Line Your Own Pockets

Michael: 00:00

Hello, everyone. Welcome back to another episode of Line Your Own Pockets. For you guys, it's just been a week, but for me and Dave, I'm just letting the cat out the bag right away. We probably haven't seen each other for like a month. There's been, you know, vacations and all of this, but we did a pretty good job of planning in advance and and recording it and doing all that.

Michael: 00:19

So it's been a while, Dave. How's it going? Yeah. I see your sidekick.

Dave: 00:24

Yeah. Was joking in our Slack channel that we're probably going to introduce ourselves again to each other. It's been so long.

Michael: 00:30

Yeah. It was well, there was like, it was just one of those I mean, we've all had it at work, right? And Dave took a trip, and and I was took a trip for a presentation, and then when there were some vacations in there, and it just all it's August when we're recording this, right, so it all kind of clusters around this time anyway, that you just wanna be away from your screen a little bit a little bit less, or a little bit more than than normal.

Dave: 00:51

Yeah. And part of this podcast is I want it it's pretty important for me that it comes out every week. Mhmm. So, you know, some podcasts would just take time off, but I I really prefer not to do that. I want people to get value out of this every single week, and I think we had a good plan for doing this.

Dave: 01:15

And yeah, I'm really pleased with how it worked out.

Michael: 01:17

Oh, and so now we can we can kinda spoil how we do it too, man. So because you guys are like, man, just seems like a different sometimes, every now and then, it's like the nerdiest thing I think I've ever done in my life is we record a podcast, we go grab a drink of water, we change our shirts, you guys will never know the difference, and then we record another one. So sometimes, you might be listening to things that happen back to back, sometimes they might be a week apart. You'll never know and we'll never tell you. So how about that?

Dave: 01:41

So this all started or this is the way I remember it. So at one point, I think I can't remember if it was your idea or my idea. We were recording these on Friday at 10AM. Mhmm. So the market would open, be open a half hour, and then we would record at 10AM eastern.

Dave: 02:02

And at some point we said.

Michael: 02:05

There was a reason for that, right? And I I have it's like I have some streaming commitments that I do, just market commentary stuff, and I do that Monday to Thursday. So we just initially thought, okay, we'll do it on Friday, and, you know, we'll we'll start with that. And then so, you know, it it wasn't an arbitrary pick, it was it was picked for a reason.

Dave: 02:23

Yeah.

Michael: 02:24

But yeah.

Dave: 02:25

So we had done that forever. And then, like I said, I can't remember if it was me or you that suggested, why don't we can we do this on Thursdays?

Michael: 02:35

Well, I think we did it one time out of necessity, and we're like, oh, man. That was way better. Uh-huh. Yeah.

Dave: 02:42

So I think we decide yeah. Maybe that was it. So we decided to switch it to Thursdays for recording, and we did it for a couple weeks, and then both of us were like, man, this was life changing.

Michael: 02:57

It is. That sounds like an exaggeration, but it's the it's the fact that I think both of us have kind of already started to schedule our lives that Friday was a bit open and free anyway. And this was like the one kind of thing. I've got like a a five minute TV spot I do every Friday, but that takes like five minutes. This was like the one kind of booked out time committed thing that I had to do each Friday, and as soon as that disappeared, yeah, it was yeah.

Michael: 03:26

It was legitimately life changing.

Dave: 03:28

Yeah. So, yeah, I don't have any calls on Friday. I don't do anything on Fridays. And as a result of this change, that's the case. So I was like, man, this is fantastic.

Dave: 03:43

The thing that struck me about this, though, we had gone so long and had such a good routine recording on Fridays.

Michael: 03:52

Mhmm.

Dave: 03:53

I I am a routinized guy, like, it's hard for me to make that change. I'm sure when we first suggested, I was like, I probably thought deep down, man, I'm not sure I could do this, like, we do it Fridays, I don't like the fact that we're gonna change it. But once I got over that hump, I was like, man, this is way better. And it and for people that are listening to this, know, we're not gonna talk about the podcast the whole time.

Michael: 04:19

We're just

Dave: 04:20

like, I wanna bring it back.

Michael: 04:21

Yeah.

Dave: 04:22

But it was such a subtle change that was so difficult for me, psychologically, just because, you know, hey, I had this routine. Let's stick with it. It's working. But it made such a big difference. Just this subtle thing, and it made me start thinking about various things in trading that are similar.

Dave: 04:47

You know, you're in a routine, you assume this is how it should work, status quo bias sneaks in, but some small changes can make a big difference. And I've and I've done some things in my trading sort of as a result of this after thinking about things differently after we made this change, that I've I've applied to my trading in a similar way, just done subtle things to change a strategy that have made a big difference.

Michael: 05:16

Well, in first, you know, I don't I don't think it's bad to be a very routine person, and I am as well, and I've noticed that of a lot of traders. And I think it's probably a good thing to most degrees. Right? You know, you need to be able to to shake that from time to time, but I think there's a huge, and especially, I guess, for systematic traders, there's there is a benefit to that, you know, you get up, I get up the same time every day, and you take the kids to school, and I exercise, and I'm at the computer at the same time, and there's a huge benefit to that. But you're right, it can put kind of blinders on sometimes, where you just kinda without knowing it, you might be doing things that are suboptimal or or that.

Michael: 05:58

And I find you find this a lot in either older generations generations or older companies, where, you know, sometimes you ask, like, oh, why are doing it that way? It's like, well, that's the way we always did it. And that's like the only answer they have. And it's moments like that where you should kind of look around and say, you know, I I need a better reason to be doing the things that I'm doing at the time I'm doing them, and and at the pace I'm doing them, than just because that's what I did before. That doesn't seem to make a lot of sense.

Dave: 06:30

Yeah. Yeah. So let me bring this back to the trading strategy that I just made a change to. This is as a result of this change on the podcast, I was like, man, where else am I too routinized making assumptions that I shouldn't be making?

Michael: 06:51

Mhmm. So Is that a real word too? Routinized? I'm gonna Google that on that.

Dave: 06:55

I think so.

Michael: 06:57

If not, I like it. You keep going on. So, like, oh, that's a good one. I might add that one.

Dave: 07:02

So I've been trading this strategy forever. From I mean, this is the first day trading strategy. I started trading back in 2005, and it's worked really well for that whole period. It's not the greatest strategy in the world, but it's one that I've been trading. I've I've found some better stuff since then, but I've traded this one routinely ever and makes money.

Dave: 07:27

So the change so I thought, maybe there's another way I should be trading this strategy. So there are two assumptions that this strategy makes that are the more I thought about, the more I thought, okay. They're a little bit arbitrary. Maybe there's another way to do it. So so there's two ways.

Dave: 07:51

So this is looking for gapping stocks Mhmm. And it looks for a pattern. This is the one we've talked about in previous episodes. Mhmm. It looks for a tightening range in the first thirty minutes, and then it either gets long or it's looking to get short, looking for that pattern based on some criteria.

Dave: 08:13

And then it puts a stop at the low of that tightening range for going long, and at the high of that tightening range to go short. Okay. So this is the way I've traded it for twenty years. And recently, I thought, okay. What and I have done some some small changes to test that stop and see if maybe there's a multiple of it.

Dave: 08:40

Like, maybe I should do it a little bit further away, so just just use the ratio to make it a little bit further. Mhmm. And sure enough, that improves it a little bit, but it made me take a step back and think, maybe even that's arbitrary. So basically, I made some changes to the strategy. I'm taking, I'm looking at for like, the criteria for whether I am looking long or short for the strategy is completely different now.

Dave: 09:08

Completely different than what I was doing for twenty years. And the stop I'm choosing for each trade is is completely different than what I was doing before. So two major differences and major improvements off a strategy that's been making money for twenty years, and it's it's it's a better strategy now.

Michael: 09:30

And you feel confident making that change with kind of just pure back tests, or is it going through some sort of, you know, bake off or something before then? Just a little bit more, I guess, detail on the on on the switch. It just feels like a pretty hard switch if you're just going kinda from one to the other like that, doesn't it?

Dave: 09:50

Yeah. It feels I I think all of the above. The the back tests look better, and it feels better. Like, it's not good enough for me for the back tests to look good. It really is having the confirmation of having traded this strategy for twenty years and knowing how it feels, knowing the Achilles' hills or whatever, things that make it difficult to trade or the worst things about it, are all improved as a result of this change.

Dave: 10:21

So it's I just it just feels like such an improvement, and from the back test, but also just thinking about it and feeling, you know, feeling how it feels to to to trade it in this way versus the way I was doing it before.

Michael: 10:40

So I yeah. Because I think that's important that, you know, it's it is easier I find to make changes to strategies like that. In ones that it's very hard for me to make a change to a brand new strategy. Because I don't know if I'm just chasing, you know, a recency bias or, you know, just moving on. But but strategies that I've been running for years, it becomes way easier because I'm like, okay, I I know how this works or doesn't work or, you know, I I fully understand the the ones don't try to interfere with them, you almost see them when you take them, whether or not this is gonna be something that is good or or or not so much.

Michael: 11:22

And in that case, I find it way easier just to implement little rules to to end up kinda changing and and tweaking them. So it's just good to kinda reiterate, you didn't just make a a whim because, you know, we we changed our podcast timing and a back test, that's something you've been you've been doing this and watching these trades, like, in your journal and after the fact, and going through the data, and probably seeing a bunch of them live long enough that you're like, okay, you know, I I I understand the change I'm making intellectually. I'm not just doing it because a bunch of numbers told me to do it.

Dave: 11:56

Yeah. So I'm gonna ask you if you have made any similar changes like that over the years, like in your strategies or something like that. But as you're thinking of example, I wanna relay another, like, completely different context, something that I came across recently that I thought was really interesting. So I was just down in Dallas to be on this podcast, which I won't mention the name of it, but this guy, it would you would recognize the name. It hasn't aired yet, but so it was we did the whole podcast, and at the end, he was showing me some of his YouTube stats for some of his videos.

Dave: 12:41

And he was showing me some of the tinkering he was doing, and some of the things he discovered about the YouTube algorithm. He's super like, he was worshiping this algorithm, you know, so it's an important thing to him. We post this thing, and I don't really care about this, so I sort of look at it every now and then. But he's super into it. And the thing that was interesting was he has been doing this a long time, is super into it.

Dave: 13:08

And whenever I see somebody like that that is super motivated about some topic, their whole process is kind of interesting to me. Like, there's something I can learn from that, something you could pick up on. And just something being around people that are passionate about what they do is fine.

Michael: 13:23

Mhmm.

Dave: 13:24

So he was showing me he said, Dave, you think when you post a video that that's what you know, you get a spike in YouTube, but then it sort of tails off after that. But I've but and that was my assumption too, until I started tinkering. He started tinkering with the videos, some of his videos that he had posted years ago, and he found that he could make big, you know, actually really small changes to the video, and have them have a spike years years after they were initially posted.

Michael: 13:57

Mhmm. And

Dave: 13:57

it was just it was kind of the same sort of thing. A subtle change came from just tinkering, like, and challenging his assumption about what videos do on YouTube. And this small change has changed the way he does his process now for his videos on his YouTube channel, and and which I thought was super interesting.

Michael: 14:19

Yeah. I have a I have a saying that I love that everyone's a nerd about something. Right? I love it's whether it doesn't matter whether it's sports or video games or fishing or whatever. Humans just seem to have a natural inclination to find something that interests them and then just go like way deeper than anyone expected.

Michael: 14:40

Yeah, you know, the the little bit of research and playing I've done with the YouTube algorithm was enough to know that it is a never ending rabbit hole that I don't have the time or the Yeah. Inclination for. But yeah, just seeing that is is just showing. And it actually, there's the people who mess with that is a lot of the the same people who kind of mess with a lot of the the trading stuff because you're using something that you can't fully see in a like, you can't see the algorithm. You can't see the back end.

Michael: 15:09

YouTube's not gonna share what they're doing, because as soon as they do, there'll be people that game it with all kinds of crazy stuff. So you're just kind of inferring based off the the best amount of data that you can, and you know, you can take that same thing and you can you can apply it to to what we do. So when, yeah, when they're in the back end looking at those statistics, it's all they're they're essentially back testing in a way, they're looking at it saying, you know, that video did well, and these are the things that I did, and that one no one watched, and these are the things that I did, and you're trying to just infer kind of what to do next and changes to make based off that the the small amount of data that you can see, and and you knowing that you'll never fully get the the whole picture, you just gotta grab your little part of it and play with it as much as you can.

Dave: 15:53

Yeah. So I've got another example here of a situation where I've seen people too routinized, and this comes from the running world and the cycling world.

Michael: 16:10

Mhmm.

Dave: 16:11

So back when I graduated college, I was in a sort of a serious running scene, and there would be people in the running scene that would train we would call it train to train. Would never race. They would never put it on the line, but they would be training to train. Like, they would always need to get in a little bit better shape before they put it on the line. They would, There's always more miles they could do, more workouts they could do, but they were never will.

Dave: 16:44

They were just always just out of reach. And it's such a bad way to live. You have to put it on the line and and do that repeatedly because it's gonna give you the feedback you need to get better.

Michael: 17:01

So Sorry. Are you just directly calling out, analysts right now With because that that just seems the difference between like an analyst and a trader right there. Right? The analysts will do all the the legwork of of the company's fundamentals and, know, all the news flow and all the stuff that they look at. But like you mentioned, just never really have anything on the line.

Michael: 17:25

You say, my price target for this stock is this, and everyone goes, okay. And it might go up a little bit or down a little bit that day, but no one remembers six months from now what it is that they're they're saying.

Dave: 17:36

Totally true. And but but where I do see this in the systematic space, not just analysts, is traders will get stuck in what I call a back test world, where they're tweaking, they're doing more optimizing, they want it to be they know it could be a little bit more perfect before they actually go and start trading it live or even paper trading it. I've seen people stuck in this place. I mean, the worst case I can remember, there was a guy who had like four strategies. He'd been testing in this mode for like four years.

Dave: 18:13

Hadn't made a paper trade, hadn't traded anything live, and was just, he was stuck. Right? Mhmm. And I think when you when you're in that situation, I think that you almost don't realize it, but I think the thing that's keeping you stuck there is how good the strategy could be. Right?

Dave: 18:36

There's always this hope that, wow, this strategy's gonna be really good. And when you don't put something on the line like that, and you don't actually take the next step, you're always in this sort of safe space of hope this thing could be really good. And but the quicker way to do this, and and the way you're gonna make more progress, you want these kind of things to fail fast. Right? That's the whole term for, in the software development world, like, how can you put an idea out there so it fails fast, so you can actually get on with your life and figure out something that's not gonna fail?

Dave: 19:17

And the quicker you get feedback on that strategy, the better it is. But I see a lot of people get stuck in that phase a little too long, and they think when they get out of that phase, sort of the work is done, and the learning stops, but the learning really begins at that point. So the quicker you can get into that phase, having lost as little money as possible as you go live with the strategy, the better, and and you're gonna learn stuff that you can apply to new strategies that you haven't even thought of or realized yet.

Michael: 19:52

Yeah. And, you know, and I think another good example is, like, remodeling houses and stuff. You don't know what you're gonna get into until you rip that cabinet up and see if it's like moldy behind it or or or something like that. And and it's it is a really big problem. There there seems to be two kinds of people when it comes to this.

Michael: 20:14

One, they want to trade way too big with way too much money, like, right away. And the people who, like you mentioned, will go years without taking even a small trade. And as as kinda crazy it is, I think the guy who wants to trade too big is probably way better off than the guy who who doesn't wanna trade at all. Because there's there's no excuse for that. In a world where, especially now with the you guys, you killed your PDT rule.

Michael: 20:44

Open up a $5 account and, you know, trade it as as much as you want, knowing absolute worst case scenario, you blow the whole thing up and depending on where you are in your life, you're you're real mad for a while, but you're hopefully, that's not the difference between eating and and not eating. And I just find it it gets very hard to kind of motivate people past that when you're saying, like, paper trading is no risk. The the platform that you're buying with the paper trade in it is your only your only expense. And opening up a small account is, you know, seemingly no risk. Put put a grand in it if you want.

Michael: 21:20

There's no Yeah. There's no rules behind it. So, yeah, it just I just never understood that mentality perfectly. I'm probably on the other side where I take too much risk, but I think that's easier to I think it's easier to kinda dial back than to get people over that hump when they can't explain to you why why not open a paper account? Why not, you know?

Michael: 21:39

Yeah. You know, push a button with a thousand dollar account, and you know, then in your head, just add a couple zeros to it. Make $10, you go, great. Well, if that could be a $100, could be a thousand bucks, could be 10,000, just depending on liquidity constraints and the and the size of my account.

Dave: 21:55

Yeah. So that so it reminds me, I saw something on Twitter recently, I can't remember who posted or who said it, but I thought it was really interesting. So it was posted by somebody who has, for a long time, hired traders for prop firms. And his quote was, the optimal times for a trader that he interviews, the optimal number of times for them to have blown up an account, Guess how many times, because what would you guess?

Michael: 22:31

Well, least one.

Dave: 22:32

Definitely have to minimum. One. And I never really quite thought about it that way, but I think that's a really good insight because zero, then you're probably gonna be a little overconfident or you don't have what it takes to step on the gas in any way. Right. Anything more than one, and you're probably gambling.

Dave: 23:00

Right?

Michael: 23:01

Mhmm. You

Dave: 23:01

probably have a more gambling mindset. So I thought that was super interesting and probably spot on the more I thought about it.

Michael: 23:08

Well, and I think it's funny because I think I heard the same quote actually when it came to business, like, you know, start up companies, that they wanted I forget who it was, but I think it was one of those Shark Tank kinda type of dudes, like venture capitalists, who was like, he kind of wanted to see somebody try to create a business and fail one time, because it meant they had the guts to do it, and they probably learned a shit ton along the way. Whereas the guy who is just coming to you with an idea hasn't really kind of suffered that, and the guy who created who did one start up and then sold it, and you know, went all the way through and did all the great things, just like you mentioned, probably just thinks he's like a a business god. So the guy who got in there and and saw a little bit of success and then blew it up, he goes, okay. Well, he's he's seen enough that hopefully he can kinda turn himself around, or the next idea will be a better one. He can manage expenses and things way better than than someone else could.

Michael: 24:12

And, yeah. So again, a lot of parallels I always find with trading and just general business kinda acumen and things like that.

Dave: 24:21

There's this reminds me of another quote from a good friend of mine that I raced bikes with for a long time. So this guy, his name's Aaron, lives near me. We raced on the same cycling team for a couple years. He's a he's a awesome cyclist. He doesn't do it anymore, but for he he trained with Lance Armstrong back when he was a teenager, and he's raced bikes for a long time.

Dave: 24:50

He's a very shrewd bike racer. But I remember one of the things he told me. He said, Dave, it's good to get your teeth kicked in every once in a while. Right? Good to, you know, get your butt handed to you on the bike every now and then because and it sorta goes back to those people, would say, the runners that were always training to train.

Dave: 25:15

It's good to get your teeth kicked in every once in a while. It keeps you humble, it keeps you and so I've I've remembered that quote for all these years, this is several years ago, and I just did this, sort of took it to heart recently, because as you mentioned, we've both been on vacation.

Michael: 25:37

Mhmm.

Dave: 25:38

And I was a little sick before I went on vacation. I didn't really get to ride as hard as I normally do. So when I came back into town, there's the Wednesday ride that I normally do. I knew there was a chance that I might get dropped on this ride. And I don't get dropped on this ride.

Dave: 25:58

This would but I was like, well, I could wait a week, get in a little bit better shape, and go back on this ride knowing that I had a much less chance of getting dropped. But so I was thinking all this through, and I was like, you know, I'm gonna go on this ride. I think there's a good chance I'll get dropped. Think and people will know. If you get dropped, people notice.

Dave: 26:20

Right?

Michael: 26:21

Mhmm.

Dave: 26:22

But I was like, I know that I gotta get my teeth kicked in every now and then, and I knew the motivation that I would get from getting dropped from this ride. Like, there's there's no downside. Like, there's only upside, because you're you have this thought, okay, maybe I'm not in as good a shape. Well, let's quantify that. Let's go, let's see how good a shape you're in.

Dave: 26:46

And then you know you're not just in la la land trying to imagine. So, yeah, went on this ride. It was hot. I got dropped at the very end, but I knew that it would be super motivating for me because of that exact quote that Aaron told me years ago.

Michael: 27:06

Well, and that's the the that's what I wanted to point out too when you were mentioning that, is the low risk. Right? You get get ribbed by your buds a little bit, right? You're not you're not gonna die. It's it's no big deal.

Michael: 27:16

And it's the same with, you know, you're talking about the the people who can't really get going. That's why I suggest open a thousand dollar account. If you blow up a thousand dollar account, you're gonna be slightly mad about it. In in this world, that's like two trips to the grocery store, you know, especially you got hungry kids like me. So you'll be you'll be fine, But it's just that kind of motivation enough to either slap you to say, you know, these strategies are are not good, or you know, you missed something in your back test, or you missed something when you were trying to bring them live or something like that, or that the, you know, you hit them and you start making money with that and everything's fine, but you know, you have to you have to put that out there, so you wanna do it in such a controlled way.

Michael: 28:09

Like, you wouldn't have joined like an actual competition or any sort of thing that you would have put money on or or had your pride too far on the line. You can you can just do it. You can do these same things just incredibly safely and just say, okay, let me just let me take a shot here and and make sure that you're you're kind of shaking yourself out of that comfort zone. And it's, you know, not to crap on someone's gonna listen and say, hey, I'm an analyst, but it's the same thing. It's like these guys these guys can say whatever they want because they don't have skin in the game.

Michael: 28:41

The reason I like to rib on them so much, back when I was a discretionary prop trader, it was my favorite strategy. I'd go look at the analyst upgrades and downgrades on the day, and those are the gaps that I'd just fade. And that was like one of my pure focus, because nothing's happened, nothing's changed in these companies, so how can I take the other side of of these trades? And it's, again, it's for that reason. You got no dog in the fight, you got no skin in the game, you don't care.

Michael: 29:05

It's not like they're you're, you know, you make these predictions and then they give you a book to trade them. It's it's just kinda out there, and it becomes really clear really quickly when you're someone out there who's just theory crafting versus someone out there who is who is actually trading. And you realize at the end of the day, yeah, theory just means kinda nothing.

Dave: 29:30

Yeah. So it reminds me of Tyler Cowen, who has this podcast that I listen to a lot. He's an economist. And one of the very first people that was really big on AI, actually. Much more optimistic on it than other people were.

Dave: 29:47

And, you know, he interacts with a lot of AI doomers, like, think the end of the world's coming because AI's And gonna take over the one of the questions he always asks him, is, alright, what's your portfolio look like? Or you must be short the entire market, right, if if you think this is gonna happen. Right? You you have to be short the market. And, of course, that's they're not short the market.

Dave: 30:12

They're they don't really believe that to a full the fullest extent they could. So, yeah, just thought it's

Michael: 30:20

it's like, guys.

Dave: 30:21

Put it on the line, right? If you believe it, let's let's do it.

Michael: 30:24

It's like the the end of the world, like, religious end of the world guys that are still in their mansions and everything. It's like, well, give it away. The world's end tomorrow. Right? Just give give it there's that homeless guy there.

Michael: 30:34

Just give him your multi million dollar mansion. You're not gonna need it. The world's

Dave: 30:37

end. Right.

Michael: 30:38

And, yeah, it's like the you know, how much your I just wish, yeah, betting on on things, I think would solve a lot of arguments online. Because like how confident are you are you really? And and how do you get shaken out of that? So, you know, back to what we're what we're talking with the change in the podcast, the I I believe that initial change was out of necessity, but it just makes you think that you should almost create that necessity every now and then. I think I had either me or you had something going on on Friday, we said, just push it to Thursday, and then it was then it was better.

Michael: 31:15

But, you know, how does someone, especially with their trading, go through and say, what if, you know. And some of this could just simply be automation, right? Like, we've we've talked about, you know, backup computers and things like that. Like, what if my power goes out? What if my internet goes down?

Michael: 31:33

Or or, you know, something like this. And then, what are the solutions that I can come up with? But I think you should be thinking about that like Dave was mentioning with his strategy, just with every strategy, you know. Take everything and and tear it apart into its individual segments and look at each of them and say, is there just like an underlying, probably right, but potentially wrong assumption that I've made here, and that I can kind of improve and and change it.

Dave: 32:01

Yeah. The way I was thinking about it is, is there something that I'm doing here that's sort of arbitrary, or that I well, like, what's the most arbitrary thing about this strategy, right, that I can't really I don't really have a lot of evidence to support. So, yeah, I think that's probably a good way to look at any sort of trading strategy you're running, like, what's the most arbitrary part of it? And what can you do to maybe do something better, or improve it in some way that you can get more confidence in?

Michael: 32:32

One and one of them, and and I you asked me this question a long time ago in this podcast, but it was like, is there anything that I had looked at that assumption change like that? And one of them was a strategy we ran, and actually an episode we did about I think, like, constituency lists. Like, do you trade the entire market? Do you trade like Russell 3,000 or S And and P five I had one strategy there that was focused on, I think, Nasdaq 100 stocks, and worked great. Still trade it.

Michael: 33:05

It's bread and butter strategy. It's one of those, like, 70 some percent correct, but one to one risk rewards, like your bread and butter just kinda turns out decent type of type of game. But yeah, I went back and I looked at it and I said, well, it's probably right. I don't I don't even know if I meant that on air, but I was like, probably Who

Dave: 33:24

was right? Who are you talking about here?

Michael: 33:25

No, Michael. Ed editor. Oh, we don't have an editor, that's just me. The and I was like, there's probably something else here. So I ended up going and looking at it, and you know, it wasn't volume.

Michael: 33:37

I said, okay, well, maybe it's volume because Nasdaq 100 names are gonna have a lot of it wasn't volume. It ended up actually just being market cap was was the thing, but that allowed me to express the same trade on just more instruments because it it was something that only worked on giant large cap, like, well known, like, you'll you'll you'd recognize every single one of the stocks that are traded there. But it wasn't necessarily that they were in the Nasdaq 100, it was just they had to have that particular component. So it ended up, you know, only adding, I think, like 10% or something more trades, but hey, something with that that high of a win rate, that's gonna irk out a little bit more gains. So, you know, that wasn't a necessity thing, but it was just kind of a conversation you had.

Michael: 34:26

So Yeah. You know, if you're just listening to this passively in the car, well, maybe, you know, trying to look at it as like, is there any beliefs that get challenged every time? And I don't think I made that change till like a month later too. Right? It's just something that kinda came up after the fact.

Michael: 34:44

So just content, guess, is another way to really look at it.

Dave: 34:47

Yeah. So the first thing I'd pick up when you said you added 10% more trades to the strategy, mean, that's a big win. I mean, that's that's that's significant.

Michael: 34:58

Yep.

Dave: 34:59

Because not only you you have a couple different ways to trade it now. You could just simply add 10% of the trades to the strategy, and that's that's totally the legitimate thing to do. The other thing you could do is I could say, hey, once you discover this, you can and you're starting from a little bit bigger starting point, then you could actually add another rule that gets you back to the same number of trades or roughly, and the entire remaining trades have a little bit more profit in them. So every trade should be have a higher average profit because you've added and you started from a bigger starting point. So there's mean, sort of what we're talking about.

Michael: 35:47

Well, I was gonna say that's that's exactly what ended up happening because when I got the more trades, it's a it's a percentage of account trade. It's not a risk per trade trade, which basically just means every time it comes up, I take a certain percentage of my account and I buy the stock. The so what I end up doing is saying, okay. Well, if it wasn't volume that made the difference, it was market cap, then in theory, there should be some linear relationship between the market cap and the profitability of the trade. So that's how I ended up cutting those 10 off as well.

Michael: 36:20

Right? Because the Nasdaq 100 probably has 50 names that are really big, and then it's got some other ones in it that are are kind of whatever. Right? Again, you're playing the volatility. So a lot of people don't know Walmart and Costco are in the at least Costco, I know for sure, is in the Nasdaq one hundred.

Michael: 36:39

To be able to go through it and and remove, you know, I was assuming that this one thing filtered out all the bad trades, and it turned out it was this other thing that allowed in more trades. But if I just tighten that particular filter, my sample set is probably pretty close to what it was before. But I basically just dropped off, say, the the bottom 10% of of the Nasdaq 100, and allowed in some names that are probably like large S and P 500 names or something instead.

Dave: 37:09

Yeah. And not to bring up the whole topic again, but the Nasdaq 100, you don't have control over that. You don't and by removing your control of that, or from your strategy, you know, not relying on that, you have lots of different ways to improve the strategy, you know, suddenly. So you got a lot more levers to pull, now that you're not relying on that one consistency to do any sort of work with this strategy. So I think that's that's awesome.

Michael: 37:44

Mhmm. And just, again, more examples of, you know, just take a take a minute, take a note of of everything out there, both, I guess, in personal life and trading that just might be built on a, oh, I do it this way because I've always done it this way, and just see if that's that's lead me a little bit a little bit of stray.

Dave: 38:06

Yeah. I guarantee that well, I'm sure there are ways that I haven't even thought of yet, that I'm doing the same thing right now, and there's there's some way I can improve something by challenging those assumptions. I'm I'm sure of it. And, you know, that it goes back to something I always say, that the bar for improving things is pretty low. Like, with any strategy you trade Yeah.

Dave: 38:33

You're just one filter away, you're just one column away from dramatic improvement. And the more you put yourself in a position to notice things, and notice assumptions you're making, notice things about the market that you hadn't realized before or hadn't noticed. You you there's you're just so close to being able to dramatically improve strategies. That's what that's what really excites me about this whole thing. Mhmm.

Michael: 39:02

Well, and that's the mission, right, is is always constant improvement. But listen, it was it was good good to see you again. Anyway, Dave, it's again, for you guys, it's nothing. For us, it it was it was a while, so glad to get back into it. Glad to back get back into recording.

Michael: 39:19

As always, for, you know, people listening, make sure you tell us what you think of this. Have you discovered anything based off this episode that you're gonna you're gonna make a change on? We'd love to hear it. And as always, I'm Michael Nauss.

Dave: 39:32

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