Line Your Own Pockets

Michael: 00:00

Hello, everyone, and welcome to another episode of Line Your Own Pockets. We're gonna keep going, I guess, we call this mini series at this point about multi strategy trading. Last two episodes, we talked a little bit about maybe taking a trading setup that you already have and making it to trading setups and and kind of where to branch off from what you're originally doing. In this one, we're gonna talk a little bit more, okay, what happens if you exhausted that and it's time to build something, like, from scratch or kinda round two? So let's I'll just have you kick it off, Dave.

Dave: 00:34

Yeah. So I thought last that last episode was really great. I thought it was good to relive a lot of the decisions I'd made years ago and how I just sort of iterate on this strategy. I actually, in the interim, I was on the Bionic Trader with S and B Capital, and I went through the same kind of sort of the same timeline and got some questions about it, so that was really good to and I got some good feedback from that. But, so my whole point there was strategies, there's more depth than you realize with strategies.

Dave: 01:17

And that's the easiest path forward typically for traders. It's like iterate on something you're already familiar with. But what we want to talk about now is let's say you feel like you've gotten to the end of that rope. There's no more iterating to do, or you could kind of see that, alright, there's diminishing returns here for iterating. And let me try this completely different space that you're not trading right now.

Dave: 01:43

And that's, I think that's probably what most people think of when they think about, okay. Let me create another strategy. They'd really think, okay. A completely different universe than what I'm doing now.

Michael: 01:55

Yeah.

Dave: 01:55

Wouldn't you say that's what people think?

Michael: 01:58

Yeah. And and I know we have some disagreement here, but this is I actually think it's generally a good thing because of just the diversification benefits of and, you know, we went through all this of of what happens if something something occurs that completely wipes out. You spend, I think, I don't know, ten years, and the only thing you trade is is gaps on on low float stocks or something like that. And all of a sudden, the world changes, and and that's happening. It's kind of something, I guess, that we're we're seeing a little bit now because we do record these timelies.

Michael: 02:33

I've seen so many Twitter posts from people as soon as the pattern day trader rule disappeared and that we're shorting these low flow penny stocks just having a horrible time. And it is one of those that, you know, you could argue that they just need to create different strategies based off what they're doing. But there will be times where the whole world shifts. And if your whole world is one area, then I think you're kind of exposing yourself to potential shifts. So even if it's not, you know, we're not talking about going from stocks to Forex or or something like that, but there may be times where it's prudent to say, okay.

Michael: 03:10

I got a lot on, you know, just trading day one of a gap up. Maybe the strategy should be I should build a second day play. Like, what happens on day two when one of these moves happen? Things like that. And so you're taking the same idea, but you're just kind of expanding it out.

Michael: 03:26

And this is, you know, we covered this last one. A lot of this is gonna be blurred lines about what is a completely new strategy versus something else because you're not necessarily jumping from one instrument to another, which you could. But right in most cases, I think most people look at it and they say, Yeah, a different trading strategy shouldn't just be an opening range breakout on a gap. Should be something else that happens later in the day or the next day or something like that.

Dave: 03:58

Yeah. And and this is this is surprisingly hard for traders to do, to make a leap that's a completely unique and different idea than what they're used to. You know, it's sorta like, you heard the expression that some people, like, believe certain things because their livelihood depends on believing it.

Michael: 04:21

Rear risk.

Dave: 04:21

Political operatives, or, you know, like, they're gonna believe something because they're getting paid basically to believe it. Yep. It's kind of the same thing. You're essentially being paid to trade the strategy you're trading, so you're going to believe that that works. You're going to believe that, okay, this is what trading is.

Dave: 04:43

I've got the secret. I've, you know, this works really well for me. So there's always going to be some doubt about whether can even come whether you're going to be able to come up with another idea. So but it is just super hard because you're I call it like you're in a rut and you don't even realize it because you're having success with a strategy that you you believe that you're the kind of trader that trades the kind of strategy that you're trading. So it's hard to get out of that rut.

Michael: 05:11

So I'm gonna I'm gonna take us because I I just thought of something while you're talking. It'll take us a little bit, I guess, to left field here. But so if that's the case, I think the next logical thing would be that that you probably agree with is that the longer and more success the person's had with strategy a, maybe the harder it is to shift their mind frame to go into strategy b. Like, if if I if I just started, and we'll just use, you know, open range breaks on gaps, for example. If I just started and I've been doing it for, like, you know, two, three months, and I just started making money, You know, it's my first systematic strategy ever, and I'm used to the the discretionary grind of of not doing anything.

Michael: 05:51

So I've just started it. My brain has been opened up now to systematic strategies as a whole. Fast forward that same person five years, and now they're making, you know, high 6 figures a year trading this one thing. I think that person is way harder to say there's a whole other world you should be exploring than that guy who just created his new his his first strategy. So I I see you nodding.

Michael: 06:16

So if you agree there, then isn't there something to be said about maybe at least thinking about these other strategies kinda like right off the bat if you're just getting into the game?

Dave: 06:28

I think I think that's true. I also think it's it is very important which first strategy you came up with. Because that is actually gonna determine in some ways, that's gonna determine your entire trading career. Because you're gonna be in that space, you're gonna be you're have the blinders on, not able to see other ideas for a while, and you're going to have to do something to get out of that. And I think the quicker you recognize this, the better off you're going to be, because you're not going to flip a switch and say, Okay, yeah, I realize I've got blinders on now, and I'll just take them off and find out So all the other it's gonna be a process, and it's gonna take a lot of time.

Dave: 07:22

Like, like there's this one trader that I'm coaching now. I've mentioned him on the podcast. He came to me and he's been trading well for a good while. And he is getting systematic. He's he he just started, using the trade client with some strategies that he's created from the ground up to be completely systematic and automated.

Dave: 07:47

And he's like up 50 R for the month with just these strategies. Wow. So, but he didn't come to me and say, okay, let's, I want to get something working in the next two weeks. He said, all right, I want to have strategies sometime over the next year. I want these strategies.

Dave: 08:06

I'm going be making significant money from strategies that I'm not trading right now. So he was smart enough to recognize that you're not gonna be able to flip the switch and just come up with ideas, but you need to have a process and put yourself in a position every day to notice some new ideas or notice the kernels of some potential new ideas. Well, and

Michael: 08:32

that's what I was gonna bring up because we mentioned on the last one that one of the good ways of generating ideas is by just watching your trades unfold. And, you know, that is is good, but could also pigeonhole you, I guess, a bit because like what you were just mentioning is that if you are trading, you know, low flow, you know, day one runners, the stocks you're gonna be exposing yourself to is is that it's just that that zone in that area. So it's going to be even harder, think, to to kind of branch out. You're gonna have to create a process for yourself where you're like, okay. You know, let me watch maybe in real time my trades and the stuff that's trading.

Michael: 09:12

And then let me have a process in which I go and look at another universe of names that could try to expose myself to that over time. Because you're right, you're not just gonna bring up one chart and say, oh, this a great trading strategy. But yeah, you're gonna need that like, like anything. You're gonna need to process yourself out of your little bubble into, into somewhere else.

Dave: 09:32

Yeah, totally. And so, so it reminds me of this analogy I thought about with cycling, You know, often, I'm a sucker for cycling, metaphor. So in cycling, you know, there's it's different than running, because you can coast down a hill on a bike. Right? So, the uphills are hard in running and cycling, but on downhills you can completely coast and go fast.

Dave: 10:06

Right? So I think the analogy here for trading is most cyclists go hard on the uphills and kind of ease off on the downhills. But if you're trying to be as efficient and as fast as you could be across the entire course for say an hour, you want to be going harder on the downhills than you think you need to, it's going to feel natural to you. And you probably want to go a little softer on the uphills than normal. That's going to allow you to spread out your effort over the entire period.

Dave: 10:46

And I see the same thing with traders where when they're in a drawdown, when they're going uphill, yeah, everybody works hard then. Right? It sucks. Right? You gotta find something that works.

Dave: 10:59

But you really should be doing this when you're going downhill, when things are going well. That's really the most you're gonna be in the right mindset and the pressure's not going to be on. That's when you're going to have some of your best ideas, but it takes some effort. It's not going to be natural for you to do that. You have to make a concerted effort.

Dave: 11:19

Okay. Here, things are great. I'm, you know, I'm I'm killing it, but I need to plan ahead. I'm gonna come up with some other ideas so that if this strategy stops working or it tails off a bit and I feel like I need something else, I'll be at the ready.

Michael: 11:34

It's it's funny because talking to traders more and more, and this is, you know, we talk about our our trusted trading group and, you we've been doing this for long enough. Most of my friends outside of the real world on the Internet or other traders. And you could tell a shift from when they're a new trader. It's all about, you know, trying to figure it out. And and if they have a string of good luck, you think you figured it out.

Michael: 12:03

And then I I noticed with kind of the old men traders, it's complete opposite where you're always waiting for something to go wrong. Like, you know, right now, for example, you know, as the swing side of things, things are awesome right now. An old me would be like, alright. Time to size up, figure it out. I'm a genius.

Michael: 12:22

Everything's gonna be like this forever. I'm quitting all my job. I don't have to do anything. But you're right. As as you do this long enough, you realize that kind of everything is temporary.

Michael: 12:31

The drawdown is temporary. The the insane gain you're making is also temporary so that you spend time. That's the best motivation, I think, in the world where, like, I know, you know that there's a clock on when you start making money that eventually something will happen. It's not means that your system goes away forever. It means there will be a drawdown.

Michael: 12:54

There will be hard times. Something no fun is going to happen to you. And yeah, when now when you have the kind of room to breathe and the freedom to do it, that's when you you wanna focus on it. And it's it we're trying, I guess, to tell people out there that are listening that might be newer traders that, yeah, you're not you're not a genius. You haven't figured it out.

Michael: 13:16

It's time to do the next one. And I just noticed that that was a big flip that happened over time, and and it just happens with everyone. It's the market's crazy and everyone's making money. And all the pro traders or all the new traders are quitting their jobs and all the pro traders are going, oh god. Something's coming and it's not gonna be fun, so I gotta figure it out even now how to be ready for it when it when it does happen.

Dave: 13:39

Yeah. So the traders I coach, one of the biggest things I emphasize for them is to have a daily review. And we've talked about this before. Most traders think of a daily review as, okay, yeah, I'm entering trades in my journal, sort of looking at my performance, blah, blah, blah. But and that's important.

Dave: 14:01

It's an important part of what it's for. But the other real important part of it, and this is the main reason I tell people to do this every day and set up their schedule around it. Like this people can schedule calls with me, like I've got some flexibility, but I had no flexibility around when I do my daily review. I do it right after the close. And for that next fifteen minutes, that is a non negotiable, no calls, nothing.

Dave: 14:30

I'm doing my review there. And what I'm doing is I'm looking at the trades I took, but also I'm looking for new potential ideas every single day. And I'm not, it's not like I'm coming up with new ideas every single day, but I'm putting myself in a position to notice some of the things that happen in the market that could turn into a profitable trading strategy one day. And that's a big part of that daily review. And we can go over some specific things I look at, and that I encourage other traders to look at Yep.

Dave: 15:11

During this daily review. But so Michael, how do you do yours? Do you do you think about yours in that way also?

Michael: 15:18

Yeah. And and I will say this is something that is an excellent use for AI to to help out with because it I not only have my daily review that I normally do, but I have that report sent to me. And in that report, there is a section that I've had it right for idea generation and things like that. So now it is, know, uploading and and looking at the trades and going through the charts, but you can have I think a lot of people think of this as a a pretty arduous task and it was back in the day. You're putting all your, you know, things into Excel and and trying to, you know, make sure all the numbers worked and all that.

Michael: 16:00

But now the the the journaling software is kind of, I guess, helped with some of this. But I find the AI is is so much better because it can put it can upload charts and put context and and kind of look at at different things and reconcile back to the back test and the whole. So I find I can do this even better now than I could before simply because the I'm not I don't have I'm not caught up in, like, the day to day grind of it the way I was. And I know you had something probably figured out fifty years ago because you're a coder. But for me, this is a pretty big deal.

Michael: 16:37

The fact that this thing wakes up every day at a certain time, and it it does all this kind of work for me and then it just presents me the raw data and then some reports around it. I think it's amazing. So, you know, if a, if you're not doing a daily wrap up, we you have to, you know, you I don't I don't think that I don't think it is a negotiable. I don't think there's a a way not to do it. But just know that you don't have to do it anymore.

Michael: 17:01

You can get the all the grunt work done for you, and then you sit there with an open mind. And that's the two where two places I'm having my brain look at is did the trading today match the system is kind of step one. That's like my debugging, did everything work. And then after that, it's okay. What did we learn today?

Michael: 17:20

And that's the the main thing I want to take away is every single day I want to have, this is what I I learned or this is what I've noticed. And you can just go back to the AI and start to say, you know, hey, I noticed that I could have gotten a better fill here, here, and here, add that to your memory. And then every now and then, you can say, okay. If it's noticed the same thing, like, 10 times, it will start to present that to you and say, hey, you could have gotten a better fill on, you know, all of these trades that you've noticed that would have made so much so much more. So, yeah, I do it.

Michael: 17:51

And this is a me, I think a really great place to to implement AI. Not to remove yourself from it, but to get the boring stuff that you don't want to do completely off your plate.

Dave: 18:01

Yeah. You're right. It's so much easier to do that than it used to be. And it's just so much more pleasant to look at with seeing some of the stuff that AI can do. It's funny because so the traders I coach, over the past, I would say six months, they've started sending me, sort of progress reports on their AI usage and usage of Claude to do this exact function of a daily review.

Dave: 18:34

And I'm just seeing some such cool visualizations and

Michael: 18:39

Cool dashboards.

Dave: 18:42

I mean, it's just so awesome. And and and I even thought, I was like, gosh, this is I would love to be able to share this with other traders I'm working with. So I've actually started a mastermind with the traders I coach and where and that was so that was the first topic for last month was where one guy, Isaac, got on and shared his dashboard, and it just was so great to see somebody else's process, how they came up came up with it, what they how they do it each day, what they're looking at. It was just very valuable for other traders to see that. And it's funny, that was the first topic for this mastermind.

Dave: 19:25

We'll have other ones coming up, but, it's an exciting time to do this and and just just such a such a you can create such efficient processes with with AI now.

Michael: 19:39

And I find it helps detach myself even more from the trades and the process. And I think this might come from, you know, my days working with hedge funds, but this is how it would work is that there would be a the hedge fund manager isn't the guy out there placing the trades. He's coming up with the ideas and, you know, we like this sector of the market for this reason or or whatever it is. And then he's given reports at at the end of the day of what actually happened and and what to look for. And it allows yourself to kind of assume that position just a little bit more.

Michael: 20:12

And I find it frees up even more time to think about, you know, to to bring it back to new strategies and new ideas is because instead of, you know, taking a a two hour process of reconciling everything and and doing whatever, I get this report. And like you mentioned, it's I make sure it's it looks visually good as well. So it's like an actual assistant prepared it for me. And each one, it has the chart and the entry and the exit. And so I'm seeing the the data at the same time that I'm going through it and just having this kind of running total of ideas that I have.

Michael: 20:48

And I just have a place just to put them saying, oh, you know, all of the shorts today, you know, I should have bid a little bit higher. What whatever it is and putting that in. And then I have a another review that happens monthly where we resurface everything I've told it throughout the the weeks or throughout the month, and it goes, here are the ideas that you had. And then you can just give more work and say, well, you have all my data. These are the ideas I have.

Michael: 21:16

Which one of these makes sense? And it'll go back and it'll start and create another report for you. So, yeah, a lot of just email me the report and I'm gonna sit down. I'm gonna take a look at it at the end of the day on on the back deck reading this thing as opposed to be sitting here and and crunching away at the numbers is Yeah. It's a lot better way to live life too.

Dave: 21:36

Yeah. So so here are three things I do in the daily review that I encourage other traders to do, and it's specifically for like noticing stuff that you could create a strategy for. So I've got three alert windows, and topless that show me all the stocks that were up the most today. All the stocks that were down the most today, that's another one. And then also all the stocks that just moved the most today compared to their average.

Dave: 22:17

And that's a good place to start for looking for new ideas because the I mean, that's where the money's coming from. Right? So that should, you should look at the charts for all those and say, okay, what if I had to get it? What if I had to participate in this move? How would I have done it?

Dave: 22:38

Like, let me just brainstorm. What what what would I have done to get in this in this trade? Like, what can I do to create a back test for this chart that I'm looking at here?

Michael: 22:50

Well, and this is this is funny. You might wanna, you know, plug your ears or take your earphones. I will talk about swing trading and investing for a minute. But same thing that William O'Deal did, you know, the very famous creator of investment business daily. The guy traded, made millions, think, if not if not a billion trading.

Michael: 23:08

And that was how he got as well. You know, back in the day, he had to print off these things, but he looked at every stock that went up. I think it was like a thousand percent. So every 10 bagger that ever existed, and he just sat there over days and weeks and went through all of the charts and all of the fundamental data of of what these looked like, you know, before they took off and during their their ride higher and and what they look like at the end. And that's how he created his investment method that there's still people that trade every day and and very successfully.

Michael: 23:43

Today, I actually finished reading chapter one of that Market Wizards book that came out with Kuala Mabe turned 5 k into a 100,000,000. He credits that same process of he would just go back at the end of he was a swing trader. We go back at the end of every week and just look at which one's ripped and then just kinda backwards engineer that process. So it's just it's everyone use it. Right?

Michael: 24:05

So it is a really good place to start is just go and kinda put yourself in those shoes and say, you know, how would I right? Gun to your head, how would you sit down and and try to make money off this trade? And then note that and then look back after maybe a week or or a month or whatever. And if it's the same thing, then well, now you got your starting point for something to at least start testing.

Dave: 24:28

Yeah. And this, it's actually a pretty hard thing to do because anybody can look into the chart of something that moved a whole lot and say, yeah, man, let me just get in right here, right at the bottom before it skyrocketed. Right? Easy. But that's a very difficult thing to do.

Dave: 24:46

Look at a chart and come up with something that actually you would create a strategy for. So it's harder than people think. And one of the tools that I recommend people use, Trade Ideas has a really nice tool on the web. You don't even have to be a subscriber. It's a free tool called Stocks Like This.

Dave: 25:05

Kind of a bad name for what it does, but what you can do is like, let's say you see a big move in Apple in chart, and you want to try to figure out, okay, how can I create a strategy from this? It's kind of hard to do that, but this what this tool does is you could say, okay, show me all the alerts that appeared in Apple today between this time and this time. And the report you get is a list of every alert that happened during that period and how often it happened. So it's sort of like the way I, the analogy I use is, you know, coming up with, coming up with a strategy without that is sorta like going to a restaurant when there's no menu. The chef just comes to you and says, Hey, what do you want to eat?

Dave: 25:57

Like, well, that doesn't make sense, right? If you got a menu, it's a lot easier to order, right? It's the same thing with this tool. It's making this very, very infinitely hard problem much more, much less hard because you're getting a list of the things that you could create a strategy from. So you're getting a list of all the alerts that you could use as a starting point.

Dave: 26:25

So it's making this infinitely hard problem a lot less hard.

Michael: 26:29

Well, and that kind of stuff. And I do I do think, right, AI is another great way to to look at it in which I actually have another thread going in which I have the same process of stocks that I would have liked to participate in essentially. I I think that I could build a strategy for. And you just with the screenshots and its ability to read those things, you can upload those and you can have it pull in, you know, you add a bunch of indicators to it and you just upload the picture and you have it pull that raw data out. And then if you do that over and over and over again, it can build its own base.

Michael: 27:08

Right? You can point at the chart and say, like, right here is where I think there'd be a an interesting way to do it. And there's there is a way to do this just like anything in systems trade. There is a way to to be, you know, bullshit about it where you're like, I wanna buy the very bottom and and get the very top. How is that gonna happen?

Michael: 27:25

But this is why I think we described the exercises putting yourself in there and saying, would you trade it? But by just looking at that and saying, okay, where are areas that, you know, pullbacks that I could maybe catch or or, you know, different patterns or whatever to do. And then just by going through and just adding these into this this kind of area, into this AI thread does a couple things. One is at any point, can say, make me a report of all of them. Just something that I can just scroll through quickly to have all of those charts that I really, really wanted.

Michael: 27:59

And then also, could just you can just start to ask a question, like, are similarities across the charts that I sent you? What are suggested? Whatever. And then from there, you could just the I'll I again, I'm obsessed with these things because then the hop to there to testing is way simpler because if it says, oh, yeah. You know, you should look for a pullback into VWAP around this time or whatever, you can say, okay.

Michael: 28:23

Code it. Right? Build the strategy. Let's throw it into something. Let's start that testing process.

Michael: 28:29

So, you know, that's a pretty decent process from, you know, observing what you wanna see to to having an AI kinda track it for you, to having it code a thing, and then that that's gonna tell you. Either back test is gonna come through and and you you have come up with a great idea or it's gonna be complete crap. But at least you have that process, and then you you go through that a number of times. Eventually, you'll stumble across something that that works.

Dave: 28:53

Yeah. I haven't done this yet, but here's an idea for your process that I think you could use. Have teach Claude how to use the stocks like this tool. Was thinking about it a thousand. As an input to figure out what alerts occurred and use that as like idea generation for Claude.

Dave: 29:14

I think that'd be, I would be very interested to see how that played out. I think it'd be very useful.

Michael: 29:20

Well, and I the other thing I so while I'm talking, you're thinking while you're just talking. I'm like, I'm now I'm thinking, well, if I'm giving it the times in which I'm looking at the trades and the symbols, it could it could kinda build its own stocks like this as well with Amibroker. Right? It could go in and run a test and and with, like, MabeKit columns, some columns I have myself, it would know each filter value at any given at any given moment. So, yeah, you could you could create this one step further And then another step further, this is how crazy AI is, you could create an automated process.

Michael: 29:59

So now we just come up with something where you're just dumping charts that you like into a system. And every week, it's grabbing those and it's it's spitting you back out raw data of what different columns would look like. And it could create a nice little pretty report that says these are the ones that are similar across all the ones that you sent me, and that's your that's your place to kinda step in and get started.

Dave: 30:25

So, so another way to think about this that I think is really useful is to think about not strategies themselves, but different universes of stocks. So different situations that stocks are in. And you have that separate from what I refer to as entry tactics, which is the second part of this. Both of those make up a strategy. So go back to the last week's episode where I was talking about the gap strategy that I used.

Dave: 30:59

It uses a very simple entry tactic, like basically a candle pattern. That candle pattern can be applied like I'm applying it to gaps, but it could be applied to other universes as well, besides gaps. So gaps in this situation is the universe. So what you could do is the way I like to think about it is, come up with different universes, situations that stocks are in, and then separately come up with like a library of entry tactics, ways you might enter trades. And then you can mix and match the entry tactic with the universe, different universes, and combining those and different combinations of those comes up with strategies.

Dave: 31:48

That's how strategies work. And that's a very I think that's a very helpful way to think about it. It sort of reduces the problem further. Thinking about universes like this, I think, is more manageable, and it's easier to think about. And then you can apply strategies or entry tactics to those.

Michael: 32:08

Mhmm. And okay. So at what point and this is gonna go back to something else that we we also fought about. So at what point when you're building these strategies, do you test it versus what you already have? Because there's there's two kind of worlds that exist there.

Michael: 32:28

One could be, what if you just created something that was way better than what you were doing currently? Like, at what point do you look to be either split up capital or or jump ship entirely? Because if if you're looking so and the reason I'm asking this, is because, basically, you said your process is you're always looking at the ones that were up the most, down the most, and move the most. Right? So you're always kinda looking inside that same universe.

Michael: 32:55

You know, we're talking about multiple strategies, but I think there's a world where you kinda just replace what you're doing currently. Like, you're able to the thing I created is better than the thing that I'm currently running. How do I reconcile that and what's what's my game plan when I do that?

Dave: 33:13

Yeah, well that's the goal every time, and those are good problems to have, right?

Michael: 33:19

Exactly what

Dave: 33:20

you want to have happen. Mean, you should always have that as your goal. Like, here's what's working now for me. Do I create something better? How can I create something that, you know, maybe it trades less frequently, but the trades are better?

Dave: 33:42

Maybe it trades more frequently, but the trades are not as profitable, but you still have a potential to make more money with a strategy like that. Each of those situations, has its own way to optimize and trade them in a certain way. And, yeah, I mean, that's, it's, it's a wonderful problem to have, to have multiple strategies and, you know, pick and choose which one you're gonna deploy or, you know, pick and choose which one you're gonna trade with the most size. I mean, these are great problems to have.

Michael: 34:18

Yeah. And because I I'm actually running into that problem a little bit now, so I've been thinking about it, and I just keep coming back to your path to confidence of it. So what I've kind of decided to do is to because it is it is capital competing. Right? So I I can't run both.

Michael: 34:37

You know? I I I could, but there's there's no real benefit, I guess, a better way to say it. There's no benefit to running both. So my game plan is to first run, say, 75% the one that's the one I've been running for years and then 25% of the new one just to get some live testing and then button back test, it beats the crap out of the thing that I've already been doing. And then my game plan is just to over time have, you know, the better one, take more and more of of this capital allocation until it replaces the other one, and I just kind of I I kinda pushed that off.

Michael: 35:16

I was just thinking if you had any any better ideas because, again, we we are talking about creating multiple strategies, obviously, to run multiple strategies and, like, you know, not to relitigate our our whole fight, but, you know, there'll be times where the strategy is, you know, I'm I'm trading this in the morning and that in the afternoon and and maybe this overnight. And and it's so they're completely independent from each other. But there will be times in which they they're gonna overlap in capital and you have to make that decision of of of which of these I preferred. So I just wonder if you've ever done that where, you know, you've you've got these two strategies that are are essentially the same. It's a better way to express the same essential idea.

Michael: 35:57

So there's no anti correlation benefit, and there's a very, you know, hard hitting capital required benefit in how you how you kind of jump from the old ship to the new ship, I guess.

Dave: 36:10

Okay. So let's assume that I think that's often helpful here to, like assume unlimited buying power, just for the purposes of thinking about If you had unlimited buying power, then which one is going to be better? And the reason you want to think about it this way is you want to be at, just like we normalize columns, you want to normalize the performance of strategies no matter what size you're trading them. Happen to be trading them at the moment. And that usually means reduce it to R, like create R charts for both of these instead of dollar based equity curves for both of And then you can see, like one's gonna have I mean, it's just an easier way to compare how much R are you gonna make over what period of time.

Dave: 37:00

And one of them is probably gonna be, I would assume, more efficient. So the other thing is if they are if it is a variation, you've it's sort of like what we described last week, a variation of the same idea. There's probably a way you can take or look at both of these strategies and make it so that it's completely additive. Like there's no overlap or like there's some way you can like maximize the number of names it takes. And once you do that, you could sort, maybe you make a, you know, figure out a way to take only the best trades from strategy B.

Michael: 37:48

And you

Dave: 37:49

know, we, we, we talk a lot about optimizing and, you know, getting rid of bad trades, but there's a whole other side to that. It's like taking your best trades with bigger size. I think we did a whole episode on that several months ago. Yeah. But that's an important thing to do.

Dave: 38:03

It's sort of the same thing as removing bad trades from the system in a way, because you're taking some trades with zero size by removing them, and you're taking, with a different size, the good trades. So, and I think there's once you get true to systems like this working well, you have a lot of flexibility to maximize the efficiency of them, and that's those are the fun things to work on. That's really fun to deal with those optimization problems.

Michael: 38:37

Well, it's what you were talking about with your your bicycle analogy. Right? When you're in that worry of you're like, oh, both these things are gonna make me a bunch of money. Which which one do I trade? It's a lot easier problem to deal with to say, okay, that's a problem as opposed to how do I start trading in a way that's going to be profitable.

Michael: 38:57

That's a much harder thing to do. It's just one of those, I wonder in my brain, am I biased to the one that I've been trading for so long and has done so well for me. And it's kinda like you're you've got a a goose that's laying like a silver egg and you got one that's laying a golden egg. You're like, oh, what if, you know, what if what if I kill the goose that's laying the silver egg and then the one that laying the golden egg stop? So it's like, how do I, you know, how do I manage?

Michael: 39:24

I can only have one goose, so I have to manage this at some point. And but, yeah, it's it's a better problem to have than someone who doesn't have any of those problems at all. Right?

Dave: 39:35

Yeah. And I think the right answer there is probably figure out a way to trade both, or at least paper trade one of them. Like you don't want to make that decision right now. You want to make it over time as it sort of proves itself. Because it's, you know, another thing that we're, that you mentioned earlier in the podcast, which was when, when strategies stop working, typically there's not a flag that says, Hey, this one stopped working and it's not coming back, which is the hard part.

Dave: 40:10

You're never going to really know. It's very rare that you have a situation where this strategy was working today or yesterday, and it's not working today. Sometimes that does happen. I mean, there's rule changes that happen, I've traded strategies like that. And that it does suck when that happens, when it's painfully clear that it's obvious that it stopped working.

Dave: 40:33

But usually there's this guessing game. Okay. Has something changed? Like, let me try to explain what's happening here. Does it tell a coherent story?

Dave: 40:44

Like, is it really gone? Is it coming back? Like, you're never going to really know. And there's no metric that you can look at to say, Yep, it stopped working. I can tell.

Dave: 40:55

So it's, it's, that's what makes this hard. And that's why you should always be looking for new ideas no matter what the current status of your equity curve is.

Michael: 41:05

Yeah. And that's, I think that's the main takeaway of this episode is that we're in, you know, basically everything that we've talked about so far is that just the never settle part of it. And it it really does help dispel, I think, the whole, oh, I get a robot to trade for me. Therefore, I spend the whole day, you know, on the beach and, you know, I I don't have to work ever again and this thing just makes money for me that forever. You know, you could probably do that and you might get away with it for a bit.

Michael: 41:35

And if you're lucky, you might be able to get away with it for, I don't know, year, a couple years. If you're if you're real lucky, you wake up every morning, you turn on the robot, you found something that works, you walk away. But eventually, that's that's going to be a problem. Right? And and you're, you know, you have to always have this, I'm never settled or comfortable in what's going on and just always have a plan to push forward and and create a new system or a new process or or, you know, like we talked about in the other ones, refining your current system so it's a little bit better, that type of thing in which you're just con constantly, you know, pushing down and and forcing yourself to just do to do more and more and and do it while the getting's good and as opposed to trying to trying to catch up from behind later.

Dave: 42:25

Yeah. So let's I I think why don't we wrap up here? I think I've got another topic for, that we can expand on here for like another completely different ways to come up with completely new edges. You know, this, I feel like this has been a process for, okay, how can you come up with a process for doing this? But let's talk about the next time, how you can get input from others for this and how that would work.

Michael: 42:58

I okay. Keep that in your head for next time. But I'm laughing because I told I told Dave this going in. I was like, yeah. We'll we'll wrap it up.

Michael: 43:06

I'm like, no. I'm like, this one's I think this one's gonna be big and we're gonna we're gonna wanna do multiples of it. So good. Look forward to it. Right?

Michael: 43:15

You know, make sure you're subscribed or followed or wherever from wherever you are. We put out one of these every single week, and and now we know what the next one will be about. So as always, I'm Michael Nauss.

Dave: 43:26

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