

Michael: 02:07

If it goes up a bit, you take off off and and you move your stock to breakeven. Okay. And you just hear it so much that you think that that's just what people do.

Dave: 02:16

Yeah. You hear so many gurus say this, people who think they're smart, people that are Like I said, there's a lot of people that are good at talking about trading, but they're not good at trading. There's a whole category of person like that. They would line up right behind this statement, what you just said. Love topics like this because there's such BS and it doesn't take long to think about it and experience it and to understand what's actually going on to realize that it is BS.

Dave: 02:58

It's a good example because you reflexively sort of want to do it to make you feel comfortable when you're in a trade that could go either way. Maybe you're sitting on a profitable trade and you don't want it to turn into a loser. That's natural. But you're going to have to weather a lot of those trades to get the big winners. So it's sort of counterintuitive.

Dave: 03:30

And yeah, you're going to feel some pain sometimes. But yeah, you just need to think about it, do some back testing, and see what actually happens when you do move your stop to breakeven.

Michael: 03:44

Well, I think you hit the nail on the head. Let's take a second there about why I think people do it. And it's just that. It's a pain avoidance mechanism. It hurts.

Michael: 03:55

And I think it hurts especially. And I think I've given this study a few times where, you know, a well known study where you give someone $20 and then they you measure kind of how happy they are, and then you take the $20 back and they're worse off than than when they started, even though financially they're net even. And I think that's that's what happens. You hear that saying all the time is never let a winner turn into a loser and and things like this. And I think that's that's like the big kind of crux of it is that people just hate the, oh, you know, I was up a couple $100 or a thousand bucks or whatever it is, and then I lost money.

Michael: 04:30

Right? At some point, if I had hit the button, I would have put a thousand bucks in my pocket, but by the end of the day or the end of the week or whatever the trading was, I ended up taking a couple $100 hit. That I think hurts people more than if you just, you know, you buy the stock and it just immediately drops and it's your stop loss, even though the, again, the dollar amount is the same. So I think all of this kind of move your stop to breakeven has just started from that very human, but very incorrect thing that we do where it's like, okay, I have the money. I should it's a thousand bucks.

Michael: 05:02

I could buy something with that. That'd be great. And you wanna just take that and move on. And you don't wanna feel the pain of what happens when it kinda completely flops around the other way, which, like you mentioned, is is gonna be a lot. It's it's gonna happen tons where you get a little bit of profit, and then it kinda comes back against you.

Dave: 05:20

Yeah. It's guaranteed to happen. And Yes. The the good traders and good trading is being able to tolerate that. And that's what makes trading so hard.

Dave: 05:31

This is exactly why, because you're going to have to go through and experience the thrill of being in a great trade, almost hitting your target by like $01 away and then it comes back down and hits your stop.

Michael: 05:46

God, I still hate it.

Dave: 05:49

Sure, it absolutely but you have to tolerate those things to have your strategy play out in the long run-in an optimal way. But yeah, I mean, it sucks. Of course, it does. But you have to be able to tolerate it.

Michael: 06:06

And yeah, that's you know, when it when it comes down to it, right, that's what if anything if you ever come across anything in trading that is just said kind of broadly like that, that I think is the main kind of crux of it is it someone has done it to make themselves feel better, and then they felt better and whether or not their P and L is is then optimal at that point, it just became a thing. And then it kind of perpetuates from there. So let's let's take it back to kind of the the quantitative side of things. So we know why people do it, right? It's just it's to to make their feelings feel better.

Michael: 06:40

But, is there any any way that someone could kind of legitimately test whether or not how much this is hurting them and in a more back tested way? Because, you know, obviously, you could you should be at the end of every day running your backtest every day if you're a day trader, week, or whatever. And, like, running your backtest saying these are the fills I should have gotten, and this is what I actually got. And eventually, hopefully, the backtest will say, oh, you should have made a grand today, and you ended up not making anything because you moved all your stops to breakeven. But on a more of a programmatic way, like, how would you because I was thinking of that myself.

Michael: 07:19

Like, how would you actually dive in to try to see how much, if any, damage is doing? Because I don't know. Maybe maybe we're wrong. Maybe it is a great thing to do. Yeah.

Michael: 07:29

Well,

Dave: 07:31

there are some back testers that make this easier than others. For example, trade ideas, you actually do this. You have to do it outside of trade ideas because there's no mechanism for recording stuff post trade. But other backtesting softwares allow this. So the first thing I would do is figure out some column to add to your backtest that's going to be a post trade column.

Dave: 08:02

And we mentioned this, I think, the previous podcast where there's basically two different types of columns you can add. One are pre trade and the other set is post trade. Most people don't even think about the post trade and it's really secondary, but that's exactly what you would do. Let's measure some behavior after the trade and then add it as a column and then at least be able to isolate that in your backtest. So you can say, okay, here's the ones that did exhibit this behavior.

Dave: 08:35

Here's the ones that didn't exhibit this behavior. And then compare. So that's the first step. I want you to think about what you're doing as you do this. Even just the very simplest rule you could add, I mean, move your stock to break even after a certain amount of time, all of a sudden that you've made your strategy quite a bit more complicated, even with this one simple rule.

Michael: 09:07

A lot. Like, twice as complicated at least. Right? I it's it's a huge because you're incorporating now just because especially, let's just let's just talk about this in the realm of day trading to make it simple. Generally speaking, you've got some sort of stop loss and profit target, and then at a kind of natural time stop, you wanna be up by the end of the day.

Michael: 09:27

Now you're trying to tweak with like a you're throwing in a whole other variable on top of, what could just be a two variable system. A lot of people just use a stop loss and exit at the end of the day. Well, now you're you're you've you've done a whole another variable that's only working intratrade. So, yeah, the amount of complexity you've now added to your system is is huge. And the amount of testing and and back testing, programming, and and the time the back tester would take and everything, it's just, yeah, you're you're making your life real hard.

Dave: 10:00

Yeah. I'm glad you brought that up because that's a huge point that most people don't consider. I mean, just because you can do something in a back test doesn't mean you should be doing that in your trading. So let's say just theoretically, you did find that there was some situation where moving your stop to break even made a lot of sense. It would have to be so much better than the baseline for one reason.

Dave: 10:28

And that is there's no order you can use, even at IB who has tons of different order types, lots of different flexibility in the order types. There's none that does exactly this in a way that's automated. So you're already gonna be doing either a lot of programming on the client side to be able to make this work like you expect. And that opens up a whole new level of risk with what you're doing. Anytime you do write software, no matter how good you are, no matter how long you've been doing it, there's gonna be bugs in there.

Dave: 11:11

There's gonna be and there's a risk of that. And it's just it for that reason alone, it needs to be significantly better than the baseline of just being able to enter some orders that on IV servers or in a standard automated fashion that implement your strategy. This is, you're right, this makes the complexity way, way more.

Michael: 11:37

Yeah. And that it could be a whole another I think we say this every episode that it could be a whole another podcast. But Yeah. I think there's a lot of people who search for performance at all costs, and I don't think that makes sense. You're looking for performance at a reasonable cost.

Michael: 11:54

You know, if I said, hey, Dave, listen, I you could make an extra $2 a year, but you've gotta sit at that desk the entire time, monitor the entire you're not allowed to, you know, use the bathroom. You're not allowed to you go, of course not. That's ridiculous. You know, my time, my ability to walk away and have systems do things is definitely worth, you know, money to me. But some people don't look at it like that.

Michael: 12:18

So they will try to make the most kind of convoluted and complicated systems that they possibly can to make the most amount of money possible. And on top of that, I think there's a certain you're adding a big level of fragility. Say there was a magic order in IB that you could could do that would do this. The more levels you put on top of the system, the less the more fragile you're you're making the overall system. Whereas now it's not just does the mechanic of, you know, the particular setup you're looking at, you have to monitor that for not breaking down.

Michael: 12:54

Now you have to monitor this other component of moving that stop. Because what if, you know, someday your idea of, hey, I'm buying stocks that are oversold, And that continues to work, but it's just the moving stop to break even part of it that has busted the system. Right? You just it's the level of complexity on top of everything that, yeah, even if someone gave me two backtests and one back test made an extra couple bucks a year, I'd still say it's just bad idea. Right?

Michael: 13:21

Just not worth

Dave: 13:22

Even you know, anytime you have yeah. I mean, I I totally agree. If there's any sort of intervention you have to do manually, man, forget it. I'm not really interested. Even if it's I mean, it would have to be very, very significant.

Dave: 13:41

And I think that's the right way to do it. I don't want to have to think about it. I don't want to have to have complexity in the trade. I don't want to have to make decisions once I'm in the trade. And if you have to make a decision, then something's going to have to make that decision.

Dave: 14:01

It's not going to be me. It needs to be my software or the logic in there. So that's why in almost every one of my systems, the all the exit orders are entered right at the entry time.

Michael: 14:17

No deviation. For anyone listening who hasn't reached that point, the stress reduction, the freedom, the just joy that comes from it. You know, as someone again, who Dave is definitely further along in kind of the systematic, I guess, journey than I am, I'm newer to it. And that to me was always the biggest stressor of not just losers, but I'd say even more importantly, great winners. You'd have a great winner.

Michael: 14:50

You're like, okay, well, what do I do with it now? Right? If I sell it now and it keeps going up and it's just you're just the amount of work you're putting on to your brain for an unknowable answer is just is just crazy. So the moment you get to the point where, and I always say this kind of the first step I would say of a lot of systematic trading is just that when you enter the trade, you enter whatever your plan is to get out. I don't care if it's a moving average crossover, the migratory patterns of elephants, whatever the hell you decide.

Michael: 15:22

But as soon as the entire trade setup is done, the moment you enter, that's that is the big the smallest amount of work for the biggest leap in kind of mental clarity that you can possibly get at. Because now you've gone from, okay, I need to find what stocks to buy or sell, and then what to do when I'm in them, and you've cut that in half. It's just simply Yeah. Right? Is this a trade to make or not?

Michael: 15:47

And yeah. So that, you know, I just when you said that, it just kind of I don't know if PTSD or whatever you wanna call it, but I I remember the time where I'm like, I've entered the order. There's a stop loss. It's gonna excel at the end of the day. I'm done.

Michael: 16:01

And the the amount of freedom and the amount of mental clarity that gave me was just, again, astronomical.

Dave: 16:09

Yeah. Any casual person that talks to me about trading and asks for advice, that's the very first thing I say. That applies to no matter what kind of trading you're doing, investing. It doesn't matter what kind of trading you're doing. That is a very good plan to follow.

Dave: 16:27

Have your plan for any eventuality when you enter the trade. No question. You're right. Very often people will say, How do I get the emotions out of my trading? I get so emotional.

Dave: 16:43

It's precisely because you don't have those rules defined. You're in a trade and you're having to make decisions. You haven't gone through the process of making those decisions beforehand. So, that is stressful. That is emotional.

Dave: 16:59

That is why you're feeling that is because you haven't quite fully systematized what you're doing in such a way. That doesn't necessarily mean completely automated everything to a robot. It's just having a plan. You don't really have a full complete plan yet. It just comes down to that.

Michael: 17:19

And even for the people, you know, speaking to the people that are, for some reason, listen to us and they're discretionary traders and they're not interested in becoming systematic, the if you just think about it mentally, when are you going to make your best decisions? When there's nothing on the line, right? When you're you haven't yet entered a trade, there's no there's no risk, there's no whatever. You're sitting in cash and you're looking to deploy that cash into into the markets. And, you know, to bring it back to, like, moving the stop breakeven, by design, you are making that decision when there is something on the line.

Michael: 17:58

So you're choosing the most kind of heightened emotional and stressful state that you can ever possibly be in in your trading career and saying, this is the time that I'm going to trust my dumb lizard brain to make like the most concrete decision on whether or not this is actually a good idea or whether or not I'm just, you know, feeling a little fear or FOMO or whatever the emotion is. Right? It's just it's not gonna work. It's you are at your most you're at your you're at your dumbest moment when you're saying I'm gonna move my stuff to break even.

Dave: 18:30

Yeah. I mean, that that's a great point. And I've said this before. Humans are hardwired to do the least profitable thing when you're in a trade. So you it's you're right.

Dave: 18:45

And, I mean, that's sort of the whole reason for putting a lot of effort in to having a plan to begin with, because you will do the wrong thing and it will be very frustrating. I mean, there will be no question that will happen.

Michael: 19:01

So now, you know, so we're we've I think we've kind of debunked a lot of the the reasons for it. But the main reason that people do this, right, is still looming out there in which they are uncomfortable with the winner turning to a loser. You know, I know one of the things that you're probably gonna say right off the bat, but that person who who feels that like really hard and and like say you had a client that came to you and that was their sticking point there. And you hear it all the time because I think this goes hand in hand with the guy who's like, always take my profits too soon. Right?

Michael: 19:40

I I got out at at ten, It went to twelve. It would have been a a way bigger trade, you know, maybe double or triple or quadruple the profits, but I just I saw the money and and I took it. With those two things hand in hand, again, what what do you what do you tell that guy that it's gonna happen? So how

Dave: 19:57

you So deal with the reason you're doing it is because you want to feel like you are correct. People want to be right. You don't wanna have made a decision and it turned out to be wrong. I remember when I first started trading, a lot of people would say, well, just go back to every losing trade you have and figure out the reason why it was a loser. And then you could just get better and better.

Dave: 20:27

That makes no sense. But there was a while where that's what I was trying to do because some people that I thought were smart were saying that. And the same sort of people are saying, Move your stock to break even. But you're really doing it because you want to feel right. Think about what happens when you move your stop to break even.

Dave: 20:48

You really probably would like to move it to break even plus $01 because that would turn, that would make it technically a winner for the purposes of your performance. Your win rate is going to be higher because of that. So you're going to feel a little bit better. But it's not the right thing to do. And I remember when I first started backtesting and, you know, when you first start backtesting, you realize, Man, this is a freaking superpower.

Dave: 21:23

This is like the antidote to all the BS I see out there. I could just go test everything. And because you hear this so often, I remember thinking, well, surely there's some combination of moving your stock to breakeven that works. So I'm going to try it. So I went through, gosh, all sorts of different combinations thinking, Well, I must not have it right because I know this works because people are telling me it does.

Dave: 21:51

So, let me wait a little bit longer. Let me make sure the stock goes far enough in my direction first and then move it to breakeven. Maybe wait, do that, but wait a little bit longer before I move it to breakeven. None of that stuff made the strategy any better because you will have stocks that come down to break even, but don't hit your stop and then continue in your direction. And the other important thing to think about is after you start trading a system like this, it's pain avoidance.

Dave: 22:33

So you see the things that when you have a losing trade, man, that's painful. So your tendency is to go look and try to eliminate some of those. So this is the kind of the first thing you do, but that's not what's going make a big difference in your strategy. You're not going to have a path to confidence where you can 10x the amount of capital you're putting toward a strategy by getting rid of some of the losers like this. You're just picking at the edges here.

Dave: 23:04

That's not what makes your strategy successful is getting rid of the losers. What gets your strategy successful is what you do during the big winning trades. Look at those, focus on those. Don't focus on your losers. That's where the biggest bang for the buck is going to be when you're just starting to trade a strategy like this.

Michael: 23:23

Well, yeah. And and that goes down to, you know, just always I always look at extremes because I think that helps find kind of the middle ground is that, you know, if you had a strategy that was right 99% of the time, say 99% of the time that didn't happen, where the great winner turned into a loser. Still happens. Right? Still happens 1% of the time.

Michael: 23:43

So I think focusing on on that and saying, okay, so it will happen. There's just an absolute certainty that, you know, that say the stock, say I'm just using an end of day stop. The stock goes down all day long and I'm short and it's amazing. And then the last ten minutes, some amazing news comes out and it just rips and then it comes all the way up and hits my stop. Like, it's going to happen at some point.

Michael: 24:06

It's just there's no if, ands, or buts about it. So, you know, I think the answer always ends up being is kind of looking at everything in aggregate is like taking a step back. If you're noticing this happen on a singular trade every now and then, and that's really getting to you, what I've kind of recommended, what I've done a little bit myself is is trade more. Right? If you have 20 trades going on at one single time, then you're gonna notice that one trade move a little bit less.

Michael: 24:35

And then maybe if it's like if this thing's really killing you, and maybe you're a little bit too big, but you just have to get in your head that, you know, your profit target is your profit target, and hopefully, it's your target, whether it's a time stop or an actual physical profit target. Hopefully it's like that for a reason. And you've spent some time, you know, really considering it and then working it through and understanding that. And you have to understand that if you had a reason to do it, then you should you should make sure that you stick to it. And then like we say with everything is you got to make sure that you track because eventually the numbers will show that you, you know, taking those profits early or moving that stop to breakeven or whatever it is, at some point you will see, you know, a detrimental effect, even if it's only one trade.

Michael: 25:23

Like I'm thinking of my trading, I had one completely standout trade that made, you know, like my last month, just stock just ripped, went up like a thousand percent in a single day. It's just nuts, nuts trade. And, you know, if you had taken profits too early on that because you were up a little bit, that the backtest and then your actual results look so dramatically different that that should be kind of a big kind of shakeup. That if that's only gonna happen once every two years or five years, it's still hurt, right? It's still a good idea to do.

Michael: 25:56

So yeah, data is everything. And then, you know, if it's getting you too much, more trades and smaller is probably a good way to do it.

Dave: 26:05

Yeah, I like that. More trades is generally better. It just reduces the importance of any one trade. So you can overwhelm a big losing trade with a whole bunch of winning trades. I love that approach.

Dave: 26:21

The other thing to think about is if you're optimizing for a system, you've got a good strategy. What's most likely going to end up in there are trades for stocks that are moving a lot. They're exhibiting unusual behavior. So, it's not going to be that unusual for it to move quite a bit during the So, is, I mean, if you're trading the right things in your strategy, very often it's going to come back to your stop and sometimes stop out. So, it's an important thing to think about.

Dave: 27:01

A good trade is very rarely going to just go straight up right in your direction. The easiest trade you've ever made goes right up to your target and you get out. A lot of trades look scary when you look at them and they feel scary because they're moving a lot and you've got potentially a lot of size on. But those are typically the ones where you make a lot of money. So you have to be able to stomach that.

Michael: 27:28

Well, I also, I don't know if this is a brilliant idea I just had or a dumb one, but it does go to what we talked about before where you don't really want to look at your P and L and at the very least, you won't see it in the moment, and it might be easier to then because I think that's what really gets people is that for me personally, and I know some people don't recommend this at all, but I've got I've got contingencies in place. Once the day has started, and I've realized that the system is working, I see the order is getting placed and the stop loss is getting placed, I close it down. And I go do other stuff, I work on other things. So I'm not looking at it constantly. We've talked about not having your P and L staring you in the face all the time.

Michael: 28:11

Yeah. Because that's just going to encourage you to do dumb stuff. If you're looking, if you look over at one moment and you're up, you know, $10, and then you look over the next moment, you're down, that's causing a lot of this kind of dopamine fluctuation that you just really doesn't benefit you at all in your life, because as we talked about, you really shouldn't be making those decisions at the time. So I know that it's funny because the people who get involved in trading are usually the really good workers. I think that's one of the the people who have, I guess, gotten to this point, they're listening to two nerds talk about systematic trading.

Michael: 28:45

You want to be there and you want to watch the thing and you want to you want to do as much of that as possible. And like we've mentioned before, your work shouldn't be that. It shouldn't be staring at your P and L tick up and down throughout the day. It should be doing building new systems and running other tests and doing all this kind of stuff. So I think a lot of this gets solved by just not watching.

Michael: 29:10

Go go for a bike ride. If you're Dave, go for a lift something at the gym. If you're me, just

Dave: 29:16

Yeah.

Michael: 29:16

Go away. Like

Dave: 29:18

Yeah. Exactly. And that's a good litmus test for me. I know I'm trading too big if I don't feel like I can go for a bike ride or go run an errand and have my system continue to take trades. That's a warning sign.

Dave: 29:38

I mean, As soon as

Michael: 29:42

you're Lack introduced of faith the because you're to the point where you're not making any decisions during the individual trade. So if you can't walk away at that point, it means you're either not confident in your system or you're not confident, like technically, like you're worried that like the actual hardware of the computers or the the program you're using or or something like that is going to end up failing on you. Right? It's it's definitely a lack of confidence if you can't just get up and go enjoy your life and you you need to sit there the whole time and and watch.

Dave: 30:15

Yeah. And even if, you know, even when you introduce a single rule that happens rarely that you have to be there, then all that's out the window, right? Whole plan is kind of out the window if you have to be there to watch it. So that's what I think about a lot. Edea, you said something a second ago about you don't think there's a lot of discretionary traders that listen to the podcast or interested in this.

Dave: 30:45

I'm not so sure because I think a lot of people are automation curious. Lot of discretionary traders are automation curious. As we've talked about before, there's so many ways you can make a tiny step in the direction of automation that will improve your discretionary trading immensely. So you don't have to go all the way to full automation to get a lot of benefit from the stuff we talk about. And I mean, I see that very often with traders that contact me, traders on my mailing list.

Dave: 31:18

Yeah, I know that a lot of discretionary traders are interested in this topic, but because as we've talked about before, ultimately, it is the same thing. Something's making a decision to make trades, whether it's a piece of software making it for you or not, you have to have some system.

Michael: 31:41

Well, and that, I always talk about that with people who are interested is that this is a good kind of slippery slope where, you know, you start the journey you can, right, I could get someone, I could sit down with them for ten minutes and the next day they're trading, if they're zero, if they're doing everything themselves right now, I could get them to, you know, say 20 systematized in like one day. And that's, you know, simple things like alerts and setting orders and all that kind of stuff And that we talk then if you can just get them there, then I think that's when everything else follows because they end up going, Oh, okay, well that made my life a whole lot easier and only took a little And bit of then that's the gateway drug. And then you're kind of pulling them down after that and you're saying, Yeah, it just gets, the further you go, just gets better. It gets better and better the further you go. So yeah, there could be and that would be a great, you know, comment below if you're someone who is still currently hitting all the buttons and coming up with all the ideas yourself and doing all that, you know, let us know what, why, if you're listening and why you're listening and welcome.

Michael: 32:56

And then hopefully, I feel like in like, like someone on a mission when I'm talking with this, but, like, hopefully, we'll we'll convince you at some point if you keep listening.

Dave: 33:05

Yeah. So the so there's one more thing that has just come to our mind as as we're talking about this. And so we'll step back to the back testing piece.

Michael: 33:15

Mhmm.

Dave: 33:16

There is one order type that you could use that is more common that could be a proxy for this kind of behavior and to test this. And that's a trailing stop because that's essentially what you're doing when you're moving your stock to break even. It's kind of a trailing stop in a way. So a simple way to back test it would be try a trailing stop. It's probably pretty, really much looser than your initial stop that works in conjunction.

Dave: 33:52

And that would be a quicker way to back test it using sort of a standard order type that you could implement that in a lot of trading systems. And you might think, well, that's not going to be quite good enough for what I want to test. That's okay because it's going to be a decent enough proxy. If you can't get a trailing stop to improve your system in any way, which I'm willing to bet it's going to be really hard to do, then you're not gonna find some iteration that's gonna be significantly better than that. So that's a good simple place to start.

Dave: 34:38

And I always like, let's distill something to the simplest possible thing first try before we create this whole rabbit hole for yourself that's going to require a lot of resources to get just right. A lot of bugs could happen from that. That's a good

Michael: 34:54

I place to trailing stops are very uncommon, and I haven't found anything from an intraday point of view that was ever beneficial by a trailing stop. But for just to tell Dave because he never knows that there's a hole. I told him that the market was down. He was like, what? He there's a whole another world out there.

Michael: 35:14

And for people who are longer term swing traders or investors, it's actually very common. You know, if you think back to the original turtle traders trading and doing very well trading futures, that was essentially their style is, right, you would buy a breakout of some period of new highs, and then you wouldn't sell until some breakdown of new lows. So that is kind of in its simplest form a way to trail a stop. Their idea is as long as it continues to go up, I don't have that kind of arbitrary end of day exit, I might as well just hold it as long as it keeps going. And again, use that kind of stop.

Michael: 35:51

So yeah, that makes perfect sense. Again, not something huge from the day trading side of things, but I know swing traders kind of use that all the time because part of the main power of swing trading is that ability to periodically catch something that just goes insane. I mean, it's just you're you're in it for for a long period of time. So in that case, yeah, it definitely used a fair amount and people people like that.

Dave: 36:15

Yeah, yeah, certainly the longer you're holding period, yeah, the more a trailing stop might make sense. Yeah, every intraday it's gonna be hard to find something good. I can go ahead and tell you it's gonna be hard to find something that works.

Michael: 36:30

Yeah, I will. I'm sure someone has, I haven't. Right? For me, it's always been stop loss profit target, get out at the end of the day is usually the best because your your time frame is so limited and there's so much jittery noise intraday that you end up usually just getting clunked out. But I do like the concept of, you know, boiling it down that is at its simplest form what what we're doing here, right, is if you're trying to move your stop to breakeven, well, you know, you don't have to think of it as an all or none system.

Michael: 36:59

You could move it kind of slowly and incrementally over time. And again, that's just a trailing stop, which you can do traditionally. I know there's some tests that you can run, like whatever breaks a moving average or something like that, which might be a little bit more refined, but yeah, depending on your time frame, it's definitely something that maybe you wanna take a look at.

Dave: 37:20

Yeah. And the other thing you could do is delay the trailing stop for some period or only put it into play when it reaches a certain level of profit or something like that. So there's so that would that would be like a a step two for testing this thing or or or to to testing the proxy of the move stop to breakeven.

Michael: 37:44

Well, thankfully, it sounds like we have fully debunked another one. I like these. I like so if you guys if you guys have any other, I don't know, old trading adages or or things that you've just kind of been told and never really sat back to think really hard about, then, you know, let us know because I love going in and just doing it because like we talked about at the beginning of the podcast, it's just something you hear. There's no way that you've gotten into the trading world and, you know, read books and talked to people and done whatever and heard this. And I don't, some of it for sure might be malicious, but I think it might be just one of those things where enough people have heard it, and then maybe they've gone on to trade successfully themselves and just never thought about it.

Michael: 38:33

So they don't even realize they're doing something that's probably wildly suboptimal just because it's like, hey, I came into the game twenty years ago and someone told me to do this and I've been doing it ever since. So it's gotta be the only way to do it.

Dave: 38:47

It sounds smart to new traders. It sounds so smart, right? Ah, this is like a great compromise. You can just move your stock to break even. I love it.

Dave: 38:55

You're playing with house money, right? Natural to think that way. And I think that's why people keep saying it because, it sounds so smart to new traders.

Michael: 39:07

Mhmm. Well, and there's a lot of things like that. Like one of my favorite, I know this won't affect Dave, but one of my favorite things in in trading is that bears sound smart and bulls make money. And it's just it comes from the people who will, you know, every day you turn on the media and they they bring on someone who talks about how awful the world is and everything's gonna go to zero tomorrow and sell everything now and then you get another guy go on go, markets go up 70% of the time, you probably just own something. Owning assets is probably a good thing.

Michael: 39:37

And it's like no one will ever listen to that guy even though it's just logical sense because it's just not it's not interesting. And it's the same with this saying, hey, you should put out your your stop loss, you should put out your profit target, you should probably, you know, go to the beach or or, you know, you should probably go for a walk or get some exercise and it's like, that's not good and that won't carry because it's just not it's not it doesn't sound as smart. It doesn't sound as interesting as anything like that.

Dave: 40:05

Yeah. Alright. Well, I think we've covered this topic pretty well. Appreciate Emmett for for bringing this up to answer the question.

Michael: 40:17

I'm wondering if people are gonna agree with us or if there's gonna be any pushback. So I'll be I'll be reading the comments thoroughly because I I could see a world where there's someone that we have tried to just shatter their, like, flat earth reality, like with the they're not coming for your stop thing and they just won't believe us and they're gonna come back. So again, let us know. Let us know if you think we're a little bit off on this one, but I had a lot of fun with this one. And as always, I'm Michael Noss.

Dave: 40:45

And I'm Dave May. We'll talk to you next week on Line Your Own Pockets.