Running Out of Buying Power - Part 2
Okay, everyone. Welcome back to another episode of Line Your Own Pocket. So this is kind of a part two. Last week, we talked a lot about, I guess, trying to convince you that running out of buying power, maxing out is a good thing. So in part two, I think we're gonna kind of go more of what could go wrong and the risks behind it.
Michael:Hopefully, we at least got you moving in the right direction to say, you know, unutilized buying power is opportunity cost that I could be doing something with. And now we're going to talk a little bit more about the risk side of things, because of course, the more you're invested, the more you've got in the market, the bigger your risks are going to be, ways to mitigate it, what happens if things go horribly wrong, and all of that. So Dave, why don't you take us away here?
Dave:Yeah, so you know, buying power is something I think about a lot. It's something I log in my trading applications like buying power over time. All about being efficient. You made a great point last week about opportunity cost. If you're not running out of buying power, then you have some extra inventory in your account that you could be using elsewhere.
Dave:There's the flip side of that, which is if you got money in your account, you can lose it. There's risks there when you have it, even in your account. Even if you don't have it at work, there's some potential for losing money in your account. I like to think of the account as like, that's how much money you can lose. We've had a little bit of discussion, we'll get to it a little bit more.
Dave:Turns out you can lose more money that's in your account, but you look like you're itching to say something. So I'm gonna flip it back to you there.
Michael:I thought of a a really good example for both of those, I think, between, of course, because I it's like second, you're done your podcast, you take a shower, you think of all the things that you should have said on the podcast. But one of those was kind of looking at your buying power as if you were, you know, say you're selling widgets in a store, right? If you don't have enough widgets to sell, then you're leaving money on the table. If you got people coming in your door and saying, hey, I wanted to buy your whatever it is, and you go, sorry, I don't have any. You gotta go.
Michael:That's one risk. But like you mentioned, the other risk is what if you have too many and nobody wants to buy them? You know, it ends up being a cost that you have spent for absolutely no benefit, and that can end up losing you money. Right? If you end up buying too many to the point where all the ones you sale sell isn't making up for your cost.
Michael:So you're right. It is a double edged sword. You know, it's the hope is that you have enough, you know, diversification. I know it's like a boomer word, but so for us we mean diversification with strategy, less about, you know, just holding individual instruments that you're not worried about, you know, the blow up that could happen. But that's I think what we're gonna talk about today, which certainly can.
Michael:But you're I think it was just a good way to kind of tie in to say yes, you wanna make sure you're you have enough that you're selling in a perfect world, everything that comes in and and no more, no less, but you'll never get there. So it was kind of walking that line that we talked about last time to make sure you're selling enough that, you know, you don't feel like you're leaving money on the table, but you're not left with a whole bunch of extra inventory that costs you.
Dave:Wow. That's so interesting you brought up that analogy because where I live in Chapel Hill, North Carolina, just last or maybe three weeks ago, there was a big flood in this area that floods and there's a lot of businesses there. Trader Joe's, really big businesses basically had to close down for months because of all this flooding that happened. Imagine the inventory in there. If you have a lot of inventory, then all of a sudden that is completely wiped out.
Dave:Think that's actually a surprisingly good analogy for money in your trading account.
Michael:Surprisingly. Is it surprisingly because I made it? Is that what you're
Dave:Not surprising. Think it's just really good. It's surprising that this sequence of events happened here in town that I can bring up on the podcast.
Michael:But
Dave:yeah, all the money in your account is at risk and that's the sort of the container of risk is your account. So I have multiple accounts where I have money spread across for this exact purpose. I know some strategies that trade have quite a bit more risk than other strategies. So I have segmented them in a specific account knowing that, okay, this thing could get wiped out potentially. Hopefully not, and hopefully you have a handle on your risk, but it's a possibility.
Dave:If that happens, I don't want to wipe out my entire net worth. That would be bad. But I have it segmented by account.
Michael:Well, and there's there's a couple ways to deal with it. One is kinda what you mentioned in segmenting the risk. The other thing is other people's money, right, which I know I'm way more of a fan of than Dave. But, you know, prop firms, I do some some work with a trade the pool company that you can just trade equities systematically with someone else's money. There's, you know, prop firms like SMB Capital or some of these places.
Michael:So if you really wanna go ham and you're worried about that kind of absolute risk, yeah, you know, segment your accounts, try to separate it maybe via a corporation or or something like that. That might be different depending on where you live. And then also look at other people's money. And then you're you're dealing with the same problems where you don't wanna intentionally lose someone else's money, but, there are ways to kind of put barriers between you and this this kind of ultimate risk, that could happen if you max out all your buying powers and some sort of calamitous event occurs at the same time, which should be very unlikely, but certainly not impossible.
Dave:Yeah. So for a long time, my assumption was that you could only lose as much money as is in your account. And we've talked about this a couple times before. You had heard some horror stories about people losing more money than is in their account. And so I got to wondering about that.
Dave:And in fact, one of the traders I'm coaching asked me that, and I said, I don't think you can lose more money than is in your account. But as it turns out, I got curious about this, And I talked to the CEO of a brokerage firm about this exact question, and it was pretty interesting, his response to it. So he said, Yeah, yes, you can lose more than is in your account. And I said, Okay, well, what happens when that occurs? Like, do you go after them with a collection or like, how does it work?
Dave:And he said it's a case by case thing. It happens pretty routinely. I mean, not every day or anything, but yeah, it happens. And it depends on how much money is lost. But, yeah, they will come after you.
Dave:Now, they don't come break your doors down, but he did say, this is a very important point, there's a huge incentive for the trader to make it right, and there's a good reason for that. Like, what we one thing you might think, well, I'll just that's easy. I'll just go to another broker to open up another account. Right? Well, as it turns out, the world's a pretty small place.
Dave:And these brokers, you you don't have a guy given right to open an account. They're doing this and taking risk on your behalf just by giving you an account. And they talk to each other. So if you don't make it right, then you won't be able to open an account anywhere because they share a list, like sort of a blacklist of, okay, this person blew up. They didn't make it right.
Dave:So you may literally not have the ability to create an account anywhere, which I thought was super interesting. Like there's no hard and fast law or regulation about this, but you don't have a right to a brokerage account. So if you want to be in this game for a long time, you have every incentive to make it right and to make your broker whole in the event that this happens, which I thought was super interesting. I kinda like the incentives there. It seems to work pretty well.
Dave:You're muted.
Michael:Oh, we're better now, I think, right? Yeah, sorry. Yep. Babies are around, so I'm trying to strategically mute when they're screaming. But yeah, so how I knew that it definitely could happen was my time laughing at people on Wall Street bets.
Michael:And there's a very it's it's weird, but it's almost part of the fun there where they share these catastrophic losses that they've done, where it's they've lost, you know, weight. They've put, you know, zero day DTE options on margin. Options that expire that day on margin, and and without a doubt, at some point, that's gonna cost you more money than the account. They all just joke that if you just delete the app, it goes away. That's kind of that's kind of the meme is that someone says, oh, I owe Robinhood $100,000 What do I do?
Michael:They say, oh, just delete the app. It's fine. But it's so yeah. It definitely can happen. But like you mentioned, it's kind of a cost of doing business with the brokers.
Michael:Now in most scenarios, they try to implement risk management protocols where, they'll do margin calls. This is what actually triggers short squeezes in stocks, right, is that these large institutions that are short on mass on stocks get margin called, and they're they're forced to buy. They will sometimes auto liquidate your positions. You don't have a say in the matter. They're just gonna get you out to try to leave you with some amount of cash left so they don't take the thing.
Michael:But, yeah, it it certainly can happen. And this is why we talk about how, you know, whatever you're doing and and when you're getting into this state of I want to utilize all my buying power at the same time, it's important that at least in some respects that you have some diversification across strategies. So hopefully, you know, you're an equal amount. You're not all in short 1p stock with your whole margin and, you know, knowing that it can get halted intraday and then you're done. So it's it's a risk, but it's for our audience in particular, I don't think it's a huge risk.
Michael:I think it's more about if you're spending a lot of time on Wall Street bets and doing what they're doing over there, it's probably a pretty big risk for you. But it still is a risk. So it's something you have to consider with protecting yourself in some way, using other people's money, whatever that ends up being.
Dave:Yeah. This is, think, super important to think about. And I spend a lot of time trying to brainstorm, what are some things that I might not be thinking about? What are some catastrophic things that are risks, even if they're tiny, that I could maybe do something to mitigate? What if the power goes out at just the right moment?
Dave:Am I at risk there with the way I'm coding my applications to send exit orders? I mean, this kind of stuff should keep you up at night a bit. Like, if you're not worried about this in the back of your mind and think about it, you should be. And you should be putting devoting some thought into brainstorming what could happen or what's the worst thing that can happen? Because if you're in this game long enough, it's just a matter of time for your power goes out at the wrong time.
Dave:Like, bad stuff will happen eventually. It's not if, it's when. Well, anything to plan for is, I think, is important.
Michael:And I think it's no different from running any other business. Right? It's if you're like the stores that you mentioned that are were in the kind of floodplain and and got flooded, you would hope that at some point, and the best time to do this is when things are going well, you would hope at some point that they were thinking about while they're making money, how do I protect this? How do I make sure that not, you know, everything ends up going bad by insurance or whatever it is that they they figure out doing? Yeah, couldn't agree more.
Michael:Again, the best time to do it is when things are going well, when you're not, you know, battling from behind to make strategies that are working and you're not battling from behind to, you know, refine those strategies, you have strategies launched, they're making money. Now your question should shift to how do I make sure I continue to make money? And that should be two things. One we talk about all the time, you got to always be looking for the next strategy. As soon as something degrades you have something else to replace it with that type of thing.
Michael:But then at the other time you're right, it's you know you know do I have a backup way to get into my account right? Know what happens if the power goes out? Do I have you know, a mobile computer that can do it? Do I write do I put everything on Amazon servers? You know, what is it that I end up having as this game plan?
Michael:Because it it will always be the black swan is the thing that you never think about. So you have to always be trying your best to to get it out of the way. And and most of these things, again, have very simple problems. So like a power outage could be you have a laptop. It could be you have one of those uninterrupted power supply things going on.
Michael:It could be a lot of things, but yeah, it's one of those that you know as soon as you get over that hurdle, lot of people I you know they kind of rest and they say, well now I've got strategies. They're making decent money and everything's fine. But you gotta understand that, right, the next hurdle is okay. What happens if, right, something happens, you have a blow up, you you have whatever. I'm interested when you're in your talk with your CEO, did he did he mention at all?
Michael:Because he said it was a fairly common occurrence. Did he mention the instrument that makes it a common con occurrence? Because for me, the two easiest things to lose more than you potentially have would be shorting low float kind of penny stocks or something like that? Something that could double quite frequently or options. Did he mention anything about that or did you just say, yeah, it happens sometimes?
Dave:Yeah, I think shorting low floats is an obvious cause. He did not mention any other things, but yeah, I think I'm not sure that it'd be interesting to see what the most common occurrences are.
Michael:Well, because there's there's
Dave:you might remember the time that oil went to a negative price.
Michael:I was actually I was actually going to say futures are another thing that came to mind because the the buying power required for futures con the reason they're such a popular instrument to trade is that the leverage on them is is insane. You can get really high. Same with forex. You can get really, really high leverage. So I wonder if that is because that, you know, it's funny every time I'm charting oil, if I zoom a little bit too far back, the chart just goes wonky because it went negative for a second.
Michael:And that I think that's a good lesson too just to talk about how you should always be thinking about this because there's not a person in the world a year before that happens that, oh, yeah. Oil could go negative. They could be paying you to take a barrel of oil and store it
Dave:in the
Michael:house. Yeah. So the fact that that happens means anything can happen and you have no idea what that next thing is going to be.
Dave:Yeah. I mean, if you think about it, you know, brokerages are providing quite a service. They're taking a lot of risk on your behalf. So they have every incentive to monitor that risk and aggregate across all their accounts, provide guardrails, make guardrails for themselves. It's an important thing they offer and yeah, they have every incentive to make sure their risk is under control just like you do.
Dave:So like I said, you don't have a guy given right to a brokerage account.
Michael:Well, and I I think how they manage their risk should be a good takeaway, right? And it's the same with prop firms, right? So, you know, a prop firm, for example, we mentioned trade the pool. The the way they manage risk is they allot different traders a small amount of buying power, And the hope is that you're gonna have one guy blow up, and you're gonna have hopefully another guy make money. And then through the long run, you're gonna be okay.
Michael:And this is the same with all prop firms. And actually, as, you know, as someone who worked a lot in the hedge fund space, the best and most profitable hedge funds in the long run were multi strategy or even multi manager funds where you have, you know, say, billion dollars under management, four managers, each gets 250,000,000 and they go. And the reason is because, you know, that one strategy will probably be struggling, the other one's hopefully doing well and enough to make up for that and some. And that's I I always think that's how we should look at ourselves as traders as well as that it's you should have enough systems in place that, you know, if the market just does, I don't knock on wood because we haven't seen a flash crash in a while, but that's another good example. We've had these flash crashes where, you know, the market, the initial one, I think the market dropped like 7% in twenty minutes or something.
Michael:It's you can really cool video you can find online is one of the guys who does like the squawk box, and he's constantly shout casting the market. There's a video of a guy doing that during the flash crash where no one knew why, but the market just what ended up happening for those who don't know, someone had put an extra zero in when they were selling their futures contract. So instead of selling, I think you're supposed to do 100 ES contracts, you did 1,000 or 10,000 and just tanked the entire market like 10% before it before it bounced. But these events can certainly occur. So you're hoping that, you know, for every long strategy, you've got, you know, some sort of short or some sort of hedge or some sort of exit so that when and if these events happen, you're kind of dealing like the prop firms and the hedge funds where you've got enough different strategies out there that you're not irrecoverably blown up.
Michael:You just take a little bit of a bruise.
Dave:Yeah, and that's one one big reason why I trade automatically so that I don't because I've put a couple more zeros in or a couple fewer zeros in than I thought, and it's just gosh, what a frustrating thing when that happens.
Michael:Yeah. But you didn't tank the whole the like, I think the global economy lost it like a trillion dollars in an afternoon. And again, it's it's a wild chart that people should definitely go look at because by the end of the day, I think we were flat. And then the next day we were positive. Because if I remember correctly, this happened in, like, 02/2006, 02/2007.
Michael:And instantly, everyone's thought was like a terrorist attack or some sort of, you know, large scale event. And this was why they developed these halt rules for stocks that, you know, if they move certain amount in a certain distance, they they stop for a bit. And, yeah, everyone's like scouring this before Twitter and everything. Everyone's scouring the news, like, what's going on? Why are we tanking?
Michael:And then when everyone found out it was nothing, there was a bunch of people that made a whole bunch of money just buying all the way back up. But, yeah, it's it's, you know, if you think you've messed up an order, at least you didn't mess up an order that bad. And I guarantee you, that bank who did that now has completely automated systematic approaches for filling orders with probably multiple checks after they they almost tanked the world economy for no reason.
Dave:Yeah, for sure. So let's talk about brokers and one thing they do to mitigate their risk that most people might not be aware of. And I discovered this sort of accidentally as I was trading a strategy that shorted some smaller price stocks. With IB, you can go see how much buying power you have. It's a nice interface for showing exactly how much margin you have, how much you're consuming.
Dave:And what I realized is some of these were like I did the buying power, what I thought would be the buying power calculation on my end, and it was consuming way more in my account than it was on paper. So I was like, why is this the case? So I, you know, called IB at the time and they said, oh yeah, those, the calculation for those price stocks is way different. Like, and the way they calculate it, this is kind of crazy. But if you're shorting a low price stock, let's say it's $1 and you buy a thousand shares.
Dave:So it's not just one times a thousand, that's how much your buying power is going to be consumed. They use $5 as the minimum. So you're going to be consuming $5,000 even you only have like $1,000 at work. It's going to consume that much more of your buying power. So it doesn't take much capital with a small price stock with a bunch of shares to consume a whole like your whole account if you're not careful.
Dave:And so that's why I that's a big reason why I log all that information right from the IB API. They'll show you, you know, how much buying power you have at any given moment using their calculation. So it's very interesting to look at that over time. And, you know, it's not just these low priced stocks that you that they do this with. Sometimes the the stocks that are just moving a lot like, just the other day, I was trading MicroStrategy.
Dave:I think it was MSTR, I think is the ticker symbol. And like I ran out of buying power. I was like, wait a second, there's no way I should be writing out of the buying power with the position size I had. That just doesn't make sense. But when I looked closely, yeah, there were, you know, this is one of those that they were counting as a larger percentage of your buying power just because it was so, so hot that day and so moving so much, and they're they're protecting their risk and, you know, ultimately yours somewhat.
Michael:Yeah. And it gets really hard to to figure out because you're right. You've got these, you know, boilerplate rules of a, know, I know it's like under $3. It's you have to put up all the money over 5. It's all of that.
Michael:But they can not only change the rules per security like you mentioned, but they can do that on the fly that day where, you know, all of a sudden, this is, like, the whole famous GameStop scenario where all of these brokers kind of got margin called because they said, hey, you know, we need to have you put up more money because this security is so risky that they had to, you know, take away margin requirements and then eventually turn off the buy button and all this all this craziness. So it's it's really hard to plan for, which again, there's it's one of those logging. It makes sense. Testing it makes sense. But at some point they're just going to say, hey, MicroStrategy, I know Dave would know nothing about this, but it, in my opinion, literally is a Ponzi scheme.
Michael:It will explode one day, but no no reason not to trade it in the meantime. So the brokers look at that and say, well, you know, there's added risk to it. Let's let's add that. And at the end of the day, you're just at the subject of of whatever they're gonna say, and they can change these rules whenever they want. Because like Dave said, it's not the idea behind it is that in theory, you just go to another broker.
Michael:But I would bet you that if you check across brokers, most of them are doing the same thing to the same securities at the same time because they're worried, and partly, I think, because a lot of these halt rules that these companies are gonna go so crazy that they're gonna have a whole bunch of their traders caught long or short, and the company is gonna be putting in like an intraday volatility halt, and then they're just screwed. And then there's nothing that anyone can do. You can't trade options. You can't hedge it. You can't can't do whatever.
Michael:So, yeah, it's super interesting and and a really hard target. And I've often wondered if there is some sort of edge in just knowing potentially which one could increase or decrease in margin at any given time.
Dave:Oh, yeah. I think there's definitely probably something there. Yeah. Or stocks that are really expensive to borrow, like very expensive to borrow. I think there might be something there.
Michael:I often doubt So
Dave:the other thing to think about, I think people sometimes assume that the amount of buying power you're given is from some regulation. I think there probably is some regulation. You probably know this better than me. But for some of these low float stocks, brokerages will negotiate, in fact, because they're competing with other brokers for your business. And they'll sometimes negotiate on buying power.
Dave:They'll certainly negotiate some of them on commission phase. You might be surprised at how much flexibility you might have. Certainly, you're a bigger trader, if you're trading a lot of volume, have more negotiating power than you might think you have.
Michael:Yeah. Was gonna say our audience bet you has more. If you're a guy who's got a $20,000 account and your dollar cost averaging into the spy every two weeks, then you're probably gonna be out of luck a lot of a lot of times what you're doing on the broker. But if you have I'd even say a 6 figure account, but you're trading it multiple times every single day on the way through, and you go talk to them. Before commissions got dramatically decreased, I remember people would go to E Trade and when it was like $4.99 a trade or something, and they would go and say, I've done this many trades.
Michael:I want you to reduce my commission rate, and they would they would do that for some of their clients because you're right. It's there's there's no it it takes what a day or two to move from one broker to another. So just like if, you know, your cell phone bill increases and you call them and you say, hey, I'm gonna go over to the other guy unless you give me a deal here. You can do that quite a bit with brokers, and they'll pull whatever lever they can to keep you, I think, within reason.
Dave:Yeah. Now, IB is sort of notoriously not a negotiator, but in fact, I did get them to pay me a refund for one time, pretty significant refund for a fault in their trading platform that costs me money.
Michael:Oh.
Dave:It was actually in GameStop. Did I ever tell you this?
Michael:No. Go ahead.
Dave:Okay. So this was GameStop back, I think, the very early days when it was just became a mean stop. You know, you remember that it was just going crazy. Right?
Michael:Yeah. It was ever you couldn't walk for those who are new to trading, you couldn't turn on even the news, like the regular, like local news they were talking about how this this stock was going crazy. It was a it was a cultural phenomenon that you certainly had to be there for.
Dave:So I was short GameStop at a really high price. And was trade was doing quite well. And I went to get out and put my order in. Nothing happened. Cancel the order.
Dave:Put my order in again. Nothing happened. This may have been the pre market. I can't remember, but it may maybe not. But it was clear to me that, it was very obvious.
Dave:My applications do a bunch of logging, which is very good. I could piece this back exactly what had happened. So it was clear to me that there was a problem with IB's platform. It was not executing my order. I'm a 100% sure it should have, and I knew that.
Dave:So it cost me well under the 4 figures. I mean, it was a lot. And so I put in a request to say, Hey, your platform failed here. It was pretty obvious to me. I've been a customer forever.
Dave:I've paid, I don't know how much in commissions. I've never even gotten a Christmas card from you. But it took a while, but eventually they actually made it right and gave me a refund for the full amount. Actually pieced it together and gave me what I thought was a fair amount for what this had cost me at the time. I tell people that they're notorious for not having great customer support.
Dave:Basically, the whole operation is automated, is good and bad. But yeah, they made it right, which I was actually quite impressed with.
Michael:I'm just shocked. I use IB again because I, you know, they're for their automation tools and everything. But even more than that, in Canada, there is no other option, right? You you use Interactive Brokers or you pay somewhere between 5 and $10 a trade. That's that those are your only two ways to to trade.
Michael:So I I'm kinda stuck. I could lie to them and say I'm gonna go somewhere else. They'd probably laugh at me because they're like, hey, you go to your local bank, they're still charging $9.99 a trade. But, yeah, I'm just shocked even that you got anyone to notice you in in any way, shape, or form. So you must have pulled the right lever at the right time, I think.
Dave:Yeah, I think I'm on their one of their They have a secret key account services support group. So I think if you rise to the level of a certain amount of volume or something because I remember I got an email saying, Hey, you're in the key account services now. I was like, Okay. I literally have a phone number I could call and somebody picks up. So you're
Michael:Talking to a human being at IV is challenge So in and of
Dave:that does exist there. If you trade enough and you trade you know, enough volume and enough frequency, you'll you'll you'll definitely come up on their radar.
Michael:So I wonder if too so just going down this thread, they're talking about and I and I've I've often wondered this where if there is certain allowances when it comes to things like auto liquidation or or capping different margin accounts or something, if they're allowed to do it differently per account, because I'd be very interested to see, you know, you have trader A, and and they know trader A is systematic and makes money over time and whatever. And they they give him a little bit more leeway to to allow margin and to do things like this versus trader B, who they know, you know, it has opened up four accounts and has, you know, blown them all and just keeps putting money in. Or if they're they can't they're not allowed to do that and they have to kind of systemically say, this particular security requires this margin or if they can kinda, you know, play with that lever per per account.
Dave:They can play with it per account. I I can confirm.
Michael:Yeah. It would it would only make sense that they would look at, you know, just pick a couple random numbers like the P and L number, Sharpe ratio, or average drawdown versus whatever. You could you could grab a bunch of metrics and throw them together and automate that pretty quickly and say, hey. This is a guy who's, you know, systematic, and he's got a plan. He's got a strategy, and then this is a guy who's just YOLO ing into whatever he sees on Wall Street bets and and and keep those two accounts monitored in different ways.
Dave:Yeah. And and they can look at your results and see how well you're doing and the types of trades you make, and they know which ones are riskier to them, riskier to you too. Could definitely It's sort of like a prop firm. You can prove your worth and you get more leeway. Yeah, that's totally true.
Dave:It's not going to be the case at some of the bigger brokers, but some of the smaller ones that cater to active traders. It's totally in their best interest to do that.
Michael:It's like insurance, right? Where insurance company is watching how you drive and if you have any accidents and and all that kind of. I've even read somewhere that if you drive a Tesla, because they have such granular data, they change your insurance rate from like day to day, week to week by like how fast you stop when you're, you know, getting to a stoplight and, like, random things like this. So I guess for the listeners out there, right, just kinda it's probably a good thing anyway. Always trade as if someone's watching because as soon as you get big enough that that anyone notices, they are.
Michael:And if you're doing things in a, you know, a consistent way and and not even I don't even think it'd be how much money do you make. It's more about, you know, are is your is it smooth? Is it consistent? Is it not? You know, just YOLO ing random stuff that you'll start to get some privileges when it comes to different different brokers, different accounts.
Dave:Yeah. So there was one other thing that, you know, I had had a similar shower thought after our last podcast that, I wish I'd brought up. But and this is, you know, we're talking about running out of buying power and how that's a good thing and what what things you could do when you when that happens. One of the things I thought about, I was talking with a trader about that this week. So he was having he's a swing trader.
Dave:He was running into buying power issues and sort of wondering what to do about it. This is a Cruncher user. And one of the things that dawned on me, like pretty obvious that if you're a swing trader, one of the first things you could do is like test a smaller hold period. It's really the holding days that have an outstanding or an uneven effect on your buying power. So if you could get your buying power or your holding time down by a day, that could have a dramatic, you know, a pretty big outsized effect on your buying power.
Michael:Well, and not and not just buying power, the the number of occurrences that are that are in your test. So for example, my my swing trades, I've tested for two week holds, and then I tested for one week holds. And even though the results were kind of roughly the same, you ended up getting way more back tests in your your overall your overall system. And then just the power of compounding, right, where, you know, if every Yeah. Every week you kinda liquidate the swing portfolio and look for new trades into the following week, kind of like a day trader would at the end of every day liquidate their holdings and look for trades the next day.
Michael:I just do the same thing with my trading swing trading systems on Monday morning. We sell everything, and then we look for things to buy throughout the week. Yeah. You get that that benefit of, you know, say you had a 10% gainer last week. That's great.
Michael:I mean, when you liquidate your portfolio and you start to split it up into different trades, you're you're left with way more buying power. And then, yeah, also when I'm running the backtest and doing things like the strategy crunch or whatever, you're doubling the amount of trades in your system. So that ends up being, you know, an even better thing. So I yeah, that's kind of I just look at those two things the same as investments for me or month to month. Swing trades are week to week and then day trades are day to day and allows.
Michael:I also just like the the pattern of it, right? I know at the end of every week I'm just loading up a new bunch of symbols for next week. At the end of every day, I'm doing that. And at the end of every month, I'm doing that as well. So yeah, I definitely think that that's a great idea just even for no other reason than just the compounding effect.
Michael:Think you end up over the long run when you test things and then make way more money.
Dave:Yeah. I'll I hesitate to even bring up where this conversation could go or where the logical conclusion of that is, well, maybe you have no overnight holds and that is by far the most efficient use of your buying power.
Michael:I will still argue. Well, would argue the exact opposite because in theory, right, you would close at the end of the day and then open up overnight positions. The way I look at it is that for 50% of your life, you're sitting on cash. If you're exclusively day trading for 50% of your life, you're sitting on on no potential trades. And I know you've seen the graph, but if the users haven't just look up buy the open, sell the close versus buy the close, sell the open.
Michael:And there's a bunch of landmark studies that if you open up positions every day and then close them, if they're only long in the S and P 500, you make no money. And if you're holding overnight, that's where all the gains are. So my argument would be just like if I wasn't day trading, which I wasn't, I think when we started this podcast and I'm getting into it more and more, I'm wasting buying power. I would argue that you're also wasting buying power just sitting in cash every night where, you know, if you could figure out something. And I'll also say I think this whole conversation is gonna go away in the next couple years because there's just gonna be twenty four hour market.
Michael:So I don't think there's gonna be day trading and swing trading. I think there's just gonna be trading, and you just hold. There'll be more of I'm gonna hold as long as the trade works for me regardless of whether that's a minute, an hour, a day, a week, a month. Right? If you were to put a a trailing stop or a moving average stop or something on a position, then, you know, if the market's always open, who cares how long you're in it?
Dave:Yeah, yeah, it's a yeah, you bring up some good points. Yeah, I don't think we're gonna settle our long standing swing trading versus day trading debate between us. Maybe it may take three or four entire podcast seasons to come to that.
Michael:The I I had an idea because my one of my nephew is over, and he's 12, I think. And he's talking about how these YouTubers have boxing matches through the subtle beasts. So maybe at someday, that's how we'll be. If if the podcast gets big enough, me and Dave will will have swing trading boxers versus day trading boxers and just go into the ring and and settle it there. But, eventually, I think you'll probably move me a little bit shorter term, and eventually, I'll probably move you a little bit longer term.
Michael:And then maybe that's just like a way that we optimize that we kind of find a middle ground where it's the which is the best one.
Dave:Yeah, I love that we're coming at this from completely different angles and yeah, these discussions are great.
Michael:Absolutely. So there we go. I think unless there's some more shower thoughts that we're going come up next week, I think we've covered why you should be trying to utilize as much buying power as you as you can with edge across as many systems as you can, and then also potentially what could go wrong and and ways to look at and mitigate that. So, you know, I I would say if you're someone who's a little bit timid and maybe you're only using a percentage of your buying power, take what we gave you and think about and start to work your way to eventually kind of full utilization. And then like we mentioned all along the way, try to think about what could happen that could potentially go wrong and and try to front run that the best you can.
Michael:But again, the black swan is always what we're not expecting.
Dave:Yeah. So maybe maybe the last we'll finish off with this. But one question I always ask traders that I start coaching is, what is it that's stopping you from using all your buying power with this strategy you're trading? That should be something you're thinking about. You should be on that path toward that.
Dave:If you're not, then you should be taking money out of your account. You should be on a path towards using all your buying power efficiently. There should be a to do list in your mind about, okay, what questions would I need to answer for myself to get bigger with this strategy? There's probably several things that you would need to answer for yourself and then figuring out the best, easiest way to get some of those answers is a great way to improve.
Michael:No, I love that and I think that's usually the way that you tackle problems like that is you ask yourself a simple question and you know you sit there with a pen and a piece of paper and you you you write down all of the multiple things that are the problem. And in some cases it could just be purely mental, In some cases it could be, you know, that the risk is too high and then you've got to figure out or whatever it is. Once you've asked the right question, then it kind of puts you on the path to the right answer. So as always, Dave, it was a lot of fun. And until next time, I'm Michael Noss.
Dave:And I'm Dave Mabe. We'll talk to you next week on Line Your Own Pockets.
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