Line Your Own Pockets

Michael: 00:01

All right, everyone. Welcome back to another episode of Line Your Own Pockets. Interesting one today from an email that Dave put out. I remember reading this email when it came through, and we're gonna talk about it a little bit more, but premise was kind of presenting a bunch of different systems to people and saying, which of these would you trade and why? I saw some back and forth with the emails of different people who had different ideas.

Michael: 00:23

And then we're gonna talk about what we think as well. So why don't you kind of queue up the exercise a little bit more for the people here?

Dave: 00:32

Yeah. So this is a strategy that I put through the cruncher, the strategy cruncher. I've got basically four different versions of this strategy that I'm thinking about, I'm choosing between. I thought I'd send a message out to my mailing list. It's a free newsletter where I talk about this stuff all the time.

Dave: 00:53

And I got a lot of really good responses to it. So I thought we'd bring it up here. So I'll just go through each version of this strategy and just display, you know, call out the stats of each one. And just as I go through these, just think about, I'm reading them, think about, listeners, think about which one you're drawn to compared to the others. So version one has a profit factor of 1.87, win percent 53.8.

Dave: 01:35

There's 3,800 trades, which corresponds to 3.3 trades per day.

Michael: 01:40

I think that's the important number to focus on. So yeah, roughly three trades a day.

Dave: 01:47

Version two, profit factor 3.29, win percent, a little bit higher, 55.1, and 1,600 trades or 1.4 trades a day. So a little bit less than half of the version one. Then there's version two version three, sorry. Version three, profit factor 4.65. So getting up there.

Dave: 02:12

Win percent, 63.2. Trades, 427. So almost half a trade per day on average.

Michael: 02:22

Or a trade every two days. Yeah.

Dave: 02:23

Yeah. Roughly. And then and then version four, profit factor 7.59. Win percent 72.6, number of trades 106, so one trade every 10 days roughly.

Michael: 02:38

So just to really kind of go through the numbers is we're getting to the point where we start off with a lot of trades and a decent edge, right? 1.9 profit factor is good. Right? It's a it's a great strategy, depending on what the equity curve looks like and all that stuff that we talk about. And as we go through, we are getting significantly better on every jump and then really shrinking it down the amount of trades.

Michael: 03:05

Whereas, you know, something like a 7.5 profit factor that has a, you know, trade every 10 days, that's a almost a rare event at that point because, you know, we're talking day trading at this point. So pretty much a rare event at that point. But again, a 7.5 profit factor is pretty ludicrous, right? It's an amazing risk reward metric, it's an amazing return metric, but that's kind of how, if you're thinking about it in your head, that version four has nearly no trades, we could say very, very little, but really, really accurate when it's right and makes a whole lot of money when it's when it happens. And then the other one is the complete opposite.

Michael: 03:46

It's a small edge that you're kind of exploiting over and over and over again and making good money with that. And the question is, of those things, where on this band of trading strategies does it make the most sense to hang out at?

Dave: 04:01

Yeah. And so just to be clear, this is all basically one strategy, one basic But I've used the Cruncher to give me basically four different versions of it. And I'm trying to decide which one to go forward with. So what was your gut reaction when you saw this, Michael?

Michael: 04:23

My gut reaction right off the bat is for a day trading strategy, three trades isn't isn't crazy. So I kind of immediately gravitated to the more frequent trader that is right, you know, a little over half the time, right? 54 is is a little bit over half the time, but has that good profit factor. And I think part of this, what we'll find is there'll be some nuance to it. But for me, that's kind of how I really like to specifically day trade.

Michael: 04:52

I want to send out tons and tons of day trades. I find it helps me mentally as well when I'm not really concerned with what any individual thing does. So I like that as well. And it just feels like one of those systems that you feel like you are the casino at that point. You're being the casino in respects of you're just putting out tons of little tiny bets, and then over time those bets make you money and you're not really focused.

Michael: 05:20

And I think another episode that this would be a good one to reference as well is when we did the the wide net versus the the the narrow amount of trades. But that's where I went to. But I see how it's a hard problem because, like, the more you stare at the more you're like, I don't know. Trading once every ten days and making a whole lot of money when I do and being right 75 or or let's just say, you know, you're only wrong one in four times. That sounds like it would feel really nice anyway.

Dave: 05:49

Yeah, I think a lot of people are drawn to that just because humans want to feel like they're right and they want to be right. I think probably new traders are drawn to that version. It's actually interesting. Probably, I would suspect newer traders are drawn to that version. Experienced traders realize the power of the version one.

Dave: 06:16

And then I bet there's a more advanced trader that wants to do a blend. So yeah, it's interesting. Yeah, I bet as you progress, you probably see the value in each of these versions and can make an argument for any one of them.

Michael: 06:37

Well, and it's funny. One of the things I wanted to do right away, because I I again, I read this email when it came in. I was I was really interested with it. And I'm I'm starting to think because, of course you have your initial reaction like I just gave you, but then you as a quant or a systematic trader, whatever wanna call us, you always wanna dig a little deeper. So in my head, I'm like saying, do I chart these out?

Michael: 06:59

Is there some sort of like regression line I run through it, or is there something? Because it's interesting because you immediately look at the extremes. You look at number one and number four. You look at the one that trades a whole bunch and and not at all. And then in my head, I'm like, well, you know, is is both good?

Michael: 07:17

Is some combination of them? Should I be trading all of these? You know, how does it work? But it's it's interesting that I I don't think and you can tell me what your response was. I bet you there wasn't many in the middle.

Michael: 07:30

I bet you it was a lot of lot of one or the other.

Dave: 07:34

Well, it was interesting. So the the responses I got were kind of all over the map. Were some people that were drawn to version two, version three. There was people that said, yeah, version four, that it's there's no way that's real. So they were kind of all over the map.

Michael: 07:56

I could see that. I I didn't immediately think of that, but that was there there was some of that in my head as well is at what point, which I guess could be a good conversation to have, at what point is it that there's too little trades to kind of trust the results? Again, in a vacuum. Right? We're we're saying, of course, you would, you know, do some sort of paper trading and live testing and things like that of a strategy before you took it live.

Michael: 08:21

But at what point do you get to the point where a 100 seems to be really small? Do you get to the point where you just don't trust the results that come out because there's just not enough data points to be confident?

Dave: 08:33

Yeah. So one guy pointed that out and said, hey, this isn't even statistically significant. There's no way. And now in a vacuum, if this if these were all independent, then I could he's totally right. But they're not all independent.

Dave: 08:50

This is all one idea, one strategy. And the reason the different versions vary so dramatically is that there are basically two columns, two data points that are highly predictive for this. So when you find that, when you find a strategy and you have, you know the data points that are really predictive to profit for a strategy, you get lots of different options like this. And the strategy cruncher will show you exactly what those are. So it's a matter of just brainstorming and finding the columns and the cruncher will tell you exactly which columns are important and the exact value to use for a role to exploit it and to come up with these different versions.

Dave: 09:47

So one way to think about that is if I didn't know the columns that were predictive for this, I would not be able to come up with the different versions. I'd be trading version one. That's it. I wouldn't have these other options to choose from. So I think it's a good lesson that any strategy is just one column away from being really great.

Dave: 10:22

If find the predictive one that matters and is important to the signal.

Michael: 10:30

Well, I like that example and it makes perfect sense when you think about it that way that if someone came to you and said, Here's a strategy that has 100 trades in it, and here's the results, and completely, again, in a vacuum where you have no idea where that came from, you would say, Yeah, that's You need more data to kind of confirm your notion here. But what you're saying is that, you know, let's say it's a a, you know, a gap mean reversion trade. Right? You know, I've taken all of the gaps that have ever existed in the universe and realized that there's, a 53% chance that they're too far. So if you if you short things that gap up and you buy things that gap down, then generally.

Michael: 11:09

And then from there, you're just narrowing those in based off of columns that, of course, make sense. They're not like, you know, the migratory patterns of elephants or something, you know, it's things that that that make sense. Then when you're narrowing those down, because your broad idea showed merit, it becomes a whole lot easier to say, okay, every iteration that narrows this down, this will also then have have some kind of merit. Where that starting point, I think, is huge. And that's where we always talk about that starting point, you want thousands and thousands and thousands of trades in to show that there is really any validity to your underlying idea at all.

Michael: 11:47

Then when you get to a version four, you know, you might not have as much confidence in it as something with more trades, but at least you know the underlying premise should always at least go back to that small edge. So, like, if if version four was completely curve fitted to death, but the initial premise that it was made off of still had that edge to it, then the worst case scenario, you're defaulting back to that that first edge. It might not be right 75% of the time, but it should still be right that 53% of the time that gave you that initial confidence to explore the strategy.

Dave: 12:20

Yeah. Yeah. So I don't know if I've told you, Michael, about the drawdown that I was in about ten or fifteen years ago, terrible drawdown. And it was the motivation for coming up with the cruncher and reinventing myself as a trader. So, I almost quit trading.

Dave: 12:48

Drawdowns are terrible, and this one was pretty bad. And I'll tell you what happened. So I was trading this Gap strategy. It was working great, scaling up over time slowly, conservatively, but scaling up over the years. And it went into a drawdown.

Dave: 13:08

And I was like, man, sucks. Let me scale back my size. I'm trading with a lot of size here. And, you know, the drawdown eventually smoothed out and, you know, eventually made new equity highs. And in my review at that time, I remember thinking, Man, if I had just kept the size I was trading, I would be just my equity would be a lot higher than now.

Dave: 13:40

I'm not going to make that mistake again. So the following year, I was determined to keep my size really high, even all the way through this drawdown. And it kept going and going, I'm losing more and more money. And that, it just sucks, right? You're doing all this work, you're making all these trades.

Dave: 14:04

You're doing all this work and you're losing money. That is a very difficult situation to be in. Sort of cried uncle, I backed off. And that was a very difficult time because I had no confidence really in this strategy at this point. It had put my daughters through college.

Dave: 14:33

It allowed me to change my lifestyle. And here it was not working. I mean, this is what I did. So it's just really, I almost quit. So I felt like I was at a dead end and I did not want to be in a dead end anymore.

Dave: 14:48

Like I did not want to ever get in that situation. So I came up with this basically completely overhauled my workflow. So I would not be in that situation again. Now, what happens is when you have a workflow like this, and a lot of the traders I coach for this workflow, it ends up being actually get some kind of hard decisions like this because it's not an easy decision which one to choose here. No.

Dave: 15:19

Yeah. And it's kind of hard. You have to figure out, okay, what do I really want here? So you've really actually got multiple good options. And that's sometimes tricky for people.

Dave: 15:34

But I like it's way better than an alternative, which the alternative is, well, you have one version or you have no versions or you're at a dead end and you're out of ideas. So the fact that this is a challenging question, I think is a great thing. And it forces people to really understand more about the strategy and figure out why it works and come up with different versions. And a lot of these versions you can use to come up with completely new strategies that are related to this tangential to the idea. So it's a good frame of mind to be in.

Michael: 16:17

Well, and I think it it proves too that it's it's the numbers aren't enough. Right? And, you know, we talk about this on a a few things where I could see worlds, probably not likely, but I could see worlds where some or all of these equity charts look awful and they look really, really hard to trade and have, you know, deep drawdowns with really clustered winners. And like you were talking about the drawdown that you went through, well, if that happens all the time, right? And there's these, you know, everything happens in clusters, big clusters of losers and big clusters of winners and ends up working out okay.

Michael: 16:51

And it just goes to show you that you can't very easily anyway, just say, Oh, well, I'll pick that one strategy because it has the highest profit factor or makes the most amount of money, you know, in the long run or whatever that ends up being, because you end up having these, you know, different tiers of, well, you know, I care about this metric and some people might care about that other metric better. For some people, again, they might really need that very high accuracy rate, the 63% plus accuracy rate. So it becomes a very difficult exercise to say, well, this thing makes more money. So in theory, that's what you should end up doing. But if, you know, losses are clustered, if it doesn't feel good to trade, if you're not able to do it, you know, I give the example of I could give you the perfect diet, but if you can't stick to it, who cares?

Michael: 17:44

Because it's not going to work for you. It's the same kind of thing. So yeah, it just shows that you can put the numbers on the page and those are interesting, but sometimes they're just not they're not enough.

Dave: 17:55

Yeah. So here's a question for you. You you said you liked version one because it was you said three trades wasn't, wasn't too many. So you're drawn to that one. What if I made a version zero that had the profit factor, let's call it 1.6 and there were, say, 10,000 trades, so maybe almost 10 trades a day.

Dave: 18:25

What would you think about that?

Michael: 18:27

Well, first, we are just to confirm with everyone, slippage and commission, all that, all trading costs, that's all included in this?

Dave: 18:37

Commissions are included. So that is a good point. So I never include slippage in my backtest. And we could probably do a whole episode on that. I look at it and compute and figure out, Okay, how much can I live with and the strategies to work?

Dave: 19:00

But I like for the backtest to be like the ideal benchmark to work from. I think that's the right way to do it. Because I think modeling slippage as a baseline and using that as the reference, way too tricky. And it varies so much by position size. So, it just becomes really, really hard to model and it doesn't make any sense to me to try to model it, especially when you're going to be scaling this thing up over time, hopefully, and it's going to vary so dramatically.

Michael: 19:38

Yeah. That seems like one. We'll we'll shelve that for later. That that seems like a whole podcast of its own. But Yeah.

Michael: 19:44

To the so commissions are are included. So it has way more trades, and the profit factor shrinks just just a little bit. I think I would still probably even go with that one, assuming couple of things. Commissions are included, and there is a way to fully automate this. So, you know, I I'm one I've probably been saying since we started this particular podcast, I am a horrible day trader, so I can I know that my, let's say, temperament is not suited to day trading?

Michael: 20:15

So to offset that, I have to fully automate every part of the day. I cannot hit a single button or I will do it wrong, and I will, you know, do it too aggressively and all of that. So assuming we can fully systematize that, I would probably go in and what I do quite a bit with my own day trading that I've been building out now is just as many trades with as tiny of an edge as possible. And for a lot of the reasons that, you know, I talked about at the beginning that I find that that's easier personally from a mental side of things to not have to concern myself with any given trait. I find that the more that I'm spread out kind of long and short throughout the day with different systems, the easier it is for my brain.

Michael: 20:58

So I'm going to do it not just because I not because I think it's like mathematically better, just because I think for me personally, there's more of a chance that I'll kind of stick with that correctly.

Dave: 21:08

Yeah. Well, you know, you I've heard you say before how terrible a day trader you are. And I think the truth is very few people are good at that.

Michael: 21:20

Oh, yeah. I'd say less than, I don't know, less than 5%, maybe even 1% are like actually naturally skilled at doing that and are able to, and you're talking like Buddhist monks at that point that are able to keep that mental cool. And I, yeah. So I think you're right. I think it's just important that people kind of admit that to themselves.

Michael: 21:43

I think that goes a long way.

Dave: 21:46

Yeah. And automation really I've seen a lot of the traders I coach, that's when they really turn the corner is basically you've given yourself a chance to scale wide. You've given yourself a chance to actually trade a version zero of this that trades 10 times a day. And when you do that, I mean, there's a whole bunch of strategies that you've just opened up yourself. And like you said, it reduces the importance of any one trade.

Dave: 22:20

You can hide big losing trades in the strategy by so there's just all different options have opened up to you by adding automation. Just So, a big step for people.

Michael: 22:35

It has been a huge, I have been profitable. You know, I've been talking about how I've been trading with this this prop firm, Trade the Pool, that's an equity prop firm. I've been able to pass one of their challenges completely and and making money with it fully and could not wouldn't even attempt it if if there wasn't automated. So I think it opens up. And then like what you talked about is not only from the kind of mental and emotional side of things, but it really opens up your mind to pushing limits.

Michael: 23:02

Like, in theory, again, commissions and everything included, I could take 500 trades a day. I could take a thousand trades a day if I had the buying power for it and there wasn't, you know, any sort of degradation doing it because I'm not hitting any buttons. The computer's doing it for you. So I think that's another part of it. Whereas that maybe not the one trade every 10 days, but maybe version two that does what, like a trade or maybe two trades a day.

Michael: 23:29

That might be better for somebody who is completely adverse to any sort of automated assistance, they want to see, you know, have some sort of alert come off or something and then take a trade manually, that one to two trade a day might be better. And for that person, I'd also say we have a podcast on that and how we try to convert you over to our side. But I think that is part of it as well is is whether or not you are, you know, three to four trades a day is still probably doable. But, yeah, that 10 trade a day, I would say, is not doable unless you're automating it in some way.

Dave: 24:01

Yeah. And so there's actually two main benefits to automation, and they're on the opposite extremes. So yeah, it allows you to be able to trade something that trades 10 or more trades today. But also it allows you to trade something that trades really infrequently. You can set up automation to constantly be looking for that trade that happened.

Dave: 24:25

You don't have to be watching for it. You don't have to remember exactly what it is. You can have automation set up to make that trade happens once every ten days. Well, that's another really good use for it.

Michael: 24:36

And that's another mental hurdle, I I would say, that if you're experiencing, right, I can definitely relate to you where I had one day this week that I fell off the bandwagon, and it was because I was actually watching the trading happening, and there was, I think, two days, and my systems will probably take between five and ten trades on average a day. But there was two days and, you know, not to kind of timestamp this too much, but the market was kind of crazy and there was just no nothing came through. There was no trades that happened. So I took a little bit of manual trade, got a small slap on the wrist, but it was pure boredom. Whereas if I wasn't watching it at all, you're 100 right, it helps.

Michael: 25:17

And they help with different sides of things where, you know, it becomes easier to say, well, I can, I'm more comfortable not taking a trade because I know if an opportunity arrives that's in my system, my bot will take it. So whereas, right, I again, I fell off the wagon, I took that manual trade because there was nothing going on. But you're right, it's it is that other side of things where if you have something that happens once a month, but it's amazing when it happens, automating that is huge because how mad would you be if you missed it? And do you have that kind of stoicism to sit there for like, say it trades once a month and you're sitting there for nineteen days out of the twenty trading days of the month doing nothing, but having to say like sharp as a tack so that when it does happen, you're ready to go. Yeah, I never thought about that, but that's obviously 100% true.

Dave: 26:11

Yeah. And then when, imagine you have all these other systems that do trade frequently, and you have this one that's going to trade once every ten days, And maybe you have multiple that trade at different frequencies. When that signal comes through and it's time to take this trade manually, are you going to remember exactly what it was? You're comparing it to other systems now. What size are you planning on taking?

Dave: 26:35

You have to do that really fast. And that's just like, it's great to have automation to do that. It's a game changer for sure. So let's talk about how I'm leaning towards trading this. I think it's a real so when you find the data points, the columns, the filters that are highly predictive, and you can create different versions like this, which are significantly different, I think it puts you in a really good mindset to figure out the subset of the trades in the system that you can take with larger size.

Dave: 27:24

We've done a whole episode on this, trading a portion of your strategy with bigger size. I think it's such a good habit to get into. It's a really good mindset to get into to be thinking about that. What subset of the trades in your system are better than the remaining? And there's just no way that they all have the same probability.

Dave: 27:49

I mean, there's just no way that's the case. And you can see that here when you find the right columns that are predictive. So the question is, what do you do in this situation? And my instinct here is I like the version one because the feedback loop is gonna be so much faster. You're gonna be able to verify that things are working as expected really quickly and you can scale up faster.

Dave: 28:26

Whereas if you choose version four, it may be several days, it may be even more than that before you really can become confident. So I like version one for a path to confidence, which is important. And then I like using automation and using a different sizing for the subset that is going to be in like a version three or version four here. So, do you you do that within your systems? What's your take on this?

Michael: 29:03

Not currently on the day trading side. I do a couple of that on the swing trading side. But not because I disagree in any way, just because I don't think I've kind of gotten there, but I do love that. And again, I love the concept of that even if Virgin four doesn't pan out, it's probably just going to revert back to like a version one. It's not going to go, you know, completely horribly against you.

Michael: 29:26

But that's that was, I think, the more advanced. You talked about how, you know, beginning traders probably gravitate to three or four, and more experienced traders maybe one or two. But with the back and forth that you're having, I think the more advanced, like the ultra advanced version, is that some sort of hybrid of one or two or a hybrid of all of them where, you know, you have different, you know, varying position sizes based off different particular equity curves. So it it very much is one of those, I think a little bit to each their own as well. I could see someone totally fine with just, you know, I'm gonna do version one.

Michael: 30:03

It's gonna be slow and steady and consistent. I'm fine with that. But yeah, I want to get into it more. I guess the question would be when it comes to buying power utilization, like how do you approach that if you're sizing up with kind of multiple systems? Because my worry would be if I'm waiting for, say, version four to trigger and take that bigger than, you know, version one, am I then not trading it with enough size?

Michael: 30:32

Like, I'm not utilizing all my buying power there if I'm waiting for the the other one, or would I liquidate some to get more buying power to hit the other, or how would that end up working?

Dave: 30:42

Yeah. You'd have to so so the way I would do it is I would trade version one and then have a rule in there that says, okay, if the filters say this, then trade it with size times three or whatever. But yeah, you would have to figure out the buying power issues. Let's just say that when you get a system like this, the buying power stuff is really fun to figure out because usually you're very highly motivated when you get that Yeah. That warning message.

Dave: 31:28

So when you get in this situation, you get that warning message, all of a sudden, most creative self comes forward to figure out exactly how to make more buying power for yourself, figure out there's just lots of things you could do to trade a system like this when you can see you can see what's available and what's, you know, what's possible.

Michael: 31:53

And maybe another episode there because I am interested in just like personally and then picking your brain on that because I was thinking the same thing, because my goal every day, and I'm seeing it right here on my day trading screen, is to get that maxed out buying power. So I've hit that. And then the question would be, okay, so now I get it would be just a failed trade at this point from this higher end version. And then, what do I end up doing in in that scenario? Right?

Michael: 32:22

Is is do I have the system liquidate enough to and and you're right. There's many ways to do it. You could say, okay, all the trades that are profitable, start to take some off those and and add to this new trade or whatever. So this is where things like path dependency really come into play, where you're trying to figure out in what scenario would this have to happen. But you're right.

Michael: 32:43

It's good problem to have if you're just making money over time, and then you're seeing an opportunity to make more. You know, it's it's if you're not there yet, what I would say is probably just trade a version one or whatever version you're comfortable with until you get to that point. And when you have that problem, you're right, that's a much more it's a high quality, it's a high class problem to have to say, oh, I missed this trade that would have made me even more money. And I really should have sized up in that one as opposed to sizing down in it.

Dave: 33:12

So really what I encourage traders to do is create versions like this of their strategy for themselves, choose one, And then when you get into the situation where you are out of buying power, you take a step back, you look at all the systems that you're trading, you look at which one is consuming the most buying power, and you look at the profitability of each of them. So, a lot of times what you can do here so, I've worked with several traders where the situation is they're trading five different strategies, say, they're running out of buying power. And when we look at the results, there's one strategy that's trading a lot and consuming a lot of buying power, but it's not as profitable as the other ones. So, what we do in that situation is you move from a version one of that strategy to a version two that trades, has a higher profit factor, fewer trades. And then you do so, it's essentially going to consume less buying power.

Dave: 34:10

And then overall, you run out of less buying power, you become more efficient. And that gives you a way for at any point to make that adjustment in a way that makes sense and in a way that you can get behind.

Michael: 34:23

Well, and then the other thing I think that leads to that is that we right now are saying and everything we're doing in this scenario is all assuming that this is the only strategy that you currently have. But the same problems we're talking about would apply across strategies. So say, for example, you have something that trades 10 times a day and it has a better profit factor than the 1.87. Well, you may just skip that due to a, you know, just a buying power restriction, right? It's where your line of what to trade is, is something that is, you know, different to different scenarios where, yeah, I could look at something and someone could say, oh, all of my current are over two profit factor.

Michael: 35:11

Right? So I'm not even gonna even look at version interesting to me because I'm usually maxed out every day buying power with Better. So I'm gonna just skip, say, version one or two, and I'm gonna go right to a three or four because that's just not it's where I am personally. But yeah. So it's going to be, again, very different depending on where you are in that trading journey.

Dave: 35:31

Yeah. And to that point, it's better to start from a version that trades more frequently because it's a lot easier to remove trades from a system to make it more profitable than to add trades. So, a common scenario is you start trading version one, it trades a lot, and then you realize, oh, there's more slippage than I thought, or for whatever reason, it's not performing quite as well as you thought. Well, when you get into that situation, you have a very natural way to improve the strategy. You could say, okay, well, I'm gonna go with version two, the Profit Factor's way better.

Dave: 36:17

It can withstand the slippage that I realize is in there now. So it's just a way to very naturally improve without feeling like you're at a dead end and you have to throw the strategy out completely. This is why I have basically a roadmap, like a blueprint for every strategy so that I because like I said, I don't want to be in that dead end situation that I was where I didn't have options. It just sucks. So it's good to give yourself options like this and sort of have a plan knowing that life's not perfect and your strategy is not going to measure up exactly to the back test, you give yourself options and a plan to react when that situation occurs.

Michael: 37:03

Well, so this is a little bit this is something to think about as well. I was just thinking while you're talking. We recently did an episode on trading on vacation, right, and how to how to trade when you're away. Would it make sense to maybe say you're trading version one of this and you're trading, you know, four or five times a day, but now you're on vacation or or something, and and and let's say you're one of those anti automation people to like push to a version four with some sort of alerting to say, listen, don't bug me in case unless the real one comes through, the one that really works, and then I'm gonna kind of drop everything and take that trade real quick if I can. That I could see would have merit if you are someone who is not, again, fully automating the system, or even if you are, and maybe you just want less work to do when it comes to journaling or something like that.

Michael: 37:55

I could see that scenario where you're saying, hey, just for this week or this day or something like that, I'm really gonna ratchet up the the quality of my trades and make sure that I'm only taking the best possible trades because I just don't have time to deal with, you know, journaling and and all of that for the other ones.

Dave: 38:12

Yeah. I like that. I I not thought about it quite in that way, but, yeah, I I think that makes a lot of sense. I think it's a great idea.

Michael: 38:20

So Yeah. Lots of and I think so at the end of the day, it boils down to really there is no answer. There's no that one is is the one that you do. It has a lot to do with, right, where are you in your trading journey? Where, you know, what are your other systems look like?

Michael: 38:37

We didn't even talk about, you know, correlations among systems, but that that could be part of the equation as well. And then, you know, your level of automation. Right? Do you, you know, are do you automate at all? Or are you very comfortable at kinda automating and leaving it?

Michael: 38:54

Because if you're doing more trades, that's gonna be more important. Less trades is gonna be less important than you know, back to the diet example, there's it's not a perfect perfect thing for everybody.

Dave: 39:05

Yeah. Yeah. So this I I hope listeners get some good use out of this one and and some good ideas for how they can apply this sort of concept to their strategies. It really all boils down to finding the predictive factors, finding the columns that are highly predictive for your strategy. And when you do that, that opens up a lot of possibilities like this.

Michael: 39:35

Well, yeah, you wouldn't be able to do this narrowing down ability if you didn't have what what happened. And also, when I was reading this, the difference between the advice for discretionary traders and systematic traders, I always find, is so vast. Like, you'll hear all the time from people who are training maybe discretionary traders say, hey, you only take your best setups. Right? You sit there and you wait for the absolute best possible setups.

Michael: 40:06

And I kinda laugh when I hear that now as as a systematic trader. I'm like, why? If you're set if, you know, if you've got a bunch of buying power sitting around and you've got a setup with a 51%, right, 1.1 profit factor edge. Why not? If that's all you got, right, use it.

Michael: 40:25

And this kind of shows that as well, that it might not be better to wait for that amazing, you know, fat pitch setup because you you know, the even the worst version of this when it comes to profit factor is still great. And to be honest, it'd the one that I would choose.

Dave: 40:42

Yeah. Yeah. And and for those discretionary traders, you know, waiting for the fat pitch ones, the more systematic you get, the more you can really be confident that you know what the fat pitch trades are. And a lot of discretionary traders, I think, think they know, but when you look at the numbers, those pitches aren't as fat as they thought or there's another way to find pitches that are way fatter to continue with the analogy.

Michael: 41:16

Or and and, again, you didn't include this. I would be interested to see in just absolute dollar value. Like, what do you make at the at the end of it? You know, assume a $100,000 account. Because I I think sending that to baby people on your email list might be interesting because I bet you version four might be the lowest.

Michael: 41:37

If if you're assuming kind of constant risk throughout, it would definitely be the lowest. But even if you're sizing up the risk a little bit, it would still probably be the lowest. So that might be an interesting exercise as well where you look at it and you say, well, you know, I've been told to wait for my fat pitch, my version four, and really, really hit it when it happens. But even if you're doubling or tripling your risk, if you're still falling short of a version one, then that kind of blows a lot of that thinking out of the water where, no, you would be better to trade constantly in in what's the the harder pitch, quote, unquote, to to hit. Over time, you'd make way more money than the guy who's sitting there waiting for the fat pitch and and really going ham when it happens.

Dave: 42:21

Yeah. I mean, you can a baseball team can hit a whole bunch of singles and never hit a home run and still win a lot of baseball games. Right?

Michael: 42:30

Yeah. Perfect. I love that analogy. I think it's a good place to leave it. I thought this was, again, very interesting.

Michael: 42:35

And, you know, make sure if you're online yourownpockets.com, I think there is links to both of our little email addresses there and make sure you're signing up because we're both sending out really good and free content. This was one of those, you know, I'm not gonna say I get super interested in every email that I get, but this was one of those that I definitely spent, let's say a way longer time thinking about than a lot of them. Because I was like, because you have that initial reaction and then of course you're always second guessing your initial reaction and saying, well, you know, I initially thought that, but is that right? Right? Am I right to say that my initial thing of I should take this?

Michael: 43:11

And those are the kind of exercises that I think is different from us and discretionary traders, where these are the problems that we're thinking about, not what that chart looks like or what the, you know, what stock am I gonna trade today or anything. We're not thinking about any of those, but we're thinking more of this kind of high level idea stuff. So, yeah, I really like that. So make sure you're signing up there. You're signing up there as well for those.

Dave: 43:36

Yep. Cool.

Michael: 43:38

Just thought looked like you're gonna say something there, so I wanted to give you some chance. But no. I thought that was a great one. And, yes, go to lineyourownpockets.com. You can always get, you know, every all of this stuff here as well.

Michael: 43:49

And until next time, I'm Michael Noss.

Dave: 43:52

And I'm Dave May. Join us next week on Line Your Own Pockets.