Line Your Own Pockets

Michael: 00:00

Hey, everyone and welcome to another episode of Line Your Own Pockets, where today we're gonna continue our discussion about drawdowns. In the last one, we just went over, you know, Dave's biggest drawdown and some of the things that takeaways and and more of just how to how they feel and and why they suck more than just losing some money and things like that. And and this one, I think we're gonna get more into the nitty gritty of actual things that people can do to help withdraw downs. Now, forgive us for a little rusty because it's been a couple weeks. So I just like saying, hey, Dave, how's it going?

Michael: 00:34

For you guys, it's only been a week. For us, it's been a couple weeks, summer vacations and all that kind of stuff.

Dave: 00:39

Yeah. So, you know, I went to Madison, Milwaukee, Chicago, and then New York, and then back, and I got a little bit sick on the way back.

Michael: 00:50

I was about to say, you can hear it a little bit in your voice, but that's when you That's know it was when you know it's a good trip, when it bangs you up a little bit, not too much, but a little bit.

Dave: 01:01

So I thought we would talk more about drawdowns. And the thing, you know, we know as we talked about last time, drawdowns suck, but they're inevitable.

Michael: 01:13

And

Dave: 01:15

I live, I really liked the analogy I brought up last time, which was, in cycling where everybody goes hard up the hills. When you're on a bike, you kind of can't not go hard up a hill. Like it's hard, but you can coast down the hills. So to it's sort of not in everybody's nature, but the way to go as quickly as possible over a long course is to go a little bit less hard up the hills and a little bit harder down the hills than you're used to. So it's the same thing with drawdowns.

Dave: 01:53

When things are going well and you're making money, you're at equity highs, you kind of lay off the gas a little bit. But then when you're in a drawdown, well, okay, everybody works hard to drawdown because you're losing money and you're panicking.

Michael: 02:09

So

Dave: 02:10

you wanna try to smooth that out and we'll get some things to do today to to to do that.

Michael: 02:17

Well, and it's yeah. And we we talked about it last time, it's important to reiterate is just that the easiest time to the time that your brain is the most free to come up with new ideas and things to change and things update is just when you're you're fat and happy. Right? Everyone's eating in in your house and and things are going okay and and that type of stuff. But it's just the hardest time to motivate yourself.

Michael: 02:42

Right? And it's the whole I always love the discipline beats motivation. You know, if you schedule a time every day or or once a week to to work on something and you just stay to it every whether or not things are going great or whether or not things are going poorly, that's gonna be kind of the best way to do it because then that inevitable drawdown is gonna hit way less because you've already been working on a new strategy. You've already been coming up with ideas and and things to tweak. So I think most of the work like we were mentioning has to be done when when things are going well.

Michael: 03:18

It just has to be, or the drawdown is going to be so much worse and everything's going be so much harder where if you can just kind of do the work when it's not fun to do the work, then it's everything will be will be way different and I think way better for you.

Dave: 03:33

Yeah. Yeah. You'll be in a much better mindset and, but, but let's, let's assume that, you know, let's assume you already have that process in place. You're, you have a process for generating new ideas and testing them. But let's say, you know, the drawdown is bad enough and it's a couple, you know, say it's a couple strategies that are causing the drawdown.

Dave: 03:58

What do you do to dig into these strategies right now during this drawdown to feel productive and to like figure out what's going on? And that's the thing I want to focus on. So so the first thing you should do is go back and make sure your back tests are up to date. Like run your back tests so that they're up to date to current, like the last trade you made. And you know, a lot of times it's, you kind of get out of that habit.

Dave: 04:26

You don't do that routinely. So get your data up to date and have that back test all the way up to current so you can see because the first thing you want to do is, is the back test in a drawdown? Sometimes you see that it's not. So, that's a very important thing to do.

Michael: 04:45

Which is and, you know, again, without I feel like sometimes I'm an AI cheerleader. Easy thing to do with AI is to say once a week on, you know, I'm actually ordering Dave might be a little shocked. I'm ordering a PC. I'm gonna have a like a and I think I'm gonna switch things over to it's $7,000. We'll talk about specs and stuff offline, but it's it's insane.

Michael: 05:11

And that's gonna be one of the things. I just want something that's right now I do everything on a laptop. Right? So I want something more consistently running and that's an easy thing to do is say Sunday night or whatever time you pick, wake up, run, make sure everything is up to date and you can even give it instructions if if you're not getting the current data, figure out what's going on and get the current data because I've done that. I'm sure you've done that Dave where you're like, man, this drawdown sucks and you run the back tests and it's like baking new equity highs and kind of thankfully, it means there's something that you can probably fix pretty easily because your trading is deviated somehow from the back test and and hopefully you can easily figure out what that is and and correct it.

Michael: 05:57

But man, you start kicking yourself in the ass when it happens because if you had done that more frequently and and spot that drift sooner, you wouldn't be in this drawdown. You'd be closer to equity highs along with your system and and yeah, that's that's definitely the first place to start because it's the easiest to do. You just run your back test and that reconciliation is just way easier than a lot of these other things I think you're gonna need to do.

Dave: 06:21

Yeah. And that the process of keeping that up to date is so much easier with those free tools I've released, the ones you can like put into your pipeline and automatically update your Ameren Broker database. It is they're totally free and it's just a really great way to do it. And I love the way it's it just keeps things up to date automatically, which is awesome. Yeah.

Dave: 06:45

So let's talk about but let's say your back test has, continued to go up and you're still in a drawdown. What's the first thing you look for, Michael? Has that ever happened to you?

Michael: 06:59

It has a few times and and this is where like boring accounting skills and reconciliations come in because it's it's not fun, but it you have to just dump the back test trades and your real trades into a spreadsheet and you've gotta you've gotta line them up and do I did a lot of this back in the hedge fund days, like account as reconciliation stuff. And again, just another great tool for AI is to say, look at these two spreadsheets and kind of spot the differences. And that's where the data will come out. Is it that there are trades just missing? Is it that, the fills are happening at a wrong price?

Michael: 07:35

Is it that there are additional trades? That's I think the first easiest thing to look at is the number of trades on each side. Is one longer than the other and is it a significantly longer than the other? Then you got to look at it because if your trading is significantly longer, that list has more trades in it than your backtest, then you or your system are taking trades that just are phantom trades. They shouldn't have existed and vice versa.

Michael: 08:02

Are you missing trades? So that's like step one is just line them up and see if they're the same and where they break. Right?

Dave: 08:09

Yeah. And if, you know, I've got a process that does this daily, but there's something about looking at it daily that, or there's something about looking at it on a longer term period, that same report, and seeing how much of this is coming from mis trades, how much of this is coming from slippage, how much of this is coming from trades that I'm taking that aren't in the back test. To see those summed up over a long period, all of a sudden you're like, okay, yes, Something's wrong here, and I can fix it. That's really what you're the feeling of horribleness when you're in a drawdown. As soon as you see what's wrong, I mean, the money doesn't come back in your account, but you feel so much better about it because you can come up with a reason.

Michael: 09:01

So much better. I I would assume I don't program, but I assume that if you were coding and you're trying to deal with a bug, that's the feeling you get when you know what the bug is. Even even though you haven't fixed it yet, you're like, okay, I see the problem. And that's just because you know that's 90% of the way there. Right?

Michael: 09:19

Once you once you have identified the problem, then you're like, okay, I not only am I close to a fix, but I have a very obvious path to walk. Right? As soon as I find out, oh, I'm taking trades that my system isn't. You feel better because you're like, okay, the obvious question is where did these trades come from and how do I make sure it lines up a little bit better? But yeah, again, I'd imagine for I know there's probably a lot of coders that listen, that's it's the same feeling of, okay, I've identified the bug.

Michael: 09:47

Now I just got to figure out how to fix it.

Dave: 09:49

Yeah. And it doesn't take many trades to for a real difference to show up in your bottom line. So, you know, I remember I remember a couple of drawdowns where I was doing this analysis, digging deep to figure out, okay, what's going on here? My backtest was looked fine. Okay.

Dave: 10:15

Let's figure out what's going on with my real trades. And there were just you know, maybe I took a 100 trades that month, let's say. Maybe only five were you know, had a discrepancy from the backtest. But those were enough to make a huge dent in my P and L because maybe those were the, you know, the best trades that I was missing for whatever reason. Or I remember one where, I was using a target order and the target, like the market went right up to my target, and I didn't get a fill.

Dave: 10:58

It went right up to the exact cent. So I basically the top tick and I didn't get the fill. That's where the people would put on

Michael: 11:05

their their tinfoil hats about right? Yeah. People being out to get you. But yeah, it it's gonna be a rare event, but it's gonna happen.

Dave: 11:13

It

Michael: 11:13

happens. Assuming you're not like, you know, it's you're trading a stock so liquid that you're the thing that stopped it. Yeah. It's just it's gonna happen. Just random luck sometimes.

Dave: 11:24

Yep. And now when that trade so I remember that trade went back and stopped me out. So in the back test, that was the trade that hit the target. But in my real real trading, I got stopped out. I mean, that's a huge difference.

Dave: 11:37

That was like a five hour difference just in that one trade. So that's a big shortfall. It didn't take too many of those for a big drawdown to happen.

Michael: 11:48

Now, what do you do there? Because, you know, like one obvious answer would just be to lower your target some, but that's there's you have to give some amount of variance between the real world and and the made up one. I just wonder where you would draw that that line. Obviously, it happened once you go, that sucks, dumb luck. But you know, if it happened consistently enough that it's going to be a large enough drawdown, then maybe you do something.

Michael: 12:16

But I would just look at that trade if it happened once or twice and go, you know, win some, you lose some, and just kinda keep slugging on with it.

Dave: 12:24

That's the right attitude to have. You know, when this happens, the right takeaway is, man, my stop is real or my target is really well placed.

Michael: 12:35

Mhmm.

Dave: 12:36

Because it's guaranteed to happen. So the fact that it does happen is really like as as bad as it sucks when you look at it and as frustrating as it can be, it's a good thing when this happens because it means your target's pretty well placed.

Michael: 12:51

Yeah. Because even if it was a penny higher than the back tests in the real world would have lined up perfectly. It was just that it was that exact sent triggered off and you didn't get a fill. And again, assuming you're not right? You're not the one who's, you know, the thing's done 500,000 shares that day and you you were a 100,000 shares on the offer.

Michael: 13:13

Right? There is a world where you were the thing that stopped it, but as long as you're confident that that's not the case, then Yeah. Yeah, I would just look at that and say, well, that sucks. I wish it went 1¢ more,

Dave: 13:23

you know. Yeah. But that, you know, that's a good point that you bring up. That's the kind of thing where you wanna you wanna go look and see, maybe there is a way to adjust this. Like, if you see this happening, you see this as a pattern, go test a different target and see how that would work over a large number of trades.

Dave: 13:39

Not just this one, see how it would work across the entire strategy. These are the kind of things that are good to do in a drawdown just because you're gonna be motivated. Mhmm. And the more of this r and d you can do, the more you understand about your strategy, the the better off you're gonna be. And the more, you know, the the more robust you as a trader are gonna be going forward.

Michael: 14:06

Well, I love how we, without meaning to, always debunk the, like, the systematic or the robot trader just sets up the algorithm and then goes to the beach all day because this is the work that you do. Now, you know, you've given yourself, if you're not the one sitting there hitting the buttons, you've given yourself a lot of flexibility as you you can kinda do it, make your own schedule and and all that kind of fun stuff. But this is this is the work. Right? This is the this is the thing that will separate you from the other traders is just going through these things and, you know, not fun stuff, but comparing fills and and and kinda doing all that.

Michael: 14:45

So, yeah, it ends up being a a good exercise like you mentioned to have some sort of schedule to do so that you could look at that trade and just see, you know, that sucks and then just kind of move on and and know there's nothing to do in that case even though you're in a bit of a drawdown and your your system's not as opposed to frantically trying to figure it out later and wondering why this is the case. Just if it's like with most things, you're just updating a couple lines on a spreadsheet every day. It's way easier than starting the analysis from scratch and and kind of working the whole way through.

Dave: 15:22

Yeah. And even when you dig deep, you find, you do some R and D, you figure out that there is nothing you can do, that still feels better than not having that answer when you're in a drawdown. And the other thing, as you were talking there, if you're not automating your trades, just think of Compare a drawdown as a discretionary trader versus a drawdown as a systematic trader. I mean, how can you like, you don't even have things to grab onto. Like, you don't have a backtest to look at.

Dave: 16:03

You don't you can't do this comparison. There's no real there's limited R and D you can actually do. So this is it's you're in such a better situation when you're and there's so much more data you can dig into when you're trading automatically that there's just your life is gonna be easier when you're in this situation.

Michael: 16:26

Well, yeah. It's it's why I think the trader psychology stuff is hyped up a little bit much because that that's generally what you see and you know, I speak from experience as a reformed discretionary trader. You That's usually where the blame goes is you know, oh, I was off my game or you know, I wasn't seeing things correctly or I wasn't, you know, reading the market or I wasn't in tune with the market or something like that because if you can't put your finger on a a real legitimate thing, you end up putting your finger on whatever it is that you can kinda come up with where Yeah. That's where I think a lot of that comes from. It might have just been that, you know, your your edge is just not there.

Michael: 17:14

It could be a normal drawdown. And and what I have found in drawdowns is more often than not the answer is to do nothing. But unless you have that data, you never know that. And you end up in doing what I think is kind of the the cardinal sin of a lot of especially discretionary traders where they're just system hopping all the time. They do something for a little bit, it works, they they get a natural drawdown, they say, this sucks and then they move on Yeah.

Michael: 17:40

To the next things. But yeah, I just don't know how because you're just dealing, you're you're putting in you've got your system and then you've got your market and how well it does with that system, then you're putting this human in the middle that could be executing correctly, could not, you don't know and you don't have the data to find out and it just becomes a a nightmare.

Dave: 18:01

Yeah. So, you know, when you when you look at the data and you you you know, run all these reports and figure things out, it's just it's it even if even if you don't find the smoking gun, it just feels it's nice to be able to actually do some work that even if you don't find anything that makes you feel like you're doing something and that you're making progress. Because the biggest part of the drawdown, I think, is just, you know, your whole identity is at risk. You're you thought you had this plan and the market's telling you, your plan sucks. You might not even have a plan.

Dave: 18:45

That that's what's going through your head. So the more data you can look at and the more you can try to understand what exactly is going on, the better off you're gonna be.

Michael: 18:54

Yeah. And just, you know, again to have that, you have to have the data and you have to have that one for one kind of relationship with the data. And as systems traders, we do and it's easy. And it's it's even easy if you haven't been doing the right thing. Someone may kind of look at what you said of, I I've been doing this every day for years and go, oh crap.

Michael: 19:17

Well, if you're a systems trader, you have the back tested data and your broker has to know all the trades that you make so they can give you the data as well. And even for people that aren't tech savvy, AIs are great at transforming data. So you could even take a dirty ugly CSV that you know, maybe splits the buys and sells and the could just huck that in and say clean this up for me and away you go. So this process is something that is just way easier now than it's ever been. It should just be if you wanna brute force it, the simplest way would just be grab CSV of both and throw them both in at the same time and say, just reconcile these for me and it will come up with something that will at least get you most of the way there.

Michael: 20:03

And then after that, again, it's just a scheduled task of download from here and download from here and put them together.

Dave: 20:10

Yeah. Now, sometimes what you'll find is you'll go and start doing some research and then realize that you don't have a data point that you need, to answer some question you have. Like for example, slippage. To calculate slippage, you need to know what your orders were and, you know, exactly what time they went in. So there could there's there could be some logging you need to add to your trading app or whatever you're using that would give you that data so that for the next time you'll be able to run that sort of report and see what the slippage is and was over time.

Dave: 20:56

Maybe there's data differences between, I've seen this plenty of times, where there's data differences in the backtest data and the live data. Sometimes you can't just use the backtest because you need to have all the data that was available in live so you can match that up and see, okay, were there discrepancies in data here? Is there something I can do about that? Maybe not, maybe so. But a lot of times this is, you should take stock and figure out, okay, what data can I put in there into my process now so that next time this will be easier and I'll have it at my fingertips, and I can run, you know, create some report now that just makes it very easy for me for the next time?

Michael: 21:45

Yeah. Well, so this is all good, but it assumes that you're just your live trading is changed from your backtest. Right? Your backtest is still good and performing and your live data has just changed or something broke, but you know, now it's time I think for the the harder question of what happens if you're you line them up and they're both the same and the back test just pointing down now. It was pointing up before and it's pointing down now.

Dave: 22:13

Yeah. So I'm curious what you which one of those scenarios do you think is more frustrating?

Michael: 22:21

For me personally, it's when the back test is pointing down because that's not something I can immediately fix. I can't go in and I can't identify the problem because it creates the, I think the hardest part of systematic trading period, which is, is my edge gone or is this just a drawdown that is normal or let's say it's it's deeper than your normal drawdown. Is is this just an abnormal noise drawdown and I should just keep doing the same thing regardless. It just creates a whole bunch of questions that you can't really find answers to. You can do your best estimation and that's about it.

Dave: 23:02

Yeah. I think I don't know. I've I've I've had some really frustrating situations where your the the back test is still looking good. Because then, you know, like, the feeling is, man, if I'd have known this, I could have done something about it. I I, like, shouldn't be in this situation, or I could, might not.

Dave: 23:25

If I'd have known I had enough time, I might not be in this situation. So, yeah, I think they're both super frustrating. But I think I think you're right. The you touched on it exactly that The hardest part of trading is like, maybe you never had an edge to begin with. You were fooling yourself all the time.

Dave: 23:40

Right?

Michael: 23:41

Yeah. Because there there is a world where there's, you know, you've done the back test and it was just even though your best efforts, you weren't, you know, curve fitting, you were there's no look ahead bias, there was there none of the the obvious cardinal sins, but it just it just doesn't work in the real world and it's just, you know, you just can't, you're not gonna so the moment you go live, it's a nice pretty equity curve that's looking up and the moment you go live, it just goes down and it's it's the inability to see what the rest of that graph looks like in real time. It's like, you know, so it's the one question I'm sure you get all the time and the one question I get all the time as as systems traders is when do you know a system is broken and it's it's time to move on? And I if anyone's figured an answer, like, let me know because that's that seems like it's the one thing just left to completely solve and I just I don't think you can. I think it's just all kind of that's where the subjectivity and and all of that kinda leaks its way back into what we do.

Dave: 24:45

Yeah. Well, mean, you hear me talk about path to confidence and, you know, there's a reason that I'll that I'll say, you know, path to knowing, because you're never gonna really know. That's the hardest part of trading. You're never gonna really know. I mean, you're we're predicting the future here is what we're doing.

Dave: 25:01

So you're never gonna actually know that it's gonna work out because you don't, you can't predict the future. So you have to have some faith. No matter how much data you get, you're still gonna have to have faith that, okay, yeah, this is this is I think this is gonna chain continue. I feel confident enough to put money at risk here. So yeah, that's definitely the hardest part.

Dave: 25:26

I think there are some things you can do though to give you confidence in your process. When the when the, you know, the back test is matching your live trading exactly, it's just going down. Like one thing you could do is do some in sample and out of sample testing. So go back, say a year ago, like split up your back testing data a year ago, maybe more, maybe two years ago. Go through your entire optimization process using that data up until two years ago.

Dave: 26:07

And then see how that exact, you know, the outcome of that would have worked over the past two years of data. That, so that would be out of sample. And you know, I, I tell people often ask me about in sample and out of sample testing. I don't do a ton of it, but it is very important for this kind of thing. Like, it's not gonna be, a magic bullet that, you know, helps you define your edge, but it can it can it can give you some confidence in your process that what you're doing is gonna work because it's it's essentially what you're doing now.

Dave: 26:45

Like, you come up with a strategy and you take all the data up until now and you start trading it now. So you're sort of simulating that by saying, okay, let me pretend that it's two years ago and go through that same process, see how it would have performed over the last two years. That's a way to, in this specific situation, see how often that's happened, what your process ends up doing out of sample, and that can help.

Michael: 27:20

Oh, absolutely. And but it all it to me, it all boils down to the question, has something changed? And that's where that's where I think a deep understanding of your particular system and what it's looking for could it like it's paramount. You have to know what edge it is that you think you're exploiting out there And and then whether or not that edge has meaningfully actually changed or whether or not it's just something that's, you know, there's just something that that's random noise. And I think it's it's understanding and this is why I think people that are just math people and have never really studied markets are end up not being good at this because they're not looking for like a behavioral edge or something that you know makes sense in the market.

Michael: 28:15

They're just kind of throwing numbers at it. So if you can look at it and you could say, for example, you know, I'm reading through the new Market Wizards book that just came out. Right? I'm on chapter five. Every single one of them started by shorting low float penny stocks.

Michael: 28:31

Every single one, all five. These guys have turned like, you know, $50 into a 100,000,000 and and like some of these crazy people. And then they all at the same time said, yeah. And then everybody started doing it and and we know the edge kind of evaporated and borrow fees increase. And it's just interesting because you know he's interviewing all of these top traders individually and they all just got to the point where the edge was was saturated.

Michael: 28:56

So I could I could see that, you know, especially if you were reading that and you were doing that particular style of trading and you noticed that it wasn't working like it it was. You could look at that and say, that is something that has fundamentally changed in the market where this particular trading style has gotten so popular that the edge has been sucked out of it a bit. How do you do that for every system? I don't know. But there you know, there are ways that you can think of and you can look at and you can say, you know, this edge is is lessened or gone now and I have to just move on versus, right, this is something that I can tweak or play with or or whatever and it again, it's just it's like an excruciatingly hard question.

Michael: 29:39

I just wanna, you know, get that to people so that they know that it's it's not easy. Right? If you're sitting there saying is, you know, is my system broken or is it just going through a drawdown? I don't know. I I Right?

Michael: 29:53

There's no way to ever know. You just have to kind of for me, it's it all comes back to that question. Is the edge gone? Has the edge changed? Has something fundamentally shifted in the market that makes it that this isn't working or is it just not working right now?

Dave: 30:10

Yeah. I mean, I would it's always good to get, look back at the equity curve and you know, the longer your back test is, the smaller those former drawdowns are gonna appear to be. But a lot of those were very painful. Were were you trading them in real time?

Michael: 30:31

Yep.

Dave: 30:32

And hopefully, probably, as you continue trading it, that drawdown is gonna you know, you're gonna eventually come get to new equity highs, and that drawdown is just gonna look like another little blip on your equity curve.

Michael: 30:48

But in only in the moment, if you're able to, like you talked about, have the confidence to keep going. Like I would love to do and there'd be no way to do it. I'd love to do a study of of like systems left behind and just and you you see the chart and it was probably left behind when the the dip was at its lowest and then run what would have happened from that moment on and and see them, you know, probably recover and and go back up. But the person just did not have the the confidence to end up, you know, dealing with that that drawdown, which I guess leads me to a question that I get all the time. I'll be interested to hear your opinion on where some people are like, should I just start to trade them smaller when they're in a drawdown?

Michael: 31:36

Should I reduce allocation to, you know, the thing that I'm most worried about and then increase allocation maybe to other strategies I have that are performing well at the time? Or is that doing it backwards? You know, are you are you always just sizing up when the thing's doing well so that when it comes down, you're hit harder and then you're sizing down on the thing that's doing poorly so that when it recovers, you're recovering slowly.

Dave: 32:03

Yeah.

Michael: 32:04

And how do you approach I

Dave: 32:06

think you have to size down during a drawdown, or have some plan for eventually sizing down. Maybe don't do it immediately, but you gotta have some plan, otherwise you're gonna just make it deeper. So and that's another good point that you should have a plan for that ahead of time. You shouldn't be coming up with just like your you know, people make trades and they come up with the plan during the trade, like they don't really have a plan.

Michael: 32:39

I used to I used to have a rule as a discretionary trader. If I've ever found myself like googling what the company did, I had to get out immediately because that was always like, oh, know, you're down 20%. Let me see or you know, is is a new drug coming out or are they doing and yeah, you're trying to like rationalize post hoc rationalization of why you're in in the position. It's like

Dave: 33:00

Yeah. Maybe I could investment. Right?

Michael: 33:03

Yeah. It's it's never the good day trades you wanna turn into investment. It's always the shitty ones that you wanna turn into investments.

Dave: 33:12

Yeah. So, so so one other thing that came to mind as we were talking here, sometimes, you know, it's really important to go back and see, have you made recent changes to your strategy? I have had situations where I've sort of gotten myself into a pickle because I made a change, like, pretty recently, but not real recently. And I'm at a drawdown, and then I can't really remember when I made the change. So I'm not really sure if it if I if the drawdown is a result of this new tweak I made.

Dave: 33:55

Like if I hadn't made the tweak, would I be still be in the drawdown? So it's it's really important, especially as systematic traders, that you have your, like, change management, version control down pats so you can go back and see exactly when you made the change, what it was, why you made the change, what were you seeing in the data? Did you run a Cruncher report and it caused you to make this change, why did you do it, exactly what data were you looking at. So all that stuff is super important. And, you know, we haven't mentioned GitHub in a while, but it's one of the first things I teach traders that I coach is how to use GitHub well.

Dave: 34:36

Because if you if you don't do it well, you can get yourself in a pickle and really cause some very uncomfortable situations for yourself if you don't have good change management and good version control with your, with your code for this.

Michael: 34:51

Yeah, you'd be shocked how many times the change that you made corresponds with the the equity high or close to it and you just have forgotten. Just been long enough that you've just forgotten what change you made and and and kind of why you made it. Another good problem to have because you could go back and just see, but having those different versions is is good too. Again, I need to learn GitHub because Dave would just be mortified by the way that I do this. Literally just naming the file different a different name.

Michael: 35:25

So I've got

Dave: 35:26

Don't give me story, Michael. Don't don't don't tell me. Don't

Michael: 35:29

tell Like this this file is named this specific date with like something that I changed. Yeah. So anyway, one of these days, I'll be able to get to that. An AI version of GitHub, there we go, and solve it all. But yeah, that it's I've done that a few times where I've I've gone through and I'm like, oh yeah, I made a change to this like three months ago and this particular strategy has has had a hard time since then.

Michael: 35:54

Let me go take a look. And then when I go back to the old file and I run that back desk, I'm like, well, this is doing great now. I shouldn't have messed with it. And as annoying as it is, it actually I kind of like it because at the very least you knew whatever direction you push the strategy in didn't work. So it opens up a whole bunch of questions about why and is pushing it in the opposite way gonna make it better?

Michael: 36:23

Did you you loosen it up to let in more trades thinking that you know you're exploiting the edge more often and you're making more money and did that degrade performance? Well, if it did, why don't I go the other way with it and try to tighten it up even more and then maybe I'm utilizing less buying power and making more money. Sometimes these failures, which I think every time you're in a drawdown or every time you mess something like this up or do something, you should look at it as like an opportunity because you have learned something, your process should get better because of it, you should be a better, you know, systems trader because of that it happened. Hard to do in the time, but you know, when your equity gets back to all time highs, maybe give yourself a little bit of pat on the back that you've learned some things and done the right way. And I think, you know, anyone can, especially as we're recording this, we're in a pretty rampant bull market like things are are going pretty nuts.

Michael: 37:18

It is kind of easy to make a lot of money now. The question is when the people who are able to stick through and and learn during the harder periods, I think is the same thing and it's the same thing with the kind of equity curves is that I'm more impressed with somebody who, I don't know, maybe made turned their 100 k account into 200 k account and then lost 50 k and then we're able to make it back than someone who just their equity kind of went in a straight line because you you wonder how much of that is just you've lined up a strategy or or investments or whatever with just really good timing versus digging your way out. I think makes you a much more kind of seasoned and interesting trader because it meant you went through the shitty time and you were able to figure your way back out. To me, that's just way more impressive.

Dave: 38:15

Yeah. Well, drawdowns are the thing you're gonna look back and remember years from now. It's not going to be, you know, every month you were at equity highs and things are going great. I mean, you'll remember the good years, but you'll remember the drawdowns even more and more vividly just because how painful it is. And you know, you wanna be able to look back on your equity curve and, you know, if somebody else looks your at your equity curve, they would look at the drawdowns and think the drawdowns caused the new highs.

Dave: 38:51

And in some sense, they did. You will change as a trader as you go through the drawdowns. You'll become better. Your process will become better. Your strategies will become better.

Dave: 39:01

You'll figure out ways to make these shallower in the future. And that's what that that's how traders grow. But when it's happening, it it really sucks, but they are like you said, they're really good learning opportunities. And I mean, as you were talking there, I was like, yeah, you know, Drawdowns are good for you, is basically the message you were saying.

Michael: 39:22

Yeah.

Dave: 39:23

And you that's probably true, but it really takes an optimistic person to be able to handle it that way. And it's just really hard to do. I mean, I hear from traders all the time. Traders have been trading years, very, very successful traders that they're like a different person when they're in a drawdown. They're just it's it's a it's a feeling that can take over you and and you just don't make rational decisions.

Michael: 39:56

Yep.

Dave: 39:56

So you have to have a plan, you know, take you know, I don't like, you know, taking notes about how you're feeling during trades, but this might be a good time to actually do some journaling, like some real, journaling when you're in a drawdown because it is a completely different mindset and there's a lot of psychology there about what's going on and you could probably learn from that.

Michael: 40:24

Well, yeah, go back to the next time you're in a drawdown. So, oh, now I now that I'm reading this, I remember how shitty I felt and Yeah. You know, the the solution was just to to get to work and and deal with that and deal with that anyway, and that's you know, we don't get personal too much on the podcast, but I'll I'll leave it with this. You know, we're talking about equity drawdowns, but, you know, there was what you were saying reminded me of when I called you and said, yeah, they shit canned me from trade ideas. And

Dave: 40:56

What did I say?

Michael: 40:56

Your response was good. And I I I was not your biggest fan at that moment.

Dave: 41:02

It was it was actually it was more than just good, I think.

Michael: 41:05

Yeah. Well, what do how do you remember it?

Dave: 41:07

It was congratulations.

Michael: 41:09

Yes. Congratulate I I I gotta say, was not you're you're not in my top 10 humans at that moment. Because you you want someone and this is, you know, to bring it back to the market, you want someone to come along and say, well, no, there's another job right here for you, everything's fine, you're gonna make double the money and everything's gonna be great and and whatever. And that was year and a two years ago? Probably two years ago now.

Michael: 41:35

And business at all time highs, equities, shared with Dave is at all time highs, a pretty big milestone recently there as well. And, you you know, it it it sucked at the time. Like, Like, I've you know, my daughter's like six months and I'm like, Jesus Christ, how am I how am I gonna, you know, pay for everything and keep everything going? The market was in a bear market at the time too. So, right, especially for my longer term trading was was not fun.

Michael: 42:05

And but, you know, the solution was just to sulk about it for for a week or two and then, you know, get up and and start doing the work and then just like everything else, like we talked about looking back at your equity curve and seeing that as a minor dip. That was like a minor dip in my my life's curve and now things are are better than ever. So, yeah, just just it's the same, know, trading mirrors life and and kinda vice versa. But don't worry, you're you're back on you're back on the good list, Dave. In that In that moment, you you definitely were not, but you listen, I I give I give I think I give Dave some props every now and then.

Michael: 42:44

You're right about the podcast going on way longer than I thought and you were right about that too. Ended up being like one of the best things that happened to me.

Dave: 42:51

Yeah. It's That's a great analogy to being in a drawdown. Because your minds I could tell that your mindset was not you were not in a rational mindset. You felt like your whole world is crashing down. It's a very similar mindset to being in a Drawdown.

Dave: 43:08

So Mhmm. Yeah. It's with with time and perspective, you you you do get a better perspective about things. But, yeah, it's and it's good to, you know, communicate and open up with other people about it.

Michael: 43:26

Yeah. Well, and again, I I called remember called you. Well, I think we're and we're having the podcast and I called you and I called Sean, buddy of ours as well. And this is the same thing, you know, expecting him to go, oh, well here, know, I'll call this guy and I'll get you a job and everything's good. And again, looking back, that would have probably been a bad thing that because I'd just be sitting in, you know, another another job somewhere as opposed to doing my own thing, which all the benefits that come from that.

Michael: 43:53

So, yeah, it's the same. It's the whole, you know, I think to summarize it's I think it's like a Buddhist thing. It's just this too shall pass. Every time you're you're killing it and you feel like every trade that your your robot puts on is doing fantastic and and you're just making money hand over fist, you gotta say that to yourself, like this too shall pass. There will be a drawdown.

Michael: 44:14

Yeah. Right? The the good times will not last forever and then the same thing when you're in the depths of the drawdown. You just kinda tell yourself, as long as I keep working and I keep doing the right things and I kinda keep my head on straight, eventually I'll look back and said, that sucked but I'm glad I'm over it now and that that will pass too.

Dave: 44:31

Yeah, it's a that's it's it's easy to say now with the things in hindsight, it's hard in the moment. But yeah, you're totally right. I mean, and like I said, trading is for optimists, and I really think that's true. And because there's gonna be situations where you don't wanna be optimistic or you're gonna it's gonna be hard to see the bright side of situations, and and you're gonna need to.

Michael: 44:59

Yeah. Well, have to have a especially if you haven't been profitable before, I think you have to have a kind of weird unfounded belief that you're just gonna learn how to to to make money doing this. Right? Where you you don't have the evidence. If you've been profitable before, can go back and say, I did it before, I can do it again.

Michael: 45:22

If you're just starting, you just have to have that kind of unhindered optimist and it might just be, if other people can figure it out, I can figure it out too. But you just have to have that, mentality of, I'm going I'm going to make this work because you're just kind of walking into minefield blind and just kind of hoping that you get out the other side okay. And then when you look back, you go, okay, well now I know how to walk through a minefield anyway, but that first time is really really hard.

Dave: 45:51

Yeah. For sure. Sure.

Michael: 45:53

Alright. Well, that was a good chat on Drawdown's. I am sure this will be a topic to be revisited at some point because it's just a mainstay of our existence. But as always, I'm Michael Nauss.

Dave: 46:05

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