Line Your Own Pockets

Michael: 00:00

Hello, everyone, and welcome to another episode of On Your Own Pockets. We've got not just one user question today. We actually got quite a few of them. I'm looking over here, about three or four to get through. And a lot of them are are somewhat similar, so I think it'll be lead to a good conversation as per always.

Michael: 00:19

So this was sent to you, Dave, so why don't why don't you take it away and we'll we'll pop into them here.

Dave: 00:23

Yeah. So this question came from Chip. He's a guy on my mailing list. He sent in so so I recognize the name. He sent in several questions over the the months, and I usually answer them on my mailing list.

Dave: 00:36

He sent a whole bunch of good ones this time, so I thought, you know, this is a whole episode here. Think that and I could tell, just for the questions that he's asking, that he's pretty advanced. They're very thoughtful questions, and I'm sure a lot of the listeners are gonna benefit from the answer. So I thought we'd do a whole episode on it.

Michael: 00:56

Sure. Yeah. And I like as I'm reading them, there's definitely some similarities. I'm sure that we'll, you know, probably do some overlap when we cover them as well. Why don't you just read out the the first one, we'll just dive right into it.

Dave: 01:09

Yeah. Okay. So the first question. Do you typically optimize longs and shorts separately, assuming there are enough trades after the split? We have a couple other newsletter articles that mention directional columns, so there must be some situations where you think optimizing them together is best.

Dave: 01:31

Yeah. So so that's the question. Yeah. There's several things we could talk about there. Mhmm.

Dave: 01:38

So so what's your first thought about this, Michael? I would

Michael: 01:44

personally, and and maybe I'm I'm wrong on this one, but my initial the way I do it is I always just optimize them separately. But, you know, assuming so just some things. Assuming we're talking about like the same strategy that is essentially flipped. Right? So Yeah.

Michael: 02:00

You you have an opening range, break out long and short. I wanna optimize them separately, but I want to kinda keep in mind in the back of my brain that this is both, you know, two sides of the same coin, because there might be worlds in which the same columns show up, the same optimizations make sense for it. And in the way I think about it is that would just affirm them. So if we were doing,

Dave: 02:27

you

Michael: 02:27

know, hey, you're trading gaps and you're deciding whether to to buy the gap or or short the gap. And in both scenarios, it looks like relative volume pops up as something. Even though they might be different numbers of relative volume, there there might be some different aspects there. I look at that and that puts a little bit of confirmation in in my thinking behind them. I say, oh, well, it it's probably really important because it showed up on both of these things.

Michael: 02:55

It's probably not only really important for this strategy, but now I should always always think of every time I'm looking at gaps, I should say, well, you know, should I be just using a relative volume as as a basic filter? So even though they're I I'm doing them differently in the back of my brain, I'm saying, well, these are kind of the same strategies. Let's see if there's some similarities that pop up.

Dave: 03:17

Yeah. I like that framing. Yeah. By default, I'm treating them separately. It depends.

Dave: 03:25

Like like, there's some strategies where I know it's the flipped version is so, like, basically the same as the the other version. So in that case, I will sometimes treat them together, but I I would say on average, more often, I'm treating them separately. And I think that's the only common scenario.

Michael: 03:48

Wouldn't even for for flipped ones. The reason that I always do it separately is because there's different characteristics of of market going the market going up and down. Right? And the famous quote that you'll hear all the time in trading is the the, you know, staircase up and elevator down. It just means that you see you watch a stock, especially some of these more speculative kind of crappy penny names.

Michael: 04:15

They'll they'll grind their way slowly up and then all of a sudden just down. Yeah. So if for no other reason than that different in difference in in characteristics also, if you, you know, study a lot of tops and bottoms, I'd get another another old man saying in in the market is that tops are a process and bottoms are an event. You you get, you know, I've noticed a lot more v bottom in nature than and and, you know, meandering kind of rounding top. So you can be looking at the same thing, but just because those whole the whole fear and greed aspect of of mankind treats a little differently, that's how you can get a lot of these things that it's the same technical setup, and it's maybe even the same fundamental setup that you're looking at.

Michael: 05:00

But just the way that they move is so different that you have to you have to really pay attention to that.

Dave: 05:06

Mhmm. Yeah. They definitely move differently in those cases, and and the examples you gave there is like a perfect way to put it. I like what you said about you're you're optimizing them separately, but when there's some overlap with the same, like you said, relative volume, or another filter that's you see pop up in the same, you know, being important, you know, on both sides, that is a good data point to keep in the back of your mind. Like, that gives you more confidence that it's it's almost like it's it's like another way to get confident in that filter when it showed up equally on the opposite side or, you know, in a similar way.

Dave: 05:50

So, I like the way you're you put that, and that's totally true. And not

Michael: 05:56

necessarily too in the same direction. I think it's important to to kinda note where So try not to give away the I I there there's a real example here from from a strategy. And and let's say, for example, you're doing a I don't know, an opening range break play, and you find the tighter that opening range, the better it is for longs, and the looser the opening range, the better it is for shorts. Like, that to me is just as interesting, even though the filter isn't pointing in the same direction for each one, it's actually pointing in opposite directions for both. Mhmm.

Michael: 06:33

That to me really, you know, kind of made me think when I was looking at that particular particular strategy saying, okay, in in some scenarios, you know, when it comes to Bollinger bands or price batter patterns or whatever, tight is good and sometimes, you know, wider or or looser is better. But it was the same filter type, and it just shows because all we're looking for is what is gonna be more predictive whether or not the the setup that you have is going to work or not. And if it just shows up again and again in different forms, then it shows, okay, that this is definitely this is definitely a lever to pull. It just might be in a different way for for different setups.

Dave: 07:17

Yeah. Yeah. I thought you were gonna mention the what he alluded to about the directional columns. And Mhmm. So there is a scenario where I will purposefully combine these and treat them as one.

Dave: 07:35

And then and here's here's the scenario where I do that. So let's say you have a strategy that trades long, some trades short, like, let's say it's a gap strategy. But you have, like, on either side, there's just not that many trades, you know, in each side. And in that case, sometimes I will combine them for the purposes of getting a larger set. Now, when you do that, like, think about gaps is a good example.

Dave: 08:07

Think about the gap percent. And if you're going long, got ones that are gapping up, going short, ones that are gapping down. Well, a lot of the filters are gonna be equal and opposite, and like, don't make sense to optimize on, because they're gonna be the opposite sign, like gap percent. So there's a whole class of of columns that I'll create in the situation that I call directional. So absolute gap percent is one that I'll use, and I'll for this for this scenario, I'd be optimizing on that.

Dave: 08:43

And that's gonna that sort of gives it a chance to appear in the optimization if you use that. Other ones might be like, let's say it's a let's say it's an opening range breakout, and you're doing it. You got a long side and a short side. So breakdown on the short side. Another one might be, you know, distance from today's extreme.

Dave: 09:09

And that in that case, the long is gonna be distance from the high. The short is gonna be distance from the low. So it basically normalizes those two opposite scenarios to give them a chance to show up in your optimization. So that's what I mentioned when I did a whole message to the newsletter about directional columns, and that's what I'm talking about. That it's a very specific scenario that normalizes it and makes it work across two different strat or two different sides of the strategy like this.

Michael: 09:47

Yeah. And that's if you're gonna combine them, I think that's the thing that you really gotta consider. I think the simplest example would be something like an RSI, right? If if you're if it's a mean reverting strategy, right, you're trying to buy stuff that's oversold and sell stuff that's overbought. If you just put it in there and you put it in with the RSI, what the math is gonna do is it's gonna eliminate all whatever has the most or the least amount of trades in it.

Michael: 10:16

Right? So if you have more longs and shorts, it's probably gonna knock out all the shorts and say you should use lower RSI and vice versa. If you have more short trades in there than long, it's probably gonna knock them out. And so whatever you're doing, I think you have to create it almost like, yeah, like you mentioned a different column base and just include those that are agnostic to direction. They are absolute ranges.

Michael: 10:40

So think of, you know, width of Bollinger bands, or or or things that shouldn't matter whether or not they're they're long and short, you can put those in as because if you yeah, if you do that thing where it's just gonna be competing with itself, then you're not really optimizing, you're just removing the opposite, you know, the opposite side of the trade, which could be super problematic, where you're just really not learning anything. It's just gonna tell you not to short stocks, basically, is gonna be the the thing.

Dave: 11:11

Yeah. And we probably should go back and I realized that somebody that, you know, doesn't have a column library, doesn't use the cruncher, is not really gonna understand what we're talking about, but it's almost like it's almost like a conversation you're having with the cruncher or whatever tool you're optimizing with, where Mhmm. It's presenting you with ideas. You don't have to come up with the ideas to to, like, okay, what do I think is gonna be predictive here? The optimizer is gonna tell you what's the most predictive things, and and it's gonna give you, like, a menu.

Dave: 11:46

So it's a whole different paradigm, and it kinda opens your mind to, you know, throw away your assumptions and see what the most predictive things are in the data and explore those. So I think it's a unique when you do it that way, it's it's it's important to think about the columns like this and to understand what's being presented to you, and and it's pretty eye opening, especially when you're looking at long versus short, and you see the differences between them.

Michael: 12:21

Yeah. And so important not to just blindly do, you know, what pops up, but but like you were mentioning there is that you you think about them, and then does it make sense? And that's, I think, the difference between like a trader and a statistician approaching the market, you know, it's gonna get when you look at it and you say, okay, this thing is showing very predictive in in the crunch or whatever it is that you're using, you know, oh, I've sorted by, you know, trades by relative strength and it they work better, and then I sorted them by the the kind of meme example I always use because I had someone send in a quarterly dividend rate for a five minute trading strategy. Mhmm. And it looked great, but of course, it's not gonna make any sense.

Michael: 13:12

It's why I love to see when something that the strategy is built around is also showing up in the data. So Mhmm. You know, gap, if you're trading gaps or or something like that. Because it just reaffirms that, yes, okay, the thing that I'm thinking of that should be predictive is just getting confirmed here as predictive. And by doing that, I it it kind of changes the game.

Michael: 13:35

So when you're looking through these results, make sure you're you're kinda always going back to your mind as a trader and what what it is you're trying what edge you're trying to express in the market. And if you see things that confirm that, that should really just make you feel good about adding them to the system.

Dave: 13:51

Yeah. It's sometimes it's good to be surprised and see something that's predictive that you had no idea it was, but Mhmm. You bring up a good point, like, if your intuition is confirmed before you'd look at anything, you know, by something that's presented, that's pretty good. You know, it's it's it's affirming, it gives you confidence in the strategy, you know, your idea, your intuition is good, so that, yeah, it's a good sign.

Michael: 14:17

Yeah. And that and that thing that showed up that was different doesn't mean you don't use it. Just really think about it first, right? Yeah. Just really go, okay, I you know, let me go on a walk or something, and just and just really have, is there something in there that makes sense that I hadn't thought about before?

Michael: 14:37

Right? Let me grab a couple trade examples and and maybe add the indicator to the chart and take a look through them and and things like that. And is there a way that I can kind of, I don't know, convince myself that it's it's something that makes a lot of sense? And if so, great. This is gonna be a a great addition, and maybe it's presented me with something that opens my brain to what edge I thought I was exploiting.

Michael: 15:05

Maybe I'm I'm actually doing something different. But yeah, when something comes out of left field like that, it just creates one of those, okay, now I gotta go for a walk in the woods and think about it for just a little bit.

Dave: 15:17

Yeah. I used to you know, when I first started doing this, you know, I was creating these tools for myself that I was using locally, basically a local version of the cruncher. I would just sort of take take the data as it was. Right? There are many times where I'm like, well, hey, I'm not a dummy.

Dave: 15:38

Look at this data. I'm just gonna follow it. Like, why wouldn't I? And it does that can work, but but it's you you need to be able to look back after you make those changes, make and challenge those assumptions and seek. I remember it pretty distinctly.

Dave: 15:58

I sort of didn't really think about it that much. Just put put the rule in, went with it. And I remember distinctly the the equity curve just being flat after that. Like, it wouldn't wouldn't fall apart, but it just felt like, okay, it's not continuing like it should, or like I thought it would, like I assumed it would. So I realized then, okay, I need to be putting more thought into it when I apply a rule just because I didn't have the confidence in it.

Dave: 16:33

Like, I was ready to give up because I didn't think it through fully and really understand and really really believe in the rule that I was applying. It's me, like exactly what you said, go for a walk, like, think about it, make sure, like, convince yourself, and be skeptical. Convince yourself that, okay, yeah, I really believe in this, and this is why, but here's the thought process. And and that's a really important skill to gain as a trader. Well, yes.

Dave: 17:02

So much

Michael: 17:03

of what we're doing is trying to dance around randomness in a way, where we're trying to, you know, you could put a random series of of indicators together and build a really wicked looking back test that looks amazing, and, you know, it may even continue to work for a long period of time going forward, and then at some point, fall apart. So you have to constantly be going back to, you know, call it call it technical analysis if you want, but I just think of it, and I I should really be calling it technical analysis of the CMT. Right? I look at technical analysis the same as and just call it behavior flynance. Like, what what are you trying to exploit?

Michael: 17:46

I I think mean reversion is the easiest for people to kind of wrap their head around there where, you know, things I, you know, I'm looking down at this stock that I I bought this morning, is down seven days in a row. Well known company that that everyone know, down seven days in a row, and my system bought it this morning, and it's it's working great now. And I I fully understand the behavioral idea behind that trade, is that, man, if I was short it, seven days in a row, I'm I'm gonna be interested in ringing the register, and then there's, you know, the people out there that look at that. So mean reversion to me makes a lot of sense, is that the market overreacts one way or another on on some piece of news. And so when I'm looking to build a system like that, because I have very grounded in my brain the mechanics behind it, then I know what to add for that particular system that would make sense.

Michael: 18:40

You know, things like Mhmm. Okay, is it a is it a garbage company, or is it a company in uptrend that's experiencing a pullback? Right? And I don't say that as look at the balance sheet or anything like that, but right, is it a is it a bed bath and beyond that hits a new low every day, or is this something that that's strong? And because I know that, when I see the columns come up, it just makes it make more sense to me to to do that confirmation to say, yeah, this is something this is something that I should add because I understand the setup behind it, which is, you know, it just goes back to the the importance of knowing what edge that it is that you think exists in the market to exploit, before you really get into a lot of this nitty gritty when it comes to the Yeah.

Michael: 19:21

The data.

Dave: 19:22

Yeah. And my guess is, for that system, there's not an equivalent short side. That's up seven days, your short price.

Michael: 19:32

Because Yeah.

Dave: 19:33

That just makes that makes a lot of sense.

Michael: 19:36

Yeah. Know. And and, you know, it's important to note as well, is I guess some of those, you know, this question kind of assumes that you have something that you have both edge in long and short. But it's probably important to note for a lot of new users that just because something works alongside wouldn't work the short side. I wouldn't want a shorter company that was up that much in a row because it may have had game changing, like, FDA news or, you know, and it could I've Yeah.

Michael: 20:02

You've probably seen that a lot where it starts to move higher for a number of days and then this explodes. So, yeah, that just because you have a long system and you've optimized that, doesn't even need to have a short system and vice versa. You might find a really good edge to the short side, and you just would never do that that particular edge to the long side. So that's, I guess, a question that that the user should ask himself first before he even gets into testing these things together or or separately.

Dave: 20:31

Yeah. Alright. Let's let's go on to the next question. Alright. Here here's the next question.

Dave: 20:39

When you look at the MAE and MFE, do you split long and short? I've seen it seem to matter and seem to not matter in certain situations. So do you have a thought on this? Sort of the system some of the similar situations, so we probably should define the terms and

Michael: 20:59

So he he's essentially saying, do you use the same MAE, MFE for both sides? Is that what is that what I'm reading? So, you know, if it's like, you know, you're you should risk one eighty ATR per trade on the long side, should you risk the same on the short? Is that what he's you think he's Yeah.

Dave: 21:19

I think he's saying my my assumption here is because he's used MAE and MFE, maximum adverse excursion, maximum favorable excursion. These are data points you use to determine the optimal stop and optimal target for a strategy. My assumption is he's it's kind of the same question as before, just more specific Do you optimize them together, or

Michael: 21:45

do they have have unique ones? And I I think my answer will be the same. And I am probably even more so for this. Right? Because the stop loss that you would put on a long might look incredibly different than a than a stop loss or profit target you put on the short, just because of those you know, how different the the the staircase up, elevator down scenario.

Michael: 22:07

Also, may make more sense if you're not just talking about day trading, you know, see our our last episode where It we battled a may make sense.

Dave: 22:18

Trigger warning.

Michael: 22:19

Let's Trigger warning, Dave. Dave, do wanna walk out one of those, like, three doors I see behind you just for a second there. But no, there there there might be a time where you wanna put a you might not wanna hold a short overnight, but you might be okay holding a long overnight or something like that. Like that, Yeah. There's there's a lot of scenarios I could see where these would be even more different than than the column example.

Dave: 22:43

Yeah. I'm gonna avoid going down that rabbit hole and changing the topic here, but yeah. Yeah. Point taken, yeah, I think that does make a lot of sense. And yeah, I would I think it's so strategy dependent.

Dave: 22:59

Like I do have some strategies where I am specifically looking at both, but there's others where I'm doing something different. So I think it's just gonna be how much is the opposite side literally a mirror of the other side, and I think it's I think that's gonna vary a lot by strategy. So

Michael: 23:20

Well, we could even go one one further. He didn't mention this, but time stops. I could see that being a situation where the same setup has two different time stops, where

Dave: 23:30

Yeah.

Michael: 23:30

You could say, okay, well, the longs, I'm gonna give an hour, and the shorts, I'm gonna give a hour. I I could see that being perfectly valid for, again, the same characteristic of when when you see the bottom give out of a stock, it usually just happens kinda all at once. So Yeah. You know, and would it would you feel better, I guess, is a question to you, if you ran them both separately and the MAE in particular, like where you put your stop loss, end up being the same? Because I don't I don't think I would care.

Michael: 24:03

I think it would just be like, I I just think I look at the way longs and shorts exist so differently that I just wouldn't it wouldn't affect me.

Dave: 24:14

Yeah. I know. I think that, yeah, I could see that, but I think there's just like you were saying before, when you see things align so well, like, just come together in a line equal and opposite, like, that's just confirmation. I think it would be I think my walk would have to be a little bit longer if it was just very different, and there was, and I thought it was, you know, an equivalent mirrored setup, you know? Yeah.

Dave: 24:44

I just I wanna think more about that. So I think there's some value when it aligns so perfectly. You know, as you were as we were talking a minute ago, it reminds me of one of the most favorite features of trade ideas is the the flip button on the config screen.

Michael: 25:05

Mhmm.

Dave: 25:06

Such an underrated feature. Like, basically, you can have you you can set up a long alert window or, you know, have a strategy that's long. And then there's literally a flip button. You press the flip button, and it reverses everything about that strategy. So what you were talking about with the RSI, it does the equal and opposite side, just one button, it does that.

Dave: 25:31

Mhmm. Really cool, and, you know, a a feature that's just so nice that I think often gets overlooked.

Michael: 25:39

Have you ever had that like, I have you ever had you hit the flip button and ended up being a good strategy as well? Because I don't think I ever had I think it was always, to me, more like a time saver to not have to go in and type the opposite of the cause I remember doing that, you know, you back test the strategy, you're like, oh, that's that's a good strategy, like, to the long side and you hit the flip button, and you back test it short and you go, wow. Right? That is awful.

Dave: 26:07

Yeah.

Michael: 26:07

And I think that's been my experience in in like a 100% of of cases.

Dave: 26:14

I think it depends on like, yeah, it would be hard to do that with an optimized version. But if you're, like, using, like it's so basically, it's a time saver, like, creating the opposite side of a base version before you optimize.

Michael: 26:31

Yeah. It was just it was super interesting just that I've just never once I just thought, like, through random luck, I I would see one that Yeah. You know, at least perform similarly. But again, it could it's the the market just seems it's different. Right?

Michael: 26:46

It just seems different from both sides. So I think the first two questions talking about long and short, that that's the best way to summarize them is that if you ever get to the point where, you know, it all lines up perfectly, great, and there may be some overlap, but just understand that if you're generally trying to exploit different edges on on different sides because the market just works a little differently to the to the long side and the short side.

Dave: 27:11

So Yeah.

Michael: 27:11

You know, make sure you're you're verifying things even if they do line up.

Dave: 27:16

Yeah. Yeah. I I like that. Alright. Ready for the third question?

Michael: 27:20

Sure.

Dave: 27:22

Alright. I knew the cruncher optimized for profit and for win win rate. Mhmm. But for some reason, I figured you never personally use the win rate setting. I'm not sure why I got a different sense after one of the recent podcast episodes, but I've been playing with that a little more.

Dave: 27:41

When optimizing for win rate, do you do so protecting profit or trade count? I'm guessing trades. It seems to smooth the equity curve a little more than protecting profit, but I haven't played with it all that much yet. See, I've had this feature in there for some time where, by default, you're optimizing on profit, which makes the most sense. But you can also optimize on win rate.

Dave: 28:08

It's been there forever. You could choose which one you're gonna do when you enter the optimization of the cruncher. So Michael, you've you're no longer the you're no longer in the lead for the most strategy cruncher uses Am I still in the 10? Still up there. You're still up there.

Dave: 28:29

Yeah.

Michael: 28:29

Okay. Well, just wait till I can get Claude to do it, then I'll I'll I'll re reshape my

Dave: 28:35

There's probably a whole episode there.

Michael: 28:37

Oh, good. So because, yeah, I I get Claude to do a lot of stuff.

Dave: 28:41

So do you ever did you ever use the win rate, like, my zone win rate, or

Michael: 28:47

what you think? No. I I see a world in which it made sense though. And and mainly what I'm thinking of is prop firms, which we've talked a lot about. A lot of times, if you go into these prop firms, they are there's rules around how much money you can risk.

Michael: 29:12

Right? So Yeah. A a user with their own account, generally speaking, would optimize for the most amount of money to make. And I could even, I guess, see a time where that wouldn't make sense. I've actually changed some optimizations for my own trading that reduced the overall profit, but increased number of of, like, winning months and things like that as as my account grows and I get older and whatever.

Michael: 29:40

But very specifically, I think at the extreme, things like prop firms where you have this drawdown, where if you hit that drawdown, you end up, you know, getting an account done. But if if you end up being able to use that, you can make, can have, like, a million dollars of someone else's money. The the the trade off is you have to be really consistent with the the trading. So for that, I I could see it make sense. So I'm not like poo pooing it as an awful idea, but I just think profit factor is or or profit as a whole is a good one.

Michael: 30:14

But that while you're reading that question, I'm like, this is a whole other episode. Because I could see an argument. People could optimize for just about anything and make an argument behind it, and I I would probably agree with it. Like, you know, the lowest drawdown or the lowest amount of time in a drawdown or Yeah. Ton tons of different optimizations.

Michael: 30:36

But I think as a general rule, if it's your own money, you're you're kinda just trying to make as much as you can. So I think gen doing for profit would make would just make the most sense.

Dave: 30:49

Yeah. I think it does make the most sense. And it is a little bit like, you know, when you reduce it to win rate, you're losing a lot of the precision that the profit gets you, right? So even if it's So basically, you're saying a thousand dollar profit for a trade is exact same as a 1¢ profit when you reduce it to win rate. So yeah, in that case, it does reduce the precision a bit.

Dave: 31:16

It is interesting to look at occasionally. I don't it's it's more of a curiosity. The the the one that I have looked at more for specific situations, with shorting strategies where there's a lot of tail risk, is optimizing on MAE, which is kind of interesting. Right? Mhmm.

Dave: 31:40

So what you're do what you would do is optimize on, like, the lowest MAE is what you're doing. So that might not necessarily be the most profit. It's gonna be highly correlated with that. But you're trying to select the ones that don't go against you a whole lot. So I think that's interesting to look at.

Michael: 32:07

You could. See, this is this is the cool thing about the kind of trading we do, I think, versus the kind of trading discretionary traders do. The moment you said that, my brain went, I kinda wanna see the ones that go against me the most. You know, as a as a separate thing, because I'm like, well, then is that just a whole other strategy where I've got limit orders sitting, you know, if if you could predict, you know, I'm I'm shorting things because they're up a bunch, just however you want to define that, and you can give me a whole bunch of subsets of ones that ripped way further. Yeah.

Michael: 32:45

And we could, you know, it's like, okay, do you just put short limit orders to short way up there, and, you know, get tagged on a couple of them? But anyway, that that that's an aside, but I just thought that was a cool moment for how we think about training, is that you you present a piece of data that I I totally agree with you, that'd be a cool thing to optimize for. But then in my brain, I'm also like, yeah, with that other piece of data, it's it's pretty interesting. Yeah. Interesting as well.

Dave: 33:12

It's the same thing. It's the exact same thing. And when you when you optimize on profit, you're looking at the end of the trade profit, not the path it took to get there. So and as you know, like, the path it took to get there, that's the sometimes a very painful path.

Michael: 33:31

Mhmm.

Dave: 33:32

And optimizing on that pain can be pretty useful and pretty enticing. One of the things I like to do is, when I have the final version of the strategy maybe, I'm doing my last optimization, and I do that on total profit. Then I'll go back and do that same one on MAE Mhmm. And just look at the difference. Like, I'm not it's more of a curiosity, like, what is the difference between this if I was only doing MAE, a lot of times you'll see similar things, but sometimes you'll see some pretty different things.

Michael: 34:16

Well, and what you're what you're doing there too is you're saying, how much am I getting rewarded for my pain? It's the the way I would look at that. Right? If if the profit factor and how much, you know, the the stock went against you was really really correlated, then you you kind of it also would confirm the edge that you're exploiting. Right?

Michael: 34:39

You're taking a lot of pain, but you're you're making money for some of that pain. Like, of the strategies I do is selling put options for certain stocks and earnings. Right? And the idea is that there's people out there who are are paying for insurance, and I am the insurance provider. And the the equity curve is exactly what you would think, in which 90 some odd percent of the time, I make money on the strategy.

Michael: 35:03

Every now and then, just like most of the time, the insurance company makes money when you pay them the premium, Every now and then, the house burns down. Right? And you got to pay out a bit and and and go from there. That I am being rewarded. The the mechanism that will work and continue to work with that strategy is I'm getting paid to take on that that risk.

Michael: 35:24

And what you were talking about there just made me think of kind of the same thing where if you are saying, oh, the ones that really hurt, are the ones that pay out the best, then you're saying, okay, well, that makes sense. I am getting rewarded for taking on taking on the pain. Now, if you ever find the opposite, in which you're never getting any pain, and you're getting the most amount of money, then you found something that it's gonna be way easier to size up, but that also makes it a 10 times better strategy. Because you're not sitting through that pain and you're able to make to make more money off of. I think that's gonna probably rip more rare, but yeah, when you find that, you know that that's the thing that you really wanna focus on.

Dave: 36:04

Yeah. Yeah. So there's, you know, any number of things you can optimize on. In fact, you know, the other day, I was just thinking about another factor, sort of related to MAE, that I hadn't considered before, and I started doing some optimizations. I'll see maybe maybe there's another episode there, I'll share it with you

Michael: 36:27

after I think we should write down a whole before we go crazy in this, I think we we went off the question. But I think a a good episode to do next, and we'll we'll schedule this one is just what to optimize for. I think there's a whole probably two hour conversation we could have on Yeah. On all of the different metrics and which ones because like any source of data, it's neither correct nor incorrect, or good or bad. It is this is what the data's telling you, and this is what the data's not telling you.

Michael: 36:57

And, yeah, I I could see a myriad of metrics, a combination of metrics, like even a weighting of metrics. I could see all these different things coming into into place, but it is it's at the end of the day, I think it's kind of personal. Right? The Yeah. The guy who's optimizing on win rate should know what he's doing, which is potentially, and and probably giving up the absolute most amount of gain that he could potentially make on on the strategy.

Michael: 37:28

But it's gonna make them feel better. Is it gonna make them stick with it more? Is it gonna make them be able to size up more? If so, then it's it's probably the right move even though it's not, like, optimally correct. You could say, yes, you know, you should potentially optimize for win rate.

Michael: 37:46

Because there are some people out there who just cannot tolerate low win rate strategies. They're just gonna abandon them during the first stretch of of inevitable drawdowns, and and that person just needs needs a high win rate to stay in the game, then go go nuts, let them have it.

Dave: 38:02

Yeah. Mean, well, all things equal, a better win rate's good. So

Michael: 38:07

Easier to deal with. Right? It's not gonna buy you as much stuff at the store, but it's gonna be it's gonna be easier for you to to maintain, for sure.

Dave: 38:16

Yeah. Yeah. Alright. Yeah. I think we should do we'll do an episode on that.

Dave: 38:21

Alright. Let's go to the last question now. Sure. This is a very pretty specific question, but, yeah,

Michael: 38:29

a lot

Dave: 38:29

of Amber broker users will will get this. Alright. Does your signal script calculate all of your column library when it runs, or just the columns necessary for the strategies that it's running? So excellent question. I'm very specific, very am I broker specific?

Dave: 38:52

So the answer is yes. It's so I have a specific version of the Amenbroker AFL file for each strategy that's running for real time. And that's exactly what he's alluding to, or the reason is exactly what he's alluding to is, if you didn't do that, and you had the script calculate your entire column library every time, then it's doing a lot of wasteful things. It's gonna take longer than it needs to, because it's gonna do all those calculations for, you know, a couple 100 columns, when it's only using, I don't know, three, four, five, I don't know, depending on the strategy, to actually determine, okay, is this signal one you should be taking or not? So there's specific things that I do in that in in the real time strategy that are streamlined for efficiency.

Dave: 39:54

So there's no four loop in there. And if you're an ad broker user and you use the make kit, you'll you'll know what the four loop is, and and you'll understand that. But you don't need the for you actually the only reason you need the for loop at all is to create the custom columns and add those to your backtest CSV. That's gonna that's gonna be able to that's sort of the ticket for you being actually being able to optimize and come up with a profitable strategy. Without that, good luck.

Dave: 40:25

I mean, you're not gonna it's gonna be just way harder. You're gonna be doing it the hard way. But in the backtest world, you don't need like, time is not of the essence. It doesn't really matter if it takes a strategy, you know, takes forty minutes or thirty minutes to run a backtest for.

Michael: 40:42

Mhmm.

Dave: 40:43

But real time, it's the utmost importance. I mean, that could be the difference between whether you get your signal in time to actually take it or not. So it's really important to have that streamlined, and one of the best ways to do it is have a minimal version that always doing the minimal things to to make sure you're generating that signal as fast as possible.

Michael: 41:04

Yeah. And as as someone who is running initially Amity Broker off of what I am so bad at computers did not know was an incredibly underpowered computer, that that column library stuff would be generally often enough to just choke it up entirely, but it it would, you know, I'd run the back test quickly, and then all of a sudden, everything would just stop and there'd just be no way to to do that live. So any any anytime I had looked at that, that was that was even my instinct as a non coder is, you know, take that now. I only understood half of what you said there, but the beauty of it is I can take it to Claude, and I can say, here is the strategy that I've back tested, and then it's run well, strip out everything that's not absolutely 100 essential, and and kind of give it back to me. And then it's just important to run if you as soon as you split the file and you have two, one for back test and one for for live trading, is that you have a reconciliation process that that happens, like, probably once a day and says, okay, while I'm sleeping, spin up this one, run the back test, show what's going on, grab this other one, you know, take take my trades and make sure that they they line up there, because that was my fear when I kinda created two systems there, is that there would be just a drift or an error, and Yeah.

Michael: 42:25

I just wouldn't see that right away. So as long as you've got that something that reconciles reconciles it all back, each day or each night, gives you a little report the next morning, then at least you'll be confident that nothing got askew on either side. And then, if you make a change in one and you forget to make a change in another, at least you'll know it pretty quickly. Yes. Like, if, you know, you'll you'll after a day or two of of them being different trades, you'll go, okay.

Michael: 42:50

So one of one of these things got misaligned, let me go figure out which one it is and fix it.

Dave: 42:55

Yeah. I mean, were mentioning before how, you know, the long and the short, when you see the optimization, like merge itself with showing you basically the same thing on the opposite side, and how confident that's making you. Same sort of confidence you see when you reconcile a process does the same thing. Like, wow, okay, it's matching up perfectly with my backtest. This is awesome.

Dave: 43:19

That that there's so much confidence in that because that's really the thing that is is makes systematic traders quicker to profitability, I think. As as soon as you can see, like, you've got this you got this equity curve, you see what theoretically it's done over the past ten years, and even just a couple days of seeing that reconcile come through and it matching up with that, you're like, alright. It's on. Like, all of a sudden, this is it's like a huge unlock.

Michael: 43:51

Mhmm. And

Dave: 43:52

that's what and imagine that same path with the discretionary trader. You don't get to you don't get that interleaving confirmation. So it's just you you get it, but it take it could take months or years to get there.

Michael: 44:06

Well, I always I always just say when and this is from experience as someone who was a discretionary trader for a while, your your north star is doesn't really exist, because you're just did I make money? Right? And it's it doesn't really matter. You could do everything right. I always made the joke when I do livestreams and stuff that I could I could come in, I could smash my forehead on the keyboard, and I could make a $100.

Michael: 44:33

Doesn't mean it was it was a good idea. And a lot of discretionary traders are stuck in that loop where they think, okay, I made money, therefore I did good things, or I lost money, therefore I did bad things. Whereas, soon as you have something to to look at your live trading and say, okay, well, it's matching the backtests. If I believe in the systems that they're gonna make money over time, I just need to make sure that they do that. Sticking with that ends up making your life so much easier, like you mentioned.

Michael: 44:59

But also, you know, with the advent of AI, it is it is so simple. I get like a really pretty PDF that was like designed by an assistant that is in on my computer when I sit down every morning. And it's like, this is what the back test showed, this is what you actually traded, here's just a a summary of everything that you own, you know, I sorry, I don't wanna trigger you twice an episode, but that you own overnight. Right? Here is here is where they are this morning.

Michael: 45:28

Right? This is, you know, everything that is done. And it's just it's presented to me like I walked in an office, and I was a hedge fund manager, and I had an assistant just hand me a Yeah. A piece of paper saying, here's everything that happened. And because they're smart, you know, they're because they're AI and they're smart, it will actually say, and there sometimes, and there was a break, and I went and I tracked down what the break was and what the difference was, And here's what I think happened, and so I just have to sit down and explore whether or not that that was correct, and then go from there.

Michael: 46:03

So it's it's one of those things that there could have been excuses not to have that reconciliation before, but now that you you literally just have to set up the process, and you're just gonna get a PDF emailed to you every night, there's there's literally no excuse.

Dave: 46:18

Yeah. So a guy I coached that I've mentioned on the podcast before, Leo, he he just came up with a killer one. And I've been sharing it with other people in the mastermind. It's I think, like you're talking about the north star, this he's got it really dialed in, and it's working really well, and this and he gave me permission to share it with people in the mastermind.

Michael: 46:41

So Mhmm.

Dave: 46:42

Yeah, it's you're you're right. It's it's an amazing time to be a trader. Doesn't come up with the ideas for you, but yeah,

Michael: 46:52

it's Freeze up freeze up your brain to come up with the ideas, and I think that's Yeah. The the biggest part. So just to go back to that options selling strategy that I have, there's a bit of manual research that just not manual research, but I have to act on that on the close, is the strategy that I've I've kind of built in. So I just have a clawed process for that, and it will just ping me and say, okay, I've looked at all the companies reporting earnings tomorrow. I have all of expected levels for you.

Michael: 47:21

Here's the five companies. Here's the options to look at. Here's the price that you should get from, like, all that kind of stuff Mhmm. Outlaid. And that is something that would have had a whole research team somewhere to to do because you have a time crunch in which to do it.

Michael: 47:39

You have to make that decision because unlike equities, that there's no post market for any of this stuff. You have to act by the close, and then the only time you can act again is the next open. And it just the fact that I don't have to do that every night is thirty, forty minutes that I have to do something else, think about new things myself, and that's that's the difference, I think, that we're gonna see a split with traders, is people that use them for things like this, like little little life improvements that save time. Yeah. And then the people who sit down and say, hey, Claude, make me a bunch of money.

Michael: 48:14

The fact that those people exist, I think, means that we'll be around and able to trade for for a lot longer.

Dave: 48:21

That's a good way to put it. Alright. Well, thanks again to Chip for these questions. These were really good. Some very specific that I'm sure some of the listeners will will resonate with.

Dave: 48:35

So Yeah. Appreciate it, Chip.

Michael: 48:38

Yeah. And again, if you have thoughtful questions that you want answered, it it we love answering them, and also, it makes our job a little bit easier, right, because we we have topics presented to ourselves of of what to talk about. And then we just like we did on this one, sometimes we go, yeah, man, that one's an episode or two that we dive into. So we read all the questions, we look at them, we'll we'll respond them in one way or another. And yeah, we just appreciate that kind of that feedback.

Michael: 49:10

But as always, I'm Michael Nauss.

Dave: 49:12

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