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How do you decide what to work on next in your trading? How do you know what's likely to actually improve your results? Dave and Michael discuss a framework for prioritizing strategy development work given your limited time and resources.
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What is Line Your Own Pockets?
Create your own trading strategies with edge.
Okay, everyone. Welcome back to Line Your Own Pockets. In this episode, we're gonna talk about how do you prioritize all your ideas? We're kinda going down this rabbit hole of generating ideas and recording ideas. And now we're gonna go, okay, so now you've generated a whole bunch of ideas, and you've recorded them all.
Michael:There's only so much time in the day. So how do you know how much time you spend on this and that, and and which do you prioritize when everything happens? But first and as always, how how's your week been, Dave?
Dave:Yeah. It's been great. I've been looking forward to this episode. There's a lot of good, analogies with software development. So as a developer myself, it's it's something I think about a lot, and I think, we'll have some good stuff to talk about.
Michael:Absolutely. And, you know, you've been mentioning to me that you've been getting some feedback on your end, and, and I've been getting some feedback on my end. And it looks like you guys are are liking the podcast, and I'm certainly enjoying doing it. So, we appreciate that. We appreciate all the kind words.
Michael:You know, you come up with one of these things. You think you're gonna shout into the void for a while, and so it's great when, you know, someone shouts back. It does keep going. So I love that.
Dave:Yeah. For sure.
Michael:Alright. So we're gonna talk so, again, we we went over in the prior ones. We went, you know, this is how we generate ideas and, you know, this is how we record them. But now when you have a list of ideas and and you're going through that process, what do you do to prioritize them? And I'm excited for this one because I think our priorities here are gonna split a little bit because, Dave, you're more of a shorter term day trader, and I'm more of a a longer term swing trader type investor.
Michael:So, I I'll be interested to see where the overlap is, and I'll be interested to see where the difference is. So, you know, what do you do when you have a little bit of time in your day and you've got that list of things that you wanna work on? How how are you sorting that out? I think
Dave:I think a good analogy here is something from software development. So, you know, I've been the CTO of Trade Ideas. It's very similar to software development in which you have a large backlog of stuff that you wanna get done, but you only have a certain amount of resources to do it. So there's only, you know, a certain number number of developers you have access to. They there's only a certain number of hours in the day.
Dave:How do you decide what to work on? And it's a very similar process. You're gonna have a bunch of trade ideas that you could work on. How do you decide which one you do now versus put off to later? So, at trade ideas, we use this priority score concept.
Dave:So let me walk through this a little bit, and you can see the analogy that will, I think, become clear after I explain it. So it's based on something with the acronym RICE. So the r is for reach, The I is for impact. The c is for confidence. The e is for effort.
Dave:All those things have varying degrees of, depending on the feature that you want to implement. So let's say you have a feature let's say you got several features. Some of them are gonna have a certain amount of reach. They're gonna affect a certain amount of users that might wanna come use the product. I's for impact.
Dave:Each of those features potentially has a much different impact. C is for confidence. How confident are you that when you get this feature done that it's gonna have the effect that you expect it to? And then, e, effort. That's probably the most important one.
Dave:How much effort is it gonna take to implement this feature? So all those contribute to a single number, and that's a score, priority score, we call it. So we can rank our backlog, our list of things we could work on by that score. And what bubbles to the top is the stuff that's easy to do, that has the biggest impact, that you're most confident that in that, in that score. So the analogy here so first of all, does that make sense, Michael?
Dave:Is there anything that I need more than I need to explain about it?
Michael:No. It it makes it makes perfect sense. My my question, I think, you can probably guess what's coming up. But the the subjectivity of of filling that out seems like it might be a problem. But I I I get the ideas.
Michael:You know, you're trying to, a, bring people to a software product, and, b, make sure that when they're there, they're getting what they want and they're they're getting, you know, the help in the edge in the market that that Trade Ideas does. So you're trying to weigh those things of, you know, if you do something that's really, really cool, but only for, like, 5 people from a business point of view, that doesn't make sense. You're trying to balance the, how good is the feature in you know, potentially for a niche versus how broad can that feature be and and trying to trying to figure out what that balance is. And I I like that because, again, you need to have a system for that because I know from consulting trade ideas, there's a whole bunch of traders in there, and they're all wanting their own thing done. And that's that tugs at the developing work from a bunch of different angles.
Michael:So this is a good way to say, okay. Well, these are the things that, you know, we've we've come up. We've ranked them, the most. But, again, my question is gonna be, like, who decides on on those particular inputs?
Dave:Yeah. It's it's important to be consistent in how you come up with that score. But you're right. Subjectivity is a big thing. And that's much harder in the software engineering space when you have multiple, owners, multiple stakeholders.
Dave:But usually with your trading business, it's just you. So you can be you know, you're not gonna have as much subjectivity there. But and it's not a completely a one for one analogy, but I think there's some good parallels to draw here. Like, the the first parallel, I would say, when you think about reach, how many users is this feature gonna reach? The way I would think about this in my trading work is how many strategies is this gonna affect?
Dave:Like, does this have the potential to improve several strategies? Does it have the potential to prove, you know, improve just one strategy? Is this a new strategy that I'm coming up with that doesn't affect existing strategies that I have? Those are all important things to think about. So I would prioritize ones that that would affect the the biggest portion of my existing trading.
Dave:The the other thing to think about here is it's more important and valuable usually to improve an existing strategy versus create a new one from scratch. So if that's the decision you're making between 2 ideas you have, you should improve the existing strategy that you have, that you already have, you know, grading live and it's producing for you, that's gonna be a much easier way to, to improve things rather than coming up with a new one from scratch because there's a long lifetime of from the initial idea of a completely new idea all the way to getting it trading live where it's producing profits for you. That's a long way. And typically, an existing idea is more easily, more quickly improved than a completely brand new one. Do do you find that to be the case?
Dave:Does that make sense?
Michael:It does, but this is where and there's gonna be a couple of these, and I'm excited for them. This is where it's gonna differ a little bit because, a lot of your strategies are gonna be run regardless of market condition because you're, you're day trading in nature So, you know, if so assuming somebody has a complete set of strategies, I'll say, you know, I 100% agree But for someone like myself who runs different strategies at different times based off different regime filters or or market conditions, sometimes, padding up the the missing bits can be more important. So, for example, I have a trend following system, a long only trend following system, and I find that works best when, you know, the market's trending, when the when we're in a bull market. And I have a simple regime filter of, you know, the market being over a certain moving average as an on off switch. So if I was somebody who, for example, that was my only strategy, as opposed to beating my head against the wall to make that strategy better, I just know that if, hey, if it's if it's, you know, 2,000 or 2,008 or even 2022, 2023, I'm you're not gonna you're not gonna make a long only trend following strategy good.
Michael:So you'd be better in that in that case, taking those empty bits where the strategies in cash and then building another strategy with it. Right? So I I could see the the kind of divergence there lie, but if I'm running if I'm day trading and I'm running all of these strategies all the time anyway, then I 100% agree that if you have an idea to create a new strategy then I would take some of that idea and see if you can apply it to what you have existing first because you're right small tweaks require much less work when it comes to you know forward testing and paper trading and before before implementing live It's, I guess, the advantage of one of the advantages of day trading versus swing trading is the frequency that you get data is is way more than than I would. Right? So I I spend a lot of my time looking and saying, you know, you know, all of my systems are in cash during, you know, crashes.
Michael:Right? The the VIX spikes a certain amount. All of my systems go into cash. So my time might be spent. Okay.
Michael:Well, what strategy can I employ on, you know, VIX spike type of environments, that type of thing?
Dave:Yeah. So in general, I agree. But I think we're sort of saying the same thing here because I would I would prioritize working on strategies that trade frequently, no matter what frequently means to you or me. Mhmm. The more frequent something is trading, the more opportunity you have to improve it.
Dave:So if you got something that's trading 10 times a day versus something that's trading 10 times a year, you're gonna have a much better ROI improving the strategy that trades 10 times a day. And and maybe that's that frequency is different for you, but that's how I would think about prioritizing which one to work on right now.
Michael:There's, and then also, I guess, for the for the longer term nerds like myself out there, one thing that that I do when I'm prioritizing strategies, I look for gaps in my buying power. Right? So, Like I mentioned there, but one thing that I'm exploring now which I haven't done for a long time is getting further back into day trading and the way that I'm looking at that is that there are avenues, prop firms, and even margin on accounts that I'm currently not using that could benefit from a day trading type strategy. Right? So I could have my my investment stuff running, and maybe that's running on cash.
Michael:And then all of a sudden, during the day, I I enter margin, and then I exit it by the end of the day. That could be another that's for me, I guess, just an example I'm doing right now, where that's where my focus is.
Dave:Yeah. Well, I think efficient use of buying power is really important, and it's something that people don't talk about a lot and don't think about a lot. Some of the traders that work with me, sometimes they'll say, Dave, I've run out of buying power. What do I do? And my my eyes light up because that's an awesome problem to have.
Dave:You know, you've got confidence in your strategies enough to run out of buying power. And the optimizing usage of buying power is a fun problem to solve and way easier and more productive than coming up with strategies initially. So it's a really fun problem to solve. And I like yeah. There's there's a lot you can do there.
Michael:And maybe that's an idea for a future. It's funny. I keep writing down ideas for future because they're really just things that I wanna ask you, but I'm like, we should just do it on the pod. But I think that's another avenue to go down is, you know, that use of buying power, I think, could be a whole other episode because I see that a lot where people will, maybe they'll have multiple strategies and they go, well, which one do I run? I only have so much money.
Michael:You know, you'll see, instances in which, you know, there's opportunity cost to certain strategies. I'm running strategy x and that's making me, you know, 20% a year. But then I I developed strategy y, and that looks like it's gonna make me 30% a year. Right? Do I abandon this or and trade this, or do I combine the 2?
Michael:You know, what what do I end up doing? And what is each individual, strategy? What does that entail? That's something that I think is a good again, it's a good problem to have. It's way way more annoying if you're just sitting in cash for long periods of time because, right, cash is yielding you well more now than it's it's have in my lifetime, I think, personally, but, still not very much.
Michael:So, yeah, having that problem, I think it's a good problem to have, but it's it's a problem nonetheless.
Dave:Yeah. I'm sure there's at least an entire episode, probably more, we could talk about buying power, and I'm sure we will. It's a great topic. But to to bring it back to doing work, let me from a developer's perspective, let me tell you something that's that can that can happen. So as developers, you know, you always wanna be working on something.
Dave:You always wanna be building something. Building something is fun.
Michael:Mhmm.
Dave:There's a trap that you fall into that you think building's new software can solve everything, so your tendency is to build something. And it's really important to think about and prioritize exactly what we're talking about here, prioritizing when to put your precious resources and effort into a particular problem. And, you know, I've seen I've heard from a lot of traders that want to do, some work on something they thought of, and I can tell right away from what they're saying that it's not gonna pan out. It's gonna be a lot of work for not a lot of gain. So it's really important to think about what you're gonna work on now in a way that is gonna have the biggest bang for the buck as quickly as possible.
Dave:That'll keep you motivated.
Michael:Well, and I think that leads to another, another idea to flush out because just like and I do use your software analogy. You're you're dealing with a little bit of an unknown there. So, for example, your software analogy and and your breakdown, Somebody fills out that form or they fill out that that point system, and they think, hey. This is going to have a massive impact. Everyone's gonna love it.
Michael:People are gonna come, you know, just we're not gonna be able to support enough copies because we're gonna sell so much. But you don't know. Right? You're guessing to some degree. And it's the same idea with building strategies where, in my opinion, if you're doing it correctly, you're following in some respects, like, a scientific method where you have hypothesis, you know, I think that mean reversion with this indicator is going to be a good thing And you run your tests, and then you're trying very hard to prove that it's not going to work Eventually, it's not going to work So I guess when you're prioritizing what it is that you're gonna work on next and you're saying the best bang for your buck, we don't know It could be what you rank as your worst idea that ends up being your most profitable and what your best idea So how do you how do you deal with that uncertainty?
Michael:You know, for me, I I'm still struggling with that, and and kind of what I do is I make the idea as broad as possible, and I test the absolute broadest version of the idea. And if that works in e even some degree, then I know it's a road to go down. And if it if it completely falls apart, the equity curve is just, you know, looks like AMC stock or something. It's just it's crashing all the time, then I'm not, I'm not interested in it. So, again, how do you know when you're on to something that that's the thing that I should be pursuing and prioritizing versus, you know, what you think might be a good thing?
Dave:Yeah. It it that decision becomes easier and easier the more experience you get. I I love what you just said about, you've got this this idea. You're not really sure, but you did this quick relatively quick simple thing to test out the broad theory. So you so with that step, you did something that was relatively low effort, but you gained a lot of confidence knowing that, okay.
Dave:Now I feel a lot better about devoting my resources to that particular idea because I did this thing that was less effort to to sort of prove it out. I think that's really important. And that's why there's, you know, all 4 of those things that we mentioned before, reach, impact, confidence, and effort contribute to the score. If there's, you know, something that where you're you know, you think it's gonna be a high impact, and you think it's gonna be a low effort, but you're not really confident about it, that score is gonna be lower because of that. So gauging that is important also.
Michael:Yeah. Because I guess, right, if you're just trying to do the best you can, you know, you may there will be times, I'm sure, if you're building systems where you believe that you're onto something or that your idea is good. And then fast forward however long your process is to to test stuff, which we'll certainly get into, you just find out that it's it's nothing. And that's that's, to me, usually a sad time where, you know, you have to go, okay. I thought I was on to something here.
Michael:You know, you you try to loosely record the amount of time that you're working on it. You're like, okay. I'm I'm 30 hours into, you know, research and testing and and this kind of stuff, and then it's not working. So it's time to just kinda move on with my, move on with my day.
Dave:Yeah. You don't you don't really think of systematic trading as being emotional, But that like, exactly what you described. You got such high hopes for this idea here. You just know it's gonna work. You do all this research, and then you find out that, it's not gonna work or it's not nearly as good as you thought it was, or it's gonna take a whole bunch of time to actually implement it.
Dave:Yeah. I mean, that's those are highs and lows of emotion, and
Michael:that that's very real. And, from the people that I've worked with, the and, again, I I feel it as well. With the people I work with, it becomes just so hard to, to kinda let that go. What in writing they say you have to to kill your babies where it's you know, you you have this piece of work, and it's time to go through and cut them. And it's it's the same when it comes to systematic trading where, you know, you could really, really believe in this idea.
Michael:But, if you find yourself beating your head against the wall, that's when it's time to move on to something else, which is why having this priority list, I think, set ahead of time actually helps and always having a backlog of ideas. Because if you're working on something and it's your only idea and and you're focused and you're doing so much time working on that idea and you don't have anything in the backlog, it becomes much, much harder to, you know, just say, okay, I'm wrong, you know, kill that idea and move on. But if you've got 3 or 4 other things that you're kind of excited about as well and you get to that period of time of testing and you can't do anything, then it does make sense to go, okay. Now, you know, I I it's easier to say, okay. I was wrong in that one.
Michael:It's time to move on. And now I've got this new idea that I I can quickly get excited about and and forget the the time kinda spent on the other one.
Dave:Yeah. It's it's really important to have a growing list of ideas in your backlog. And just because, you know, I think the tendency is, for new traders, is you think you're gonna you've got this idea. It's gonna work. You start trading, and then it works.
Dave:And then you're done. But that's really just the beginning. Once you start trading something and you make profits with it, you're just at the beginning part of a long term process of being a successful trader. And it can be overwhelming, but you you have that's why it's so important to have a regular system of recording your ideas and putting it into a backlog. And don't be scared when that backlog gets really big.
Dave:And, you know, no I mean, at some point, you're gonna realize, gosh. I'll never get through all these ideas. And that's a good situation to be in. Mhmm. And managing that backlog in a way we're talking about now becomes more and more important the more experience you have as a trader, the more trading you've done just becomes and, you know, sort of the closer you get to death, right, you're realizing your time is valuable.
Dave:Yeah. You gotta figure out what to work on.
Michael:Yeah. Because the the one thing that I guess we're trying to avoid with this episode with people going down this journey, which I think we probably both have seen is well, you already mentioned is the guys that you can just see are going to beat their head against the wall for something for for really no reason for hours and hours and hours and hours. And then you've just gotten to the same point that we're trying to avoid with systematic trading where you're sitting, you know, we talked about this in, I think, the first episode where part of the beauty of systematic trading is I'm not sitting watching every p and l tick and every tick and every stock all day long. I have systems and ideas in place and the freeing nature of that. Well, you can easily replace that watching, you know, every P and L and every tick if you're just running back tests all day long and you're watching the back tests carry out and you're not being purposeful enough about this is what I'm gonna test, and this is how long I'm gonna give myself to try to flush out this idea.
Michael:And then this is what I'm gonna do if that idea doesn't work, which, again, you need a backlog for. So you're not kinda all in on one idea.
Dave:Yeah. And the other thing, when when you do a lot of work on an idea and it doesn't pan out, like we just said, yeah, that could be depressing, but there's still a lot of benefit you get from doing that. You learn now that this idea wasn't as good as you thought it was. But also for future ideas, that confidence part of the equation that we're talking about, you're you're getting better and better at being more accurate with your confidence. So, you know, you gained a lot of good experience.
Dave:You learn something from that strategy. Even if you learn that it sucked, that's still a valuable thing that you can apply to future ideas.
Michael:Well, in the the actual art of or or the the process of going through backtesting can do that as well because just to use my example again, maybe you were looking at mean reversion with stochastics, and you found out that there was just no edge at all to to this particular indicator. Well, if you have that indicator in maybe some of your other systems, maybe it's worthwhile to go and say, okay. Well, maybe there's a better way to judge something being overbought or oversold or something like that. Maybe there's a piece of information, from the failure that you can take to other systems and say, okay. Well, maybe if I replace this piece that failed in this one system with a different indicator or a different metric in some some respects, then I've made my other systems better.
Michael:Because, yeah, it's just you know, part of it, again, it's just the scientific method. And I I was reading this blog that I thought was interesting. There's all these things that were invented by accident. Like, there's some sweeteners that were, like, pesticides or something, and someone tasted it. Well, no.
Michael:That's pretty like, the all of these just completely accidental scientific things where someone was focused on x and then something completely insane and different came out of that. So just by writing off the time and having this idealist and going through this in in a, you know, responsible and a systematic way, you end up just kind of learning some things that you you there's no way you would just stumble upon in the wild.
Dave:Yeah. So, do we have time for one more analogy that I think will be helpful? Or we
Michael:It's our podcast. We can go on we can go on as long as we can.
Dave:Yeah. Alright. So this I'd be remiss if I didn't bring this up. I love this analogy. So this is from a book called quit by Annie Duke, famous, poker player.
Dave:Mhmm.
Michael:I think I read one of her. Didn't she have she do think is that the same one thinking in bets or thinking in Yep. She wrote
Dave:thinking in bets first and then wrote another one called quit,
Michael:which is
Dave:a good one to read. We should put it in the show notes. Alright. She talks about an analogy there, which I think is really good and pertinent to this. So she interviewed the person at Google that is responsible for their moonshots projects.
Dave:So these are, you know, really big out there projects that have kind of had a low expectation of success. But if they do hit, they're gonna be huge ideas. So in our interview with him, he mentioned this analogy called the monkey and the pedestal. So imagine you've got imagine this thought product this, thought experiment. You've got a monkey that if you can get it to juggle on a pedestal, you can make a lot of money.
Dave:Right? So so that's the the premise.
Michael:K.
Dave:And that's the problem you're trying to solve. If you can do that, you can make a lot of money. How would you attempt to solve that? How would you attempt to create the situation where you could make that, where you could make a lot of money with this? Well, it turns out most people start with the pedestal.
Dave:Making pedestals are really easy. Right? A lot of people will focus on making a pedestal, making it the perfect pedestal. That's where they start the project, but that misses the entire point of the entire project because that's not the hard part. None of it's gonna work if you can't get the monkey to juggle, and that's the that is the hard part.
Dave:So working on the pedestal, as easy as it may be, that's completely irrelevant because it's not gonna work if you can't do the hard part. But most people start by working on the pedestal. Now I think there's some analogies here with software development and coming up with trading ideas. A lot of people will focus on an easy thing, an easy part of a project that is not the essence of the thing. Like, it's even if you get that to work, the ultimate part is getting a strategy that's gonna work.
Dave:So you can imagine some tangential part of getting a strategy to work that you could focus on first, which misses the entire point. So it's it's just I thought it's a really good analogy in a way to think about, divvying up your work and figuring out what to work on and thinking about projects in general.
Michael:Yeah. It becomes becomes very problematic when you're, I think, trying to reinvent the wheel. Right? You're you're trying to grab, again, that easy thing of of, you know, you know, how do I decide that the stock is down a lot or or whatever the instrument is? And you you go into the easy thing, which you can grab from anywhere.
Michael:It's the whole, I guess, part of software development is, you know, what do I just completely co opt from someone else or something else? And then what do I actually do to kinda put my own my own spin on it? And it ends up being, there's a lot there's definitely a lot more to this. When we were talking with this as kind of a topic, I'm like, oh, yeah. You just you pick whatever.
Michael:Because I'm always looking at it from more of the the buying power perspective. And and maybe it's just I haven't gotten that that backlog yet, but there's, you know, a lot of different ways to look at it. And more importantly, there's not a lot of time in the day. So especially for a lot of people out there who are who are systematic or interested in systematic and trading, a lot of it has to do with the fact that they've got other obligations and other other things to do. So that becomes even more important to, to kinda manage your time correctly.
Dave:Yeah. I think I mean, one of the things I really feel like I'm good at with traders is, like, telling them telling them the rabbit holes to avoid. If they're thinking about working on one of these 2 different things, I can easily tell that one of them is gonna be better. So saving them a whole bunch of effort and time is just I I love doing that. So
Michael:Well, it's it's and it's part of the problem with the market, Sue, is not only is there a a near infinite amount of, possibilities and combinations and permutations you can do about just about anything is that is only ever going to continue to grow as we, every day, print more data. And, you know, we have more instruments that are opening up for people to trade. There's, different asset classes. And then with crypto now, there's just completely different things that just never existed before. So having that skill, I think, is really, really important.
Michael:Like, it's one of those that kind of when the Internet came out, the skill went less from knowing a thing and more about being able to find the correct thing because pretty much everything exists out there. And it's the same kind of thing that we're hinting at now is that you could test anything. Right? You could test phases of the moon. There's people out there that use, you know, sacred numerology or whatever with their trading, whatever it is.
Michael:You can test it. The question that you should always be asking yourself is, is this the best use of of my time and energy, and is this the thing that I should really be focused on and and really be testing?
Dave:Yeah. It's you get better at it over time. It's it's very it can be overwhelming in the beginning figuring out what to work on, but it's a skill that you never master. You're always getting better at it. And, yes.
Dave:It's it's the longer you trade, the more you realize how important it is.
Michael:And, for people, I I think this is the crux of it for a lot of people. A lot of people like myself, and I probably you included, you enjoy the process. You enjoy the process of running a back test and and looking at the numbers and the output of it and then tweaking the system and then running another back test and then doing these things. So you almost have to stop yourself, and it becomes stopping yourself doing something that you enjoy, to make sure that you're you're focusing on on something else. So, like, a cooking example would be, I really like the eating part.
Michael:I don't like the cooking part. But if I'm gonna be a good cook, I need to spend most of my time focusing on on the thing that I might not enjoy as much as, you know, the end result and the end product.
Dave:For sure. Yeah. You have to be you have to be an optimist because you're gonna run into these you know, you're you're gonna, do some work on your ideas. A lot of them aren't gonna pan out. And like, we're talking about how that, you know, emotional low, you have to see the silver lining in those situations and just be constantly optimistic.
Michael:Awesome. Well, listen. I think we could go on forever about this. And, you know, again, each of the each one of these, I enjoy more, and each one of these, I think, are getting better. And, again, we're only getting started.
Michael:We've got whole bunch of stuff already to talk about, and I'm sure as we go on, just more and more things will open up. I have a couple notes here already, for for stuff that we're gonna chat about. So listen. Thank thank you everyone for coming by. We do like the feedback.
Michael:I personally like the feedback. I like when somebody got a couple emails. Hey. I really like this. It's it's great.
Michael:So I appreciate everyone for coming by, and stay tuned wherever you're seeing this to the same time and place next week, and I'll talk to you guys then.
Dave:Talk to you next week.