When is your Strategy Good Enough?
Okay, everyone. Welcome back to another episode of Line Your Own Pockets. In this part, which is part three of this little mini series that we're doing, we're gonna teach you guys about, how we know a strategy is getting ready in order to kinda move to the next step. Talked a little bit, I think, in prior ones about getting caught in back test world just a little bit, and this is gonna be how do you get out of that. So you you're going through your back test, you've kind of figured out, okay, this is strategy that I think has edge, I've done all my testing, but when are you when are you done massaging it?
Michael:You know, we talked about columns. When the columns, you can add in, you can start to massage the data. But when you just launch it live? So, Dave, why don't you get us started with just some some things that people can look forward to get know when they're ready to go.
Dave:Yeah. I think a lot of traders get stuck here. I've talked to some traders that they never get beyond this point. There's a little bit of perfection involved where they feel like they should be doing a little bit more. It could be a little bit better.
Dave:But I think a good way to think about it is sort of what you alluded to there. There's several stages of a strategy, steps to go as it progresses in maturity from the original idea all the way to trading it with full size. And there's a lot of stages there. And the stage we're talking about here is kind of early in that process, where a lot of traders, when they're new to this, they think this is the last step, right? Yeah.
Dave:They think they're done after they come up with a strategy, and then they trade it live. So I think it's helpful when you get stuck. Okay, is this strategy good enough? Maybe I could make it more perfect. Just realize that you're on the first steps of this journey.
Dave:And as soon as you get the thing live, you're going to learn a whole lot more that you aren't even exposed to now. And that that's that's really where the real learning happens and how you can start to begin to gain the confidence to trade something with size.
Michael:Yeah. And I I think the reason that traders generally get stopped, I think you you hit the nail on the head there within the back test is the discretionary is the they're used to being discretionary traders where every trade is generally, I think, a little bit more impactful if you're a discretionary trader, both mentally and capital wise. But when you're a systematic trader, it's, I think, way more important to take your idea live as quickly as possible. I would even argue even if it's small. Because like you mentioned, not only do you learn a lot, but there's a a kind of a break that can happen there where a lot of people don't really think of it.
Michael:I'm always looking for where can my strategy just kind of implode. Like, where where can I think I'm onto something and then realize I'm not? And some of that can happen in the back testing process, you know, robustness testing of filters and things like that. But really, the the the real at the end of the day, what we're looking for is when we go live, does it just fall apart? Because it's better to learn that now even though it's gonna probably cost you a little bit of money, and we'll talk about sizing and things like that.
Michael:It's better to learn that now than to spend hundreds of hours on this thing in backtest world and then you take it live and you realize fills are unreasonable or slippage is a problem or something like that where you're you're just wasting so much time. So I'm one of those where I probably go live. I don't know. May maybe maybe you I'd love to say you probably go live too fast, but maybe you won't agree with that. But I try to go as live as quickly as I can, just not full tilt, right, to smaller to get started with.
Dave:Yeah. I think as an experienced trader, that's good and that's kind of the norm. That's what you want to get to. I think when you're not an experienced trader, you do that too quickly. So I think it's important to take baby steps if you're a beginner.
Dave:And then as you become more comfortable with that, you know where the potholes are going to be. Know what could go wrong. And you can plan ahead of time so that you know to avoid those before you go live.
Michael:Well, let's go through that's probably the the best place to go next. Let's go through those baby steps. So let's say you're a brand new trader, you've done your first backtest. You've probably if you're a new trader and you've done your backtest, you probably spent a little too much time backtesting, but you you have something that you think is, getting good. Now let's just stay in kind of the backtesting world from there.
Michael:What is the the trigger that you say, okay, this is the thing that should push a new trader into trading, and then we'll talk about maybe all the different steps to then, you know, get to get to a full size trade from there?
Dave:Yeah. Well, I've talked a lot about on my newsletter about looking at the equity curves as you're creating a strategy, because that's really it tells a complete story about what it's going to feel like when you trade it. I mean, trader that's ever quit, quit during a drawdown. Right?
Michael:You don't quit when you're making new equity highs every day.
Dave:Right? Yeah. And that equity curve is telling a story. It's giving you a glimpse into what it's going to feel like in those dips. Great traders have the confidence to trade through drawdowns.
Dave:And that doesn't come quickly. That doesn't come easily. But it does come from doing the work before you go live, making decisions about the strategy before you go live to finalize it and come up with a final version that you think is tradable and that you have confidence in. Because that's where your confidence is going to be the absolute lowest is when you are in a drawdown and you're trying to decide whether, okay, did this thing just fall apart or is it going to come back? I have no real idea.
Dave:If you don't have an idea or if you get caught by surprise by a drawdown, there's something in your development process of the strategy that's lacking. You need to be able to anticipate that and understand what's going happen and know what it's going to feel like when you get to that point where going to feel like quitting or abandoning the strategy.
Michael:Let's go let's go one level deeper there because a 100% agree with all that, and we've talked about the importance of the equity curve and that that that that's gonna tell you what your real experience is roughly gonna be like. Right? How deep are the drawdowns? How long are the drawdowns? All that kind of stuff.
Michael:But I think a lot of traders get stuck in the area where they are always they're always trying to make it better. Right? So they they have a curve, an equity curve, and they're like, okay, there's my equity curve. That's, you know, that's good to go. But what if I add one more filter or maybe what if I tweak a filter value or what if I do a, at what point, say you're, like, watching over someone's shoulder, would you, like, slap their hand off the keyboard and say, enough.
Michael:It's time to to graduate this thing to live. Like because there's always, like, on the edges you can do. If we're if we're talking about how smooth an equity curve is, there's probably always a way to get it a little tiny bit more smoother at the sacrifice of trades or a risk of curve fitting or or one of the drawdowns. But, you know, it's kinda looking for what is the point where you just go enough. Just just take it.
Michael:Just trade it. It's good. Get to work.
Dave:Yeah. I think you get to the point where you do more optimizations and there's not much improvement or the trade offs are getting slider or when you to make another big improvement, you're going to have to eliminate a whole bunch of trades from the strategy. I think it just comes with time and experience that you recognize when that point is. Do think that that's actually the, probably the better problem to have is you're being too careful. Yeah.
Dave:And you're not going live first. The worst problem is you're going live too quickly and that's way more common. And I see a lot of traders that go live too quickly, didn't realize something that would be pretty obvious to a more experienced trader, and would be obvious if they even paper traded it first, instead of just going from the backtest to trading live. There's a lot of tuition. So, I mean, the points in my career where I've paid tuition, it's because I went live too early with a strategy.
Dave:Too confident with the strategy to to go live with it.
Michael:And I think that naturally leads us into kind of the next step, right? You hit on it there and I totally agree with paper trading. If you are to the point where you have built the backtest and you're happy with the backtest, but you're still stare terrified to risk real money with it, I think that's for me anyway, and then get your feedback on it, that's the good middle ground. It's just take it and put it in a paper trader. Right?
Michael:Understand that a paper trader is not ever going to be a perfect facsimile of what will happen in the real market, but it's kind of your your bridge. Right? You talk about your path to confidence. You go from your back test, you've refined it, you've gotten to the point where Dave just mentioned where you're making tweaks and they're not doing too much anymore. Right?
Michael:Maybe it's like, you know, half a percent better year over year return or you've cut the back straw down by a half percent or something, kind of insignificant. And but you're still terrified to go live. Again, that to me is always baby step one, is just put in a paper trader and just watch it and and see and then do that that backwards reconciliation to say, this is what the paper trader did, this is what the back duster did, and then and then let me go from there.
Dave:Yeah. I mean, the better your process is at, keeping track of your trades, keeping it in a journal, comparing to the back test, the more quickly you should go live. I mean, there's a lot of steps there that should be in place and that if they're not in place, you'll realize soon should be. But yeah, it's it's people go live too quickly and you know, another question that I get a lot of times is how good should my strategy be according to some metric before I go live? People ask me, Okay, what's the number?
Dave:And I've always resisted to say a number because it doesn't really matter what my number is compared to what your number is. Like, you shouldn't be comparing yourself to other traders. It should be about what you like, none, nothing that any other trader does affects what you do. And you should hold yourself to your own standard because as soon as you start looking at what other people do, it's sort of messed with your head and it's not useful, it's not productive. So I think you just compare it to what you've traded before.
Dave:Is it better than what you've traded before?
Michael:No. And
Dave:if it is, then go live with it.
Michael:I love that because it's not a point in time. It's a process. Like, we pretty much every episode, we talk about the importance of trading multiple strategies. Right? Strategy one, the way I ship I I think about it is that's your your, like, in development.
Michael:That's your minimum viable product. Right? That's to get you in, that's to get you out, that's to get you moving, it's to get potentially some income or or profits coming in. Just get there and just start doing it even if it's kind of imperfect because as you mentioned, you'll learn so much along the way because you're never done. Right?
Michael:You're gonna go and you're either gonna refine the strategy or you're gonna build strategy too. So I'm I'm a 100% with you there when they say, oh, you know, my strategy makes x. Is that good enough? I'm like, if it's good enough for you, it's it's good enough. Are you are you and then also, what are you doing currently?
Michael:Like, you said your own trading, but I know a lot of people out there that have that I was talking to and and mentoring. They just have a bunch of cash sitting there waiting for a trading strategy to kick in. I'm like, okay. So any return over zero is is better than what's currently happening. So get to that point, and then you'll learn so much along the way that when you go back, you'll go through it.
Michael:It's it's I think people something that freezes people up is they think it's like a point in time of is the strategy live or not? And it's not. It's like a continuum. You're you're live on this strategy. Yeah.
Michael:You're not done.
Dave:Right. Sure. And it's not that you're not even done. It's that you haven't even learned what you can do to lever the strategy up big time and make a lot of money with it. That that's not gonna happen at that point.
Dave:It's gonna happen when you trade it live, pro sometimes for months or more and something dawns on you that you could say, okay, wow. Okay. In this situation, I can make my tie and my stop a lot tighter. I can lever up a lot. I can use much larger position size with a small amount of risk and do that time and time again.
Dave:You're going to start recognizing things, but you only get to that point when you're trading live. So all the improvement comes or the vast majority of the improvement comes later, and that's what traders need to understand. You're not at the end, you're at the beginning.
Michael:We've got to the paper trading. You've get pushed out of and I'm again, I I think I move a little bit faster where if I have anything that's even remotely interesting, I am in paper trading it or or trading it with a very small amount of money, which I would almost classify the same very quickly. And I guess we can use an example recently that, you know, I've talked about on my YouTube channel, I actually even showed you where I built a backtest and I was just shocked on how well it worked as quickly as it did. And I didn't trust it. And I actually I took the code and I went to every single AI that I know and said, what's wrong?
Michael:Am I is there a look ahead bias? Is that, you know, is there something going on? It wasn't so good that it was obviously broken. Right? It wasn't just a straight you make money on a every trade, you make money every month, every year.
Michael:There was, one down year in the back test. But it was it was smooth enough that it it got me interested. So not really what we're talking about with new traders, but the same kind of thing where I built the backtest, I was instantly happy with it, but I didn't trust it. So step one for me was just right away paper trade or in this case, what I did was instead of, you know, say took $10,000, you're supposed to allocate on every position. I did a thousand, and I'm just gonna trade that for a couple months and do that reconciliation back.
Michael:When the person's done paper trading, how much I think is the bare minimum of capital that you would kinda suggest them go through before they start to like, if you put in $10 in it, it's probably not that realistic, but I'd say it's still better than the paper trader. Would you agree there?
Dave:Oh, it's definitely better than paper trader. I've got traders that multiple traders that I work with, they will spend a good amount of time trading one share through a strategy
Michael:Yeah.
Dave:Just for the purposes of gathering data, just so they have to go through the process of keeping a journal with it, of following up, doing the back test, having it in there. There's something fundamentally different about even trading a single share compared to paper trading that really kind of piques your interest and makes you involved. So, yeah, that that's totally acceptable. And that that you're gonna learn a lot even even doing that.
Michael:I yeah. Very much. And that's why for me, personally, I'm not saying everyone, especially if you're not very confident, you don't necessarily have to skip the paper trader. But for me, the reason I went to small dollar amount instead of the paper trader was just that, is I wanna find out very quickly if the problem with the system is fill based. Right?
Michael:Is it because again, I'm always looking at this kind of with the scientific method of my goal is to break this thing. I've built this. I've had this hypothesis. I've built this back test. My goal is to attempt to break it in the best way that I can.
Michael:There's probably some correlations to development work there as well. And if I can't figure out how to break it, then it's it's probably a good strategy. So, yeah, I think that's the next logical step is yeah. I I like a single share or a very low dollar amount. You're putting a thousand dollars.
Michael:Because then if you if you're putting a thousand dollars on every every trade, that's the amount that you're buying in each position. If it goes to zero, somehow, the company goes to zero the second you bought in. It's
Dave:not
Michael:fun, but, you know, it's it's not that big of a deal.
Dave:Yeah. I mean, the point of that's that step is not to make money. The the point is not to make money at that point. It's to learn how way more about your strategy than you were in backtest world.
Michael:Mhmm.
Dave:And you can do that with very, very, very small size. And so that's the goal in the end. Do it as cheaply as you can. There's nothing wrong with that. So so it reminds me, Michael, have you ever heard of a premortem?
Dave:No. This is a concept that I learned
Michael:from Postmortem.
Dave:But yeah. This is the concept that I learned from the book Quit by Annie Duke. Mhmm. If there's anybody any listener that happens to know Annie Duke, I've tried to get her on the podcast a couple times. She's blown me off a bit.
Dave:But if anybody knows her, please put in a good word. It'd great to have her on. I know there's some poker players that listen to the podcast. So if anybody knows her, put in a good word. The So this is where I learned this.
Michael:Wait. Is this is this the same? Because I did I think I listened to a book first. It was like thinking in bets or something. Is that the same?
Michael:Okay.
Dave:This is her follow-up book to that called quit.
Michael:And I know what I'm reading next, though.
Dave:So might know the concept of a postmortem. So just to describe that, I was the CTO of Trade Ideas for many years. We would do postmortems when there's an outage. So when there's an outage, you want to go back and say, okay, what happened here? What caused the outage?
Dave:Were we notified quickly enough that there was an outage? What happened? What sort of processes can we put in place to prevent the outage from ever happening again?
Michael:Yep.
Dave:If, you know, could we have known about it sooner? Do we have the right alerting in place? So there's all sorts of things that you can do to figure out how to get better. And that process is called a postmortem. And the important thing that I implemented there was it needed to be a blameless postmortem.
Dave:So oftentimes, it could go down to somebody doing something wrong, right? And you want to create an environment where the goal is not to hide that, but it's to present that. And so the way to do that is make sure you have blameless postmortems where the thing to blame is the process. The process failed here. Everybody is involved in the process.
Dave:And how can we improve the process to get better? So the interesting thing was Andy Duke in Quip described the process of a pre mortem. And that's sort of what you were describing there. Like before you put the strategy in place, brainstorm, try to figure out, okay, if this thing is going to fail, how is it going to fail? Let me see if I can guess how it's going to fail now.
Dave:Or if it's going to succeed, the other term she called it was a pre parade. If it's going to succeed, how is it going to succeed? So a lot of times you can figure that out ahead of time, like anticipate what the failure point might be and do some more research now to determine that before you put money at risk. And that can really help you go from backtest world to live trading much faster.
Michael:I I like that. And it it the you know, again, you mentioned trade ideas. Part of the thing that I did over there too is I would get the early versions and say, you're beat on them. And that was kind of the way it was was described, and I think that's the same thing is that you're trying to before it matters, you're trying to have the thing break. It would be better, you know, your one chair example, if you're if you quickly go from back test to the real world as quick as you as you can without, you know, doing anything, you know, not skipping any important steps, and then you you try at one chair and you're trying to break it then, and then if it can't, then it's that path to confidence you you talk about.
Michael:And then when it comes to scaling up the strategy, which I guess is the last part of of taking it live, is that a I know for me what it is, but are you looking for profits at that strategy or are you looking for more of a close reconciliation back to the backtest? Like, what are you looking to see with that one share that's gonna make give you the confidence of, you know, applying more and more of your account kinda incrementally over time?
Dave:Sure. So becoming confident in strategy once it starts trading live, the the the quickest way to do that is to reconcile it with the back test. You can look at a backtest and compare the fills. It's kind of hard work, right? You've got to look at every fill to see where the slippage is, see where the missed trades were.
Dave:I've got a report that I put a lot of work into to do that reconciliation automatically, so I see that and I know exactly what I'm looking for there. You can very quickly extrapolate from that reconciliation process to figure out, Okay, this strategy is working or this strategy is not working. I need to put some more work into it. So it's a very quick path to do it and it saves a lot of time. But there is a good bit of plumbing you have to set up.
Dave:And if that's not set up, then it is a tedious process to do it. But it's really it's well worth doing because you're gonna use that same process over and over over the years.
Michael:Well, and You're you're gonna use probably the same the same if your broker is the same and your back testing engine is the same, then this is one of those things we talk about all the time that is is front loaded work. Right? You're it's it's a lot of work now. Again, I keep laughing because we keep giving people homework, but that makes just perfect sense because you you want to be able to do that now. I think another way to do it is if your broker or your back tester doesn't have the best reporting, then you can use something like a journaling software.
Michael:Sometimes, we'll automatically upload trades and then maybe an export from that. And like a recent video that we just put out, this is perfect for AI. I I'm actually so I am a a an f tier coder, but at one point in my life, I was like b plus, a tier, excel person, and I still don't. I I use the AI now for build me a formula to do this or build me a spreadsheet. Here's one data point.
Michael:Here's another data point. I actually have a process every morning where for my service, I export from the back tester all of the the levels that, something's interesting at. I have gotten lazy and I haven't even built a spreadsheet to, build those altogether. I just have an AI thread, and I just dump the file in it every morning. It does it for it.
Michael:So, yeah, there's definitely it's one of those things that it's hugely important and, you know, in the world of AI, there should be no you you should I haven't tried it, but now I want to. Or you should be able to take your broker export and take your back tester export and just upload both of those and say, hey, you know, compare the slippage to this and see see what it fits back at you.
Dave:Yeah. So the better way or what I would do there is I wouldn't wanna have to upload it every time, but what what I would say is, okay. Here's the two formats. Write me a Python script that does the reconciliation that's easy to follow, I can edit from that point forward. And then you don't have to use the AI every time you do it.
Dave:And it's sort of like a reference that you can improve. So yeah, I was just thinking as you were talking, I'm not sure if AI is more valuable for you or more valuable for me. Like you're not a developer. I've been a developer for a long time. They're both very valuable to us in different ways.
Dave:It's pretty interesting to think about. I'm not sure because it's you a lot more powerful. It's made me a lot more powerful too. I'm not sure.
Michael:I could not be doing what I'm doing now. If if the snap the finger and the AI is gone, it sets me back six months plus in in what I'm I use it again, it's it's the first thing that I open up on my computer every morning. It's now part of my process throughout. Like, in that Excel thing, it's one of those I'm I've just been lazy on. I should, in that same thread type, I don't want you to do this anymore.
Michael:Right? Write a Excel thing because it's it's basically just combining lines, and I know there's probably easy way to do that with a pivot table, in Excel, but yeah, it's just gotten to the point, but it's it's huge when it comes to this reconciliation, which is kind of what we're going over and why it's so important, is because you can or if you're really good at Excel yourself, build the Excel and have it check for you because that to me is the point that now we can start to size up. Right? So you've got your one share trade going, and you're you're comparing those and things start lining up. What is the path to sizing up from you there?
Michael:Is it instantly going from one chair to full size, or are you taking what you want to trade and, like, parsing it up? What is it that you're you're doing there?
Dave:I think we've had an episode on this where we've talked about scaling up. And the way I always tell people to do it is create a game for yourself where you have an equity curve of live trading for this specific strategy. And your goal, as you size up, is to never have that line go below zero. So if you size up too quickly and have just a normal loss, you could very easily go below zero. So the goal is keep that line above zero no matter what.
Dave:So that means you're probably gonna be sizing up slower than a lot of lot of traders that I see end up doing.
Michael:Yeah. And I think in that episode, my my response to that too was the boiling the frog alive analogy. Right? So I I scale very frequently, but very, very small. Right?
Michael:So I would rather Yeah. Like, I'd rather every day or every week, you tick it up a little bit than to wait a month and then pop it up a huge. And that's, I think, a better way to do it. And it could be, you know, a percentage of your account. It could be, you know, there's a lot of different ways to do this.
Michael:I know, like the Kelly Criterion we talked about and things like that. And that scaling, again, yeah, I think it should be so much, not only just from a dollar benefit, but from a psychological benefit. If you go, you know, say your average loss is $50 on a trade. If that goes from 50 to 500, psychologically, that's hard. If it goes from 50 to 55 to 60 to by the time you know it, you're at 500 anyway, but you've just kind of dealt with every step on the way up mentally that I think it's easier to go.
Michael:So I think it does both of those those things pretty well.
Dave:Yeah. I think it's it's always good to think about longer term, bigger picture stuff. So like what kind of trader do I want to be in a year? And how do I get there? What would I do today, this week, this month to get to that point?
Dave:A lot of traders are like, Okay, what size do I want to trade tomorrow? I just crushed it today with the strategy. I'm ready to size up. Well, you need to think, Okay, I want to size up with a strategy. Let me take a step back.
Dave:What's the best plan to do that? Maybe I set a goal for at two months from now, I want to be at size X with this strategy. How do I get there in a manageable way that's not gonna make that equity curve go below zero? How can I do this responsibly in a way that is gonna keep me in the game for the long run and do it in a way that I can learn from the process?
Michael:So the the last thing I think we gotta hit here is that so we've kind of done already to summarize the path of everything going well. Right? You back test, and as soon as you get to the point where every change is incremental and not doing it too much, you try to go either paper trading or trade it small and then slowly kind of increase from there. That's your way out of backtest world. At what say something breaks somewhere along the process.
Michael:How far back do you go? Right? So say your one share test fails. Right? Is that a complete scrap of everything?
Michael:Do you think have you come across times where in backtest world, it works perfect? In the real world, there's enough slippage that it's it's it's making it from a profitable strategy to barely profitable to unprofitable. Do you look to fix that or is it just kind of abandon all hope and and start again?
Dave:Sure. There's so many ways you can fix a strategy when you get to that point. I've seen a lot of traders give up on strategies too soon. I've worked with some really good traders that they've got dozens of strategies that they've just abandoned because they, quote unquote, don't work anymore. And I've been able to look at it and get them back online.
Dave:People give up on strategies too soon. I've seen it time and time again. There's just so many ways to improve a strategy once you get it to that point. And yeah, people give up on them too soon. If the fills are not good enough, look at your entry order, see if there's a way you can fix your entry order to get more of those fills.
Dave:Look at time and sales. If you've not looked at time and sales, you should. It shows a historical view of the tape at the time, the bid and the ask and the trades. Go back and look at your order at the time. What was the bid and the ask doing?
Dave:What could you have done to get that fill that you missed? How could you adjust your order so that you got that fill? What would that do to the rest of the strategy? Would that create too much slippage for other trades? There's so much you could do once you get something working.
Dave:Even at a backtest level, there's usually some way to get it to trade live. Maybe there turns out that there's somewhat of a ceiling, so you can't trade it with all your size, but there's usually some threshold where you can figure out a way to make it profitable. That's what good traders do. They find and get every last bit of the meat on the bone. And they're really great at doing that.
Dave:And that's how you get good is, like, figuring out all the nitty gritty details. Like, there's a I heard this on a podcast the other day. They were talking with John Arnold, who's a very wealthy, very successful energies trader, long since Yep. He said that his goal was think about the whole strategy space. His goal is to go an inch wide, but a mile deep.
Michael:Mhmm. Right? Yep.
Dave:So pick your niche and go deep with it. And that's how you get that's how you get good. You don't get good like trading every possible strategy you can trade. You get good by finding your niche and exploiting it and going as deep as you can into that niche. And there's probably a good episode for another podcast because it's I always tell people, you can be the best trader in the world at your niche.
Dave:It's not hard to find a niche where you're the only person trading it in the world.
Michael:Well, and not only, do I think that's important just from a, a focus point of view, it's also just basic math with buying power and and capital. Right? If you look to trade everything, your capital is spread out amongst, you know, the good and the bad strategies by by coming up with strategies that complement each other, that have, you know, you're using leverage for intraday and and not for swing or something like that where you it's it's making sure you're utilizing kind of buying power at all time. That's important. So, yeah, refining a currently existing strategy is is just important from that buying power point of view.
Michael:You're way better off making a current strategy make you an extra 5% a year than to have a different strategy make you 10% a year because you have to take some strategy from the good to the good to the bad. So that makes perfect sense as well. And I'm glad you mentioned that you don't scrap the strategy. That was kind of a bait question because I knew what the answer would be because I know a lot of people that have done the same. They said, oh, I back tested this, and then I trade it live, and it just completely fell apart.
Michael:So I scrapped it and I moved on. It's like, well, wait. Like, why? You know? There may be there may yeah.
Michael:There may be a world where, your back test was so bad, not to, you know, make fun of it, you just did you you did such a bad time back testing that it just doesn't work. There's something curve fitted. There's something, you know, biased or something like that. But in most cases, if your back testing process is solid, then yes, there there is a way to salvage that the the fills and to salvage the trade. One of them was even I just made the guy switch brokers because it was just he wasn't his broker was was, one of those order flow payment for order flow guys, and, you know, he noticed that on these things, it was always, like, moving against them the second he hit the button.
Michael:And then he switched to interact brokers where he pays a commission, but he's like, the fills are just way more consistent. And Yeah. So sometimes it's within the data itself, sometimes it's external, like, is your broker just slow? Is you know, does your computer suck? There's a lot of things that you can look at, but, make sure that if in this thing that we've described, a way to get out of backtesting world into trading live, If you come up with a hiccup, don't scrap it all.
Michael:Go back and just one go back one step in what we've described and really take some time and try to see if you can figure out a way around it before you you give up all hope.
Dave:Yeah. I mean, you asked exactly the right question. Why? Why did it fail? And you can go back and work that into your back test somehow and see, you know, maybe you can make your back testing process much stronger if you dive deep into that problem and figure out why it failed.
Dave:And you can know that ahead of time. It's like we were just talking about the pre mortem. You can work that into your pre mortem process to figure out, okay, I've seen this live now. This is how you learn. This is how you get better.
Dave:Yep. Is seeing what happens, observing what happens live and seeing how you can recreate that in the back test, or at least recognize that the back test can't capture this phenomenon that does happen live. How do you account for that beforehand. There's lots of things you can do.
Michael:Yeah, and it's always a process, I think is the biggest thing. The thing that I've done to shake a lot of people out of not being able to go to backtest world is just telling them over and over again. It's not a binary event. You don't go from not trading to trading. Yeah.
Michael:You go from not trading to trading a little bit to trading a lot to well, now you need to build another strategy to trade. Now, it's it's just it's when it's kinda treated or thought of like a binary event, it's like, once I'm live, then that's it. It's, you know, it's going. I think that creates a lot of the fear and people holding back when it's just like that you're on step one, you're just going to step two and there's step a gazillion that you're you're never done. That makes them feel a little bit better about it.
Michael:It's like going to the gym. It's not, you know, I've I've researched my workout plan and whatever. If I go to the gym, then I'm I'm just I'm gonna go there. It's like, no. You go there and you do the workout plan.
Michael:If you don't like it, you change it. Right? So it's just part of the Yeah. Part of the process you gotta deal with.
Dave:Yep. Totally. Well, I've got I've I've thought of two or three what I think are gonna be really good episodes. We've you know, that that happens every time we do this. Like, we're we're always coming up with new ideas.
Dave:So I love this. And I love you know, we should mention the the YouTube discussion on some of these episodes has been phenomenal recently. Yeah. So I would encourage everybody to go check it out because there's we've been hanging out there. There's been some real I know some really good traders have been posting there with some really good feedback and ideas.
Dave:So it's very valuable. They can be more valuable.
Michael:Yeah. I'll hit on that too. Not just for, you know, coming and talking about the particular episode, but I've seen, like, full on, like, chat chains of of people chatting back and forth about, you know, things they've not just learned from us, but giving their own input on something that maybe we didn't cover in part of that topic and and talking about that and and coming up with ideas and doing that. So we have a whole episode on finding a trading community that that makes sense and, you know, not to toot our horn too much. I think if you're watching a podcast about systematic trading, you've probably found a bunch of fellow nerds that are also doing this.
Michael:Like, I you know, I think it's a very, specific type of group and and niche that if you do end up chatting back and forth amongst each other and and we hang out there as well, you're probably gonna gain a couple value and, a lot of value and probably make couple trading buds that could open your eyes to to different things about trading that you might not be finding on your own.
Dave:Yeah. So one more thing about the podcast before we go. Mhmm. We're coming up on 50 episodes, if you can believe it. So I think this what I say, this is 48 or 47?
Michael:Yep. We're getting there.
Dave:Think it's 47.
Michael:It's almost a year.
Dave:I think we should put our heads together and figure out something notable to do for 50. I don't know. Something special, but maybe we'll put our heads together and think about that for the next episode to maybe have I don't know. We'll we'll figure something out. But, yeah, this is exciting.
Michael:Yeah. When in again, in the comments, you give ideas. We'll I don't know. I was thinking of so many ones, but none of them were really gree appropriate. Like, we should do it drunk.
Michael:We should but no, we'll we'll think of something that I think is a little better, maybe something live, maybe bring on I don't know. We'll we'll think just give us some ideas and we'll we'll try to figure that out because, yeah. A year of this, when Dave approached me to start this one, initially in my head, I'm like, well, how how many topics could you really cover for, such a huge a niche part of trading? And I you know, just like you mentioned, every time we do an episode, there is another two or three episodes that are made. So there's it's like the with that Hydra thing.
Michael:Right? You cut off one head and then two more come out, and it's kinda like what we're dealing with here with the podcast. I don't think we'll ever run out of ideas at this point. Yeah. So yeah.
Michael:Well, listen. Thanks everyone for tuning in. We don't know how long this mini series is gonna be between me and David. We're just gonna keep going until, you know, this this process is kind of sorted. We've already gone through the whole, like, back testing to column creation to, you know, how to take that back test live.
Michael:I think we'll keep going until we find a kind of natural stopping ground. And then there's one other quick note about the YouTube is I'm putting all of these in their own separate playlist. So if you go to our YouTube channel and then you go to that, there's a separate playlist for just this particular course, and you can certainly check that out as well. Cool. So until next time, I'm Michael Noss.
Dave:And I'm Dave May. Talk to you next week on Line Your Own Pockets.
Creators and Guests
