Line Your Own Pockets

Michael: 00:00

Alright, everyone. Welcome back to another episode of Align Your Own Pockets. Today, it's not a user that brought in the topic, it's me. So I actually had a question for Dave, and as always, the response wasn't to answer my question. Was we should talk about this on the podcast in a couple of weeks, which I think is hilarious.

Michael: 00:17

But the the question that I was asking, and I think this is a big topic that we're really going to kind of sink our teeth into here is what to optimize for when you're when you're back testing, you have a system, you know, you've done a base strategy, a really loose strategy, and you find there is some edge there that you want to explore. And then you start getting into the nitty gritty. You start saying, Okay, well, you know, let me play with some filters or tweak stop losses and do things like that. The simple everyone says, Oh, well, you should you should optimize to make the most money. But I it's just so much more complicated than that.

Michael: 00:51

And just like a lot of things that we explore here when it comes to systematic trading is one question opens up 10 other questions, which then open up 10 other questions, and sometimes you work your way back to an answer. So Dave, you kept me waiting this long, so let's talk about what to optimize for.

Dave: 01:08

Okay. Yeah. So actually before we get started, I have I'm a little brazzled. You may even see a little sweat on my brow, and I wanna tell you kinda interesting what what happened this morning. So before the open, I usually exercise.

Dave: 01:24

I'm usually running. So I I play this kind of game with myself sometimes where I wait till kind of the last minute, and I know so it sort of makes me run harder, run faster, or ride harder to get back in time for the open. A little game I play, a little pressure I put on myself to it's kinda fun. But so I'm getting ready to go to the beach this afternoon. So I rode my bike this morning instead.

Dave: 01:57

And I I get halfway out on this ride that I plan to do. And I looked down at my watch, and I think, wait a second. Doing the math. I think I don't have enough time to get back until the o for the open. And I'm pretty sure I didn't start this.

Dave: 02:15

It dawns on me that I'm pretty sure I didn't start this program that needs to be running for my trades to happen. So I'm looking down, I think, well, I'm gonna all of a sudden this became a really expensive bike ride,

Michael: 02:30

much more

Dave: 02:31

expensive than I thought it was gonna be. So I was like, well, I think I can get back in time, but I'm gonna have to, like, prop up a lawn to do it and go really, really hard. So I did. So the last like, if you're looking at if you look at my ride on Strava, it's just like this sort of social network for runners and cyclists. Oh, that's cool.

Dave: 02:52

See me you're gonna see me all of a sudden look like I'm being chased by a bear or something. All of a sudden, I'm, like, going all out for the last twenty minutes to make it back so I can start this program so that my trades will execute if they happen. And I was, like, back at my desk completely sweaty. And within a twenty second period, I got back just in time to start this program before like so I've got like a dozen trades on now. But man, I had to cough up along to do it pretty much.

Michael: 03:29

Jeez. That it's cool. It's good. I hope those trades work out well. Right.

Michael: 03:34

And it's one of those it would it would really suck to have a down day and you just busted yourself to get there. But you obviously have no way of knowing beforehand.

Dave: 03:44

But yeah, sometimes that happens.

Michael: 03:47

It it feels like the the people out there, like, my wife has the same thing where in the car, she sets the clock, like, four minutes behind. So she always thinks she's, like, running late. And I'm like, I don't know. Doesn't your brain just, like auto adjust when you play those games for yourself? For me, it would anyway.

Michael: 04:04

Just, I don't know. But I guess if you're fooling yourself every day, then I that's a good thing, right? A little motivation. You're what they call it the Ulysses principle, where you do something smart to constrain yourself to, like, help with discipline later. You're like, okay, I've I've put myself in this situation for when he tied himself to the mass so that he wouldn't run after the sirens.

Michael: 04:27

You're Yeah. Yeah. You're kinda doing that to yourself every day.

Dave: 04:31

Yeah. It's yeah. It's a bit of a it's a bit of a mind game, but it's a fun I like riding hard. I like running hard. So to make a game out of it is kinda fun.

Dave: 04:42

Cool. But back to your I

Michael: 04:44

just want to say you're still you're still stringing me along here, Dave. I'm always going to go into the Slack and see how long ago I asked this, but you're just been you've been stringing me along for too long. I need to know what to optimize for.

Dave: 04:57

Yeah. So the answer is it doesn't really matter that much.

Michael: 05:02

I know. That's the answer I came into. But I think we'll find a little bit more than that as we dive into it for sure.

Dave: 05:11

Yeah. It is a common question. It comes up a lot. I've thought about this a lot. I've gone through different things over the course of my career.

Dave: 05:19

In fact, I was just looking at some strategies that I traded ten years ago, and it was an optimization that I'd run. And there were several different metrics to evaluate a a trading system, and I could see where I had you know, it was a spreadsheet. I I could see where I had gone through this exact thought process of, yeah, I could do it on this. I could do it on this. I could do it on this.

Dave: 05:48

And there's nothing but trade offs there. So but, yeah, it's a little bit like the search for the holy grail trading system. You know, everybody thinks there's one right answer that's gonna rule them all, but the answer is there's not. But Well, let's let's zoom out

Michael: 06:04

and let's talk about what are what are the most common ones because I think there's some that we'll agree with that you shouldn't do, right? So the case that caused this question, I guess, a good way to start it, was that there was two equity curves based off a very simple filter, like if something that, you know, it made perfect sense why one equity curve was one way and then one was the other. Was a very simple thing. One generated by far the most money in the long run, but with big increased volatility, right? So net adjusted return or risk adjusted return did worse than the other one that made way less money over time.

Michael: 06:44

But the equity curve was was much smoother. It was taking it was basically the difference between taking incredibly volatile names and incredibly simple names in the same system when you were buying power constrained. So that's what kind of pushed this. So I guess that's the a good way to start with is that, you know, we're all kind of trying to adjust to make the most amount of money. But I think what this kind of gave me the idea to think about, again, to talk about in this podcast was, it's not necessarily going to be the best way to do it because with the most amount of money can come the most amount of drawdown, the most amount of pain, and that drawdown may take from other systems.

Michael: 07:24

So I guess that's just initially, you know, kind of the two things that I think most people are trying to optimize for.

Dave: 07:31

Yeah, so you hit on a couple things there that are really important. One is people have different risk tolerances. People have different amounts of buying power. So that there that's part of the reason why there's no one answer because people are the wide variety of preferences we'll have. And but but but I do go back to there's another thing you pointed out in there that I think is the most important thing to look at, and that's the equity curve, a smooth equity curve.

Dave: 08:07

If you have a smooth equity curve, that gives you a lot of options to lever up the strategy, to trade it in a variety of different ways, to use different account sizing or position sizing. Like, there's lots of diff that the hard part is creating the equity curve look smooth. Once you get that, that gives you a lot of flexibility.

Michael: 08:32

I think that's that makes the most sense. And what I liked the best, and I think that was my comment too, I always think I'm gonna do this based off this, the smoother equity curve, because you're right. Can you can size up, you can apply different strategies, you can do you can do that kind of thing. Now, you know, for some of the more spicy questions, does it ever make sense to optimize based on win rate ever? Can you ever think of it?

Michael: 08:57

Because that's the that's the example I usually get when I'm either showing my strategies to clients or talking to clients who want to build their own strategies. You know, I'll show them some of my best strategies have a 40% win rate. And they say, well, why don't you optimize on a way that that brings that up? Can you ever think of an example in which that would make sense to do?

Dave: 09:19

I don't optimize on it per se, but it is one of the things I look at when evaluating a strategy just because I know, psychologically, it's gonna be easier to trade something with a higher win rate. That said, I just did a review of all my trading results over the past twenty years. I've got them all in a journal so I can look at every year. And I remember there was a couple really good like, when I've had my first couple of really good years, the win rate was 38%, and I crushed it. So that's Mhmm.

Dave: 10:03

So it's not everything, but there were streaks that year, like, one of my best years at the time where I lost I remember, like, I had a streak of 14 losing trades in a row. So that is tough. You know, we talked about it last week on the podcast. That's when most traders quit because they don't have the confidence to trade through a drawdown And you're just gonna have more it's gonna be more difficult if you

Michael: 10:35

got a lower win rate.

Dave: 10:36

I mean, that's that's the plain and simple of it, but it's not everything. And it's certainly I mean, absolutely not the only metric I look at, but I do look at it just because I know it's there's going to be some pain there.

Michael: 10:49

Well, and not only do I think for systematic traders, it's very hard for low win rate. If for discretionary traders, I'd say it's almost impossible. Imagine you made the decision and you did the analysis and you hit the button and you were wrong 14 times in a row to make the same analysis and hit the same button and fool yourself into thinking that you're kind of in a clear mental state. To do that, I think is is just completely impossible. That's why I again, especially for low win rate stuff, I think the systematic side of things is so important.

Michael: 11:23

And I always I always go to the the turtle traders and and those guys, the old school trend followers, some of them still doing the same thing today. Yeah. 25, 30 percent win rates and and doing just fine with that with that low win rate. The question I always have when it comes to optimizing for just the win rate itself is it it would always have to be suboptimal, which I think because, you know, say you have two trades, right, and then one trade is a massive winner and the other trade is a is a very small winner. If you're optimizing for win rate, it would it would look at both of those and say the same thing, even though one you made a dollar on and one you made a thousand dollars on.

Michael: 12:05

So I'm kind of to the point now where I think no win rate, especially if you're systematic, just not really caring what win rate is super important. But then we can get kind of more into the nitty gritty of it. So, you know, profit factor, I think is a common number, and that's one that I think makes a lot of sense. So what do you do you utilize that in your in your backtesting? Well, I guess I should define profit factor for those who don't know, which is the sum of all of your winners versus the sum of all of your losers.

Michael: 12:33

So if you if you in your tire strategy, say it lost a million dollars, but it gained $1,500,000, then your profit factor is 1.5, just saying that basically for every dollar you lose, you make a dollar and a half.

Dave: 12:46

Yeah. So that's a I like this metric and I've grown to like it even more over the years. It is one of the ones I look at. I I look at basically four, I think, four metrics when I evaluate strategy. So there's not one particular one, but I'll I wanna look at a combination of these.

Dave: 13:07

And one of them is profit factor. Mhmm. The reason I like it is it doesn't require a stop to be calculated. Now what do I mean by that? There's another metric that I like even more, which is expectancy Yes.

Dave: 13:27

And r multiple. Yep. That requires a stop value to be included with your trades, and it calculates the performance based on the distance to the stop. Mhmm. I think that is incredibly valuable.

Dave: 13:42

I think it's the best way for most traders to start trading because it puts you in a completely different mindset. It puts you in mindset of performance based on what you're risking. That's such an important concept. And when you go to optimize on expectancy, your strat you'll find some stuff in your strategies. It's you'll be pointed to some stuff in your strategies that will make a huge difference because of the the that stop distance, and you can really lever up stuff that you do because of it.

Michael: 14:20

That's interesting. That gave me an idea that we got to write down for another podcast because this and I read an email you wrote to this is a little off topic for just a second, but about, you know, not using stop losses or any extra criteria when you're running your tests. It's fine for day trading. I'd love to and just put a pin in this till one of the next time, how we do that in the swing trading side of things where, cause you have a natural, you're out by the end of the day. Be interesting to see.

Michael: 14:48

And anyway, that's that's off topic, but it just made me start thinking about it. So profit factor, agree with. I I very much like it, and I like it just because it it smooths the two most important numbers is you it's because it's win is either win rate or risk reward. And it's it's either of those two things are good. You'll have a good profit factor.

Michael: 15:07

You can have a good profit factor with a a one to one kind of risk reward, but a really high win rate, a 60 whatever percent win rate plus, and then you could have a really good profit factor with a low win rate. But you know, when you make money, you make a lot of money. So I like that as a kind of other side of things. What about Sharp? Right?

Michael: 15:26

Do you use Sharp or Sortino or any of those at all?

Dave: 15:30

I don't look at that. I think it I I have looked at it before. So I think there's an important thing to think about here. I I think most traders complicate things by trying to optimize two different things. One is the profitability of a particular system, and then one is their portfolio of strategies and how to trade it.

Dave: 16:00

I think those are two different things and it's way more valuable when you keep those separate. What I was talking about, when you have a smooth equity curve, that's what you really want. I mean, think about your equity curve. It's telling such an amazing story that no metric could possibly capture. Right?

Dave: 16:23

You're seeing the lines. You're seeing the drawdowns. You're you're it's telling you a story about, okay. Here's what it's gonna be like to actually trade this strategy. Mhmm.

Dave: 16:34

It's telling you the pain you're gonna go through. You're gonna see the 14 trades in a row and and this big drawdown. Right? You can see that on the chart. Very easy to spot that.

Dave: 16:45

And the better you are at sort of reading that and and understanding the story that it's telling you, the better sense you'll have about what about making it through the hardest part of trading, which is trading through a drawdown.

Michael: 17:00

It's it's funny that of the guy, I would say between the two of us, who's the most systematic and and scientific and all of that, that your end answer there is something that is, I would say, probably the most discretionary side of things, right? Because you are taking a visual representation of data without any hard numbers, and then leaning on that more than anything else. Not that I'm disagreeing with you at all, it's the same thing. It's just from what I know about you, it's a little bit shocking.

Dave: 17:39

Yeah, I've just known how I've felt over the years trading a bunch of different strategies, a bunch of different win rates, looking at a bunch of different ratios, trying to optimize on one certain thing. It's just that there's something a little bit intangible and that can't be boiled down to a metric no matter how hard you try of what it's gonna be like trading this. I've just had too much experience to know, and I know that you can just can't boil it down to a metric, single metric. But, yeah, you're right. I've tried.

Dave: 18:23

In fact, I I I do have a metric that is for, like, the quality of the equity curve, and I use that a lot. In fact, I I that's one of the things that I have optimized on the past in the past is equity curve quality. And the way it's calculated, it's actually pretty I'm pretty proud of this one because I came up with this several years ago, and I think it's I haven't seen anything quite better. It's basically the correlation of your equity curve with a 45 degree line up into the right. So

Michael: 19:00

So it's a regression, like, a regression analysis kind of thing. Right?

Dave: 19:03

Yeah. So it so it the metric varies between one and negative one. So if it's the one is, like, perfectly correlated with up into the right, and negative one is perfectly correlated with down into the right. So, you know, one you know, a strategy that risks a dollar and loses a dollar every single time is one that goes down to the right, so that would be negative one. So you could actually when you look at the metrics metrics for this, you can see, like, a wavy line, even if it's up to the right, is a little is scored a little bit less than one that's maybe not as steep, but great.

Dave: 19:44

Mhmm. So it's I I like if there's if if you told me I had to use one metric and that's the only thing I could look at, it would be that one.

Michael: 19:55

Well, now it's actually going to be kind of my follow-up question, right, is because instead of just kind of eyeballing it, right, that there's a way to quantify, that the smoothness of the equity return. And that's a good way to do it. I was also thinking of, like, even a Bollinger Band or a moving average and deviation from that, or, you know, there could be ways to desistematize it. But I think, you know, what we're landing at is where I thought we would land at, is that at the end of the day, you have to visualize yourself trading this thing. And, you know, I've seen people out there with equity curves of something that's downward sloping for like three, four years and then, you know, massive equity high.

Michael: 20:37

Then it's- you know, these are- they're looking for kind of tail risk type of events. If you are- if that is part of an entire portfolio of things, then maybe, maybe you'd be okay with that little bit of drag to protect you during- during market crashes. But I couldn't imagine that being something that is your, you know, sole strategy or even a huge part of your portfolio, because I I would hold anyone's feet to the fire to say, okay, you are going to look at the market making 20% gains year over year, and you're going to lose money on your portfolio, and you're going to have the guts to stick with it, knowing that at some point, could be five years from now, could be ten years from now, there's a crash and you make a whole bunch of money. You know, it's like if you if you're putting that as part of a portfolio as a hedge or something, then it's it's absolutely fine. But seeing these equity curves where, yeah, there's nothing for months or months or years and then a spike, I'm like, really, bro?

Michael: 21:37

Right? You're really gonna Yeah. And and, yeah, so I think it's one of those you're you're spending more time staring at the equity curve and just envisioning yourself, you know, sitting down every day, running your systems, loading it into the bot, hitting a button and then going about your day. Doing that for a couple of weeks and have it underperform is one thing. Doing it for a couple of years and having it underperform, yeah,

Dave: 22:01

seems different. Yeah, think that's I totally agree. You know, one of the another metric that I look at is one that I I've not heard a lot of people looking at before. So I have this one report that I'll well, it gets automatically generated whenever I do any sort of optimization and look at, you know, slice and dice my strategies in any way. It's got let me think about it.

Dave: 22:29

I think it's got profit factor, win rate, the number of trades, total profit, and trades per day. I think that's the only ones. I also think maybe there's one more. But I look at all those, and I've simplified this report so it's only showing me exactly what I wanna see and nothing else. And, also, I have an equity curve that pops up when whenever I run a a particular report.

Dave: 23:03

So I look at a combination of all these things, and one of them is trades by day. I want that number to be as high as I can get it. And that puts you in you know, there's a trade off there between number of trades you can get per day and the profitability of this system. Like, you could make more you could create more trades for yourself, but the average profit per trade would be lower. So maybe the total profit will be higher.

Dave: 23:37

So there's this dynamic of trade offs that you have to make, And that's, you know, that's another reason why I like multiple factors to look at because oftentimes I've I've looked at my buying power and sort of what I call the coverage of the systems that I trade over the market day, and I'm I realize, okay, I'm I'm missing some coverage in this particular area that I'm trying to find a system for. And so I've got I've already got some parameters that I'm of the type of system that I'm looking for, and I'm trying to find something that fits it loosely. So, yeah, I already have a and that's why it's it can't be boiled down to a single metric. And, I mean, you can, and people do. I see people do doing optimizations on all sorts of crazy metrics, you know, some of the ones you mentioned.

Dave: 24:32

Yep. But the problem is you miss out on so many details, so many learning opportunities, like tough decisions to make, like trade offs you have to make by looking at, okay, am I gonna am I willing to give up some total profit here, but the average profit per trade will be higher or maybe the win rate will be higher. Like, these are trade offs that you have to make in the strategy. And if you're doing a huge optimization, which and to try to boil it down to, you know, your holy grail indicator that you found or metric that's gonna rule them all, You're not gonna you're not gonna have to make those decisions. You're not gonna be confronted with these trade offs.

Dave: 25:18

I like to be confronted with the trade offs because that helps me understand deeper what's going on and and making it easier on my future self when I have to trade these things and and maybe there's a drawdown and and what it would mean about it. And, you know, it's just Yeah. It it's there's a lot of learning that you that happens there.

Michael: 25:36

No. I think just like we talked about, you know, in prior episodes about watching the chart kind of play out, even as an auto trader, you're not going to do anything, you're going to sit there and you're going to watch the trade work. There is some value to that, just because you're again, you're watching what happened, and that may generate ideas to fix things. Get a better feel of kind of how the stock moves from your entry point to to the exit point and how important that can be for an idea generation kind of mechanism. I think it's the same with the equity curve, right, where you're looking through it.

Michael: 26:13

And, you know, maybe especially for swing trading, you know, for example, there's some prominent bear markets, right? I always look to see how the system performed in the year February and 02/2008 and 2020, and then now more recently in 2025. By watching and studying those periods of time with what's happening with the system, There's a lot of information I can glean from, you know, just correlation to the overall market, right? Is it just a high beta system? Does it do amazing in bull markets and and really, really poorly in bear markets?

Michael: 26:47

Is there some sort of kind of natural hedge built into it? A lot of things that you learn by looking, and I think one of the reasons it's so important is because it is kind of the harder work than to just say optimize based off this number and hit a button.

Dave: 27:04

Yeah. Yeah. It's you know, a lot of traders think about systematic trading and they think, well, you know, you you've created the strategy. Now it's just easy street from then on, but there's all sorts of trade offs and decisions you had to make in creating the strategy. And then once you create it, there's all sorts of decisions about sizing, sizing compared to other strategies, sizing over time for the entire your entire portfolio of strategies.

Dave: 27:40

Like, if something's in a drawdown, has something changed? What is it like compared to the backtest? There's I could go on and on. I mean, there's tons of things that seem easy from the outside that are there's just lots of lots of things to think about and decisions to make that are hard. And and a lot of the, you know, people wanna distill it down to the the exact right answer.

Dave: 28:11

Like, one guy I'm coaching right now just actually, yesterday said, Dave, which one's more important? The equity curve or profit factor? And, well, I mean, I have an opinion there, but it's not super strong, and there's not a particular right answer. And anybody that says is the right answer, they're not. They either don't have enough experience or they're fooling themselves.

Michael: 28:38

Well, yeah, it could just be different answers for different strategies or different answers based off portfolio, like the example I gave of the the kind of tail risk strategy. If you had a whole bunch of long strategies and they were doing fantastic and right, you could allocate this tail risk strategy and you plug it into your system and it ends up shoring up some weakness, even though it might be suboptimal from an equity curve standpoint, it may fit in well into the kind of the whole basket or the whole breadth of what you're doing. And not only is there not one single answer, period, the answer is going to dramatically change based off of where you are in your in your trading kind of experience. Would I would argue that especially if you're only have one trading strategy, the smoothness of that equity curve is probably going to be everything because that's your only your only strategy. Now, maybe that changes or degrades a bit.

Michael: 29:33

If you have five or six different strategies, you're okay with ones that may be a little bit more opportunistic where they don't trigger very often. But when they do, they have good gains or, you know, they the equity curve is a little bit more choppy because you have that smooth equity curve, and that's kind of like the salary and then this other one's the bonus. So it's really going to look at where it stands in the whole breadth of thing. Another reason that I end up asking this question too is I don't know if you've ever been on our algo trading, the Reddit, the algo trading Reddit.

Dave: 30:07

Oh, yeah.

Michael: 30:08

There's just so many people and they're just pacing. Here's a screenshot of my, my back test. Is this good or not? And then all the comments are the exact same saying, well, you're not telling us anything about the strategy and and you know, where does this fit into the grand scheme of what you're doing? Is this a swing trading, day trading, a weekly?

Michael: 30:24

And everyone just goes for the lines pointing up. And it's like, Okay, well, doesn't matter, right? It's like, where who are you? Where is it? And I kind of always bring it back to to like a financial advisor, right?

Michael: 30:34

If you were sit down with a financial advisor, they're going to ask, what's your age, what's your income, what's your retirement goals, do you have any kids? There's just like a whole list of questions they need to know before they can give you a right answer of where you should put your money. And again, I think it's the same with optimization.

Dave: 30:50

Yeah. Yeah. I think you're right. Yeah. I've gone to that.

Dave: 30:55

I used to go to that subreddit a decent amount. The Algo Trading one. Yeah. I can't go to it anymore. It's just too I don't know.

Dave: 31:06

Like, it's kind of the same story over and over. You get people kind jumping in there saying, is this is this possible at all? It's impossible. Like, nobody can really do this. I'm like, well, okay.

Dave: 31:16

It's it's of the same story over and over.

Michael: 31:18

There's a bunch of and I don't know why those people are still there, but I I see them all the time. Everybody, they've got a back test and, like, even with the very detailed notes of here's my back test, I've include slippage and commissions, and I did some walk forward testing, and I like the guy seems to do everything right, and the top comments like, ah, that's bad. You're gonna and then the rest of the comments are just like, well, start trading it. Like, it's those are the only two answers that that happened in that, but it's still a it's still a fun place to go every now and then. It's no Wall Street bets, though, if you really wanna have fun.

Dave: 31:49

Yeah. It's it's better than that. Yeah. One of the classic questions there is always, you know, is here's my here's my equity curve. Should I trade other people's money with this now?

Dave: 32:04

Like, I like, I haven't they've never traded it live at all, but they're, like, so confident in this fictitious theoretical backtest that they're ready to just jump all in with with both feet. It's funny. So funny. How do I get a

Michael: 32:23

hundred million dollar hedge fund?

Dave: 32:26

So so there's another topic that you reminded me of as you were talking there. So I see a lot of traders, day traders, who kinda get stuck in a rut where they're shorting low low float stocks and doing quite well. But they get stuck with this one strategy, and they can't seem to find any additional strategies. And I've I kinda have a theory about this, why so many people get stuck there. I think it's it's it's really no different than when you first trade a strategy and it works.

Dave: 33:12

You kinda feel like, okay. I found the answer, and anything else is sort of really tangential to this or looks really close to the metrics that my strategy that I know works well has. Yep. So they get into this rut where anything that's a little bit different than that or the metrics look a little bit different, much less way different, they think they just sort of dismiss it, so they don't kind of allow themselves to think about that. And I think one of the best things you can do is really open your mind to the possibilities of trading a strategy with a very different win rate than one you're trading now.

Dave: 33:59

Maybe it's a lot higher. Like, that's sort of the way I got started was, you know, I'm just trading a strategy with it was like a 35% win rate. I got it up to 38. I crushed it for many years with just doing that. But I'd set out, okay.

Dave: 34:16

Let me let me look for some strategies that have a very different win rate than that. What would they look like? What would I need them to look like to be able to trade them? It's gonna be I know it's gonna be a very different experience than the one I'm trading now. So but I really forced myself to think out of this little rut that I was in to open my mind to other possibilities.

Dave: 34:41

And I think other I think traders who were you know, low float shorting a low float stock strategy works really well. There's some high tail risk involved there. It works really well. There's a high win rate. There's high tail risk.

Dave: 35:00

But if you step back and think about, okay, what would it look like to trade a strategy with a lot lower win rate? What would I need to do? What would the strategy need to look like for me to trade it? And there's just a lot of possibilities there, but I see so many traders. They're in that rut and they can't get out of it.

Dave: 35:19

I I work with several who get out of it and create a a workflow for themselves to come up with new ideas, which is just so important, especially when you got a strategy with really high tail risk.

Michael: 35:34

Well, my suggestion there too would be to start testing the strategies together, right? So take your current strategy that you've run, you've tested, you have that equity curve, And then instead of testing the second strategy in a vacuum, as soon as you have it that it's even okay. And this is just more not to not to optimize, but just to convince yourself. If you've got another strategy that's different, and even if it's okay, and you're looking at it's like, it's not as good as what I'm doing right now, test those two strategies together, and probably what you'll find out is that your overall equity curve gets way better than you even thought, combining what is your, you know, bread and butter strategy with something that just looks kind of okay. And I've done that to give people the motivation to, oh, okay.

Michael: 36:17

If I even add a a suboptimal but somewhat profitable strategy to what I'm doing right now, my equity curve smooths right out and increases. And then I say, okay, now you go back knowing that and make that second strategy that you've come up with better, because then you know when you combine the two, it's going to be it's going to be even better still. So that's one way that I really think for motivation that that can help with. And that comes back to, again, what to optimize for. At the end of the day, it's not necessarily the equity curve of each individual strategies, but it's the it's the combined equity curve that we're really after.

Michael: 36:52

Because at the end of the day, we're going to look at our portfolio and our equity account. And if it's going up every day, it's going be much easier to stick with that. So yeah, especially unused buying power or a strategy that works well in some sort of uncorrelated fashion. So it works well maybe when low float stocks are not active, which there are seasons where it just seems like like even recently, I saw, you know, a lot of traders I was talking to who were those low float short guys, seeing them trading like the Qs because there was a 5% range on the day. So yeah, even if you can find a strategy that's not super active all the time, if it chores up some sort of weakness, then it's going to give you that motivation I think to dive in.

Dave: 37:34

Yeah. So back to you asked me about the Sharpe ratio at Sortino, think you said. How do you feel about those? What do you think? Did it make sense what I was saying about optimizing metrics on a specific strategy versus a portfolio of strategies?

Michael: 37:54

Yeah, I sharp ratio I hate because sharp ratio for some reason penalizes upside for those. Again, I should just for audience members that don't understand, sharp ratio is essentially just a risk adjusted return ratio. So it takes the amount of money you made, but it also takes the variability of kind of how you make it. And the problem with Sharpe is it if you have a wicked upside volatility, it somehow thinks it's a bad thing and punishes you for it. Right?

Michael: 38:22

It treats upside volatility the same as it treats downside. Sortino is a little bit better because it cleans that up. It doesn't punish the upside volatility. But again, the problem I have with that is that, like we were talking about, it doesn't give me a good way of how to feel about boat trading. That's why, again, at the end of the day, I was I was fully agreeing with you that all these numbers kind of help.

Michael: 38:46

And what I might do with something like a profit factor is if I see there's two wildly different strategies, one has a 1.5 profit factor and the other one has a 1.1, Even though the equity curve on the 1.51 may be worse, I may be more interested in exploring that side of things and trying to figure out and optimise it further. But at the end of the day, we I think we arrived and leave with the same answer that it's the equity curve more than those those individual numbers because, yeah, I just found the whole Sharpe ratio thing being very, very misleading. You'll find a very high number and you'll go look at it and you'll just see that there is no upside volatility. And that's that's what we Yeah.

Dave: 39:32

Yeah. I think the big takeaway here is there's not one metric, but you should probably have a handful of metrics. And notice, you know, the ones that I look at are super simple. There's nothing complicated about them. You don't I I mean, you barely even have to explain what they are to traders that they're ones that everybody should recognize.

Dave: 39:52

And those are the ones that make the most sense. I mean, any sort of any metric where you have to explain what it is deeply, it's probably gonna be too complicated. Yeah. And just the simpler, the better.

Michael: 40:10

Well, that's the same with trading strategies, right? It's that's one of the ways that I learned at the prop firm. I remember part of the thing was the risk manager and and the owner would come out and tap you on the shoulder and say, why are you in that trade? And if you couldn't sum it up in like a sentence or two, they'd make you liquidate the trade and go home for the day. Right?

Michael: 40:30

If it wasn't if it wasn't just, hey, you know, it's got positive news catalysts and it's capping it and there's momentum behind it or Because they found that the people who had really, really complicated trading strategies didn't do nearly as well as the people who had really simple ones. It's the same there as well. But since we are talking about optimization, do you have something to tease for the folks or are we gonna hold off on Go ahead.

Dave: 40:55

Yeah, think I'll say yes. So I've got a big announcement here. I'm releasing a product called Strategy Cruncher, and I love this thing because this is the exact tool that I have used to create all my strategies for the past fifteen years, twenty years. It's if you have a backtest if you've ever done a backtest and you have one, you're gonna wanna look at this tool because it helps you optimize your strategy in a way without curve fitting and will help you improve a strategy you are trading and more easily create new strategies that you haven't thought of yet. And it gives you a toolset for very quickly optimizing them and pointing you to the right things to improve them.

Dave: 41:46

So so, Michael, you've used this. You've been an early beta tester. I think you've done more optimizations than anybody else in the beta program. So, yeah, what do you think?

Michael: 41:57

Yeah, and I, you know, I really like it. So, you know, the workflow for just to explain to people is, you know, you have your backtests and you download that backtest from, from in my scenario real test, you upload the trades that are in there, and it spits you out with- with some filters attached, and it spits you out some ideas of, hey, if you, you know, add this filter and make it this value, this is what the equity curve turns into, and vice versa. I think it's really good to help just with the optimized process, and it's really good to explore some questions, which is a reason why I think I do it so much is that I'm not using it to say, Okay, it's given me that number, let me just throw in that number and move on. But what it's doing is, for example, saying, sometimes there'll be a surprise, I'll throw in a backtest and it says, hey, the regression of price really matters if it's under what you think it is, or in some case it was like, hey, if the moving average is sloping down, that's better. Then in in my initial thought would have been it would have been the complete opposite, right?

Michael: 43:04

Or or a gap down is better than a gap up. And then when it's giving me conflicting information of what I was thinking, that's where I get really interested because then it ends up exploring through it. Again, no dog in the fight, but I really do think that this is great for for what it is and for our niche of people, where it's just it's spitting out ideas really, really fast. Like, I'm always impressed. I've uploaded, I think the other day, 50,000 trades or something to it.

Michael: 43:34

Within five minutes, it's like, is what I've this is what the bot has said that you should be optimizing for and filtering by.

Dave: 43:43

Yeah, I mean, so yeah, when I created this for myself years ago, it's all text based And I knew because I was trying to do this in Excel, like, using a filter, like, figuring out what value for relative volume I should be using. It's super complicated, way more complicated than you think it should be. So I was like, there has to be a tool that can do this. So I created it. And it's been years in the making because I've used this every day, multiple times a day to create, like, I've got, like, 30 different strategies now.

Dave: 44:20

And I've finally figured out a good way to open it up to users to where other traders can use it well because and that's I've gotten a lot of great feedback from the beta program. People like you, others who said, man, this was some eye popping insights that it told me real fast that pointed me into a direction that I had never thought of. So Well, and

Michael: 44:45

if if I can use it and I can use it that much, then you know it's it's easy, because I, again, I'm not the the tech savvy side of things. So yeah, all web based, you know, like, you're hitting four or five buttons, and then you're you're getting your backtest out. So that's what I really like about it, because I was worried when you were showing me the output of it, was like, this seems awesome. And then my brain instantly went, will I ever be able to? Will I ever be able to use this?

Michael: 45:09

But yeah, web based, you know, again, you're just hitting buttons here or there. So I think this is gonna be great and, you know, congratulations for finally putting it out there to people.

Dave: 45:19

Yeah, thanks, Michael. It's been, you know, a lot of, like I said, lot of good feedback in the beta program, which helped me because it's, like I said, I've used it for fifteen years. I know it in and out. It's good for somebody who hasn't ever used it like you to give me that feedback through the whole course of the beta program. And a lot of other traders did the same.

Dave: 45:41

So yeah, I really like how it ended up and there were some really just good insights for me about how people learn and how people can create strategies and what they need and what they're missing. So yeah, I've really enjoyed the whole process.

Michael: 45:57

It's a very nice way of saying I didn't think that people would be dumb enough to use this thing in this way. But it has been great to see the evolution again, especially as a non tech guy, because I'll be like, what's that button do? And then now there's documentation for it and all of that that again really helps out us less tech savvy nerds out there. So again, I think it's great and stay tuned and davemabe.com, is that where they'll find it?

Dave: 46:24

Yeah. So there'll be a link up at the top, DaveMabe.com. I'll be giving people on my newsletter a first crack at using it and some early bird discounts. So, yeah, if you're not on my newsletter, go jump on there now. Just go to DaveMain.com, and you'll see it at the top where it says start here.

Dave: 46:42

But, yeah, I'm excited about it and looking forward to feedback.

Michael: 46:45

And it's just in beta, but, yeah, it's already part of my workflow. It's one of the first things I run the I run the test, the base test, and then I huck it into there because it's, you know, it's fast and it's easy. And I'm going to already have some ideas in my heads on ways to take the base idea and optimize it. But it's always good to get those ideas as well and kind of see where we agree or disagree and, you know, like having kind of an external, like an assistant or something help you with the optimisation process. Then, the times that you disagree, I think it's the most interesting.

Michael: 47:18

The times that you agree, I go, Okay, I'll just add that filter the way I thought. The times I disagree has been the times that really kind of unlocked certain things for certain ideas. So it's awesome. So again, well, I'm sure we'll chat more about it. If you have questions on optimizations, if you have questions on, you know, what Dave's releasing here, as always, right, we got every comment sections everywhere, our emails are listed.

Michael: 47:41

Come check us out and send us send us all that. And until next time, I'm Michael Noss.

Dave: 47:46

And I'm Dave May. Hope you join us next week on Line Your Own Pockets.