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This very simple exercise can help you identify dozens of ways to improve your daily trading routine.
Creators & Guests
What is Line Your Own Pockets?
A weekly show for systematic traders who want to make more money from their trading strategies.
Okay, everyone, and welcome back to Line Your Own Pockets. We're on episode 3 now. Still getting started, but so far, so fantastic. I'm having a great time talking about this kind of stuff. We've already talked about introduced ourselves and talked about our our journeys and why we've decided to become more systematic traders.
Michael:Today, we're gonna take a bigger a deeper dive into first steps. Because the idea behind this podcast is, like, we talked about, there's a lot of podcasts about markets. Me and Dave approached the markets a little bit differently for most, more of the systematic side. So, we talked about why. Now we're gonna talk a little bit about how, and we're gonna be expanding that out over the next couple episodes.
Michael:So nice to chat with you again, Dave. How's your how's your week been so far?
Dave:Yeah. It's been great. I've been looking forward to talking about this. In my newsletter this week, I set up a challenge for people to do something that I did many years ago that we talked about last week, which was, as I would set up a video of my screen during my trading day to figure out exactly why I was missing some big winning trades. It happened a couple days in a row, and I remember I said, I have to figure out why I'm missing these trades.
Dave:And I set up a video, recorded my screen, and at the end of the day, I would go back as a neutral observer and figure out, okay. What was what was going on? What was I doing to miss these trades, and what can I fix? How how can I fix my routine so that I would miss fewer of these? And it was really eye opening.
Dave:I mean, very eye opening. And there was always 3 or 4 to dos that came out of that that I noticed things I could fix, things I could improve in my layout, in the way my charts were set up, in the way I was doing certain things. And a lot of that a lot of that came that came out of that was not, you know, fully automating anything quite yet, but there were little things I could do right away to get more systematic, to eliminate some opportunities for human error. And I wanted to talk about 3 of those things today that I I think people would be interested in. Do you remember going through a similar thing?
Dave:Like, do you remember some first things first steps you made when you were trying to get more systematic?
Michael:For sure. And and one of them was, like, you mentioned recording your screen, and it's funny. I remember you mentioned you had to do a slideshow. So the challenge that you're giving everybody now in 2024, there's really no excuse not to. It's way easier to record your screen now than it would have been it would have been way back then.
Michael:Yeah. But for me, it was more about limiting a lot of noise and and doing a lot more focus. So what I would do a lot of is I would go through a scan that I built and I would load up all the history I could on it and just scroll back on charts and go this is where it would have triggered this is where the trade I would have made, you know, there's ways now that you can grab almost randomized data and trade on it in real time, right, tick by tick. But back then, that was kind of the best we had, and that's what I did a lot of it. So, okay, here's all of the output of the scan.
Michael:It would have said buy here and put a stop loss there, And, you know, that's why they call it paper trading because I'd actually write down on a physical piece of paper. I buy Apple at this price, sell this price, this would have been the profit. And then started to compare that to what I actually did. So at the end of the day, I would load up the scans, and it okay. It said to trade these 4 stocks and to trade these 4 stocks in these ways.
Michael:And then I would look at my actual P and L and see where that difference, which end up usually being pretty wide, where that difference was. And that was one of the first steps is to say, okay. This is what the system told you to do how good were you at that how close were you and the one thing that that really opened to me that I think is is a help for a lot of systematic traders is I was no longer looking at the end of the day and saying did I make money and that was a good thing, or did I lose money and that was a bad thing? It was the system said to do this, did you do that? And if you lost money when you followed it, then I was, you know, still a little bummed I lost money, but I was more okay with it.
Dave:Sure. Yeah. That's a good point. So here are 3 I'm a go through 3 things that I think people could take away from this to implement in their own trading. Even if they're trading manually now, especially if they're trading manually now, these are things that that I remember implementing at the time that are concrete steps you can do.
Dave:So the first one is setting up shortcut keys in your broker platform and in your trading platform.
Michael:Mhmm.
Dave:It's it's pretty amazing. As a developer, seeing what you can do with the shortcut keys, some of these platforms are extremely sophisticated with what you can do and what you can set up. You'd be surprised at what you can do. And as I went back and looked at those screenshots at the time, video now, it's really clear how you can save some keystrokes. You can save some typing.
Dave:If you kinda take a step back and look and see what shortcuts are available in your platform and brainstorm how you can implement that into your workflow. You know, now I've got some shortcut keys that I use to to set up reasonable defaults where I have to do very little, beyond that to make a trade. So I wanna I'm trying to reduce the number of steps, automate as much as possible with the, with the platform you're already trading with.
Michael:Well, it's funny, and, again, this is way back in the prod firm days. They wouldn't actually the one that I worked at anyway, they wouldn't plug in your mouse for the 1st 6 months or so of your trading career. You'd sit down, and there was only a keyboard. And the reason for that was this was before HFT trading. So the, and I think I mentioned this in the first episode that I was essentially hired because I played a whole lot of StarCraft, which is a very again, it's a it's a nerd game, but it's like chess where you can't see the other side of the board and everyone's acting very quick.
Michael:And that was part of it is because they found that if they gave people a mouse and they learned on that, they got addicted to going up to the buy button and hitting buy and then changing their position size by clicking in the little box and typing it in where you would see the pro traders and they just had their hands like a gamer, kinda sprawled it on the keyboard, and they were just waiting for things to happen and hit the key. So it's just funny that, you know, you're talking with this again in 2024. This was back in 2006, and it was you cannot touch your mouse until you're a profitable trader, and then we'll give you a mouse to play around with.
Dave:Love that. Yeah. It's it's like removing the crutch before you can start relying on it. That's great. You know, it reminds me, so it very specifically reminds me of about that time, I had a keyboard, and I I specifically bought a keyboard without labels on the keys.
Dave:So I was there was there's literally no point to look at your keyboard at that point. You're forced to learn how to type really, really well. I think most people grow up now being good typists. At the time, though, it was sort of a novel thing. So this sort of forced you kind of the same thing you were talking about with the mouse, forces you to become an excellent typist real fast.
Michael:Well and it it's funny just to bring it back to the the video game thing. Right? If you, obviously, as an old man with 2 kids, I don't have time to play games anymore, but I was big, back in the day. And you could always tell if you handed a controller or a keyboard and mouse over someone who didn't play. It was like handing someone a stick who couldn't drive stick.
Michael:Right? They're they're looking down at the thing, and they're trying to to hit the buttons the whole time. And then, you know, myself, I'd sit down, and and I you just intuitively know where everything is. So, yeah, it's it's a bit of a muscle memory game. But if you are gonna stay in the side where you're entering the orders yourself, I I couldn't agree more.
Michael:It just makes way more sense you're you're way faster I find just navigating around the computer trying as hard as little as possible I do a lot on a lot a laptop you know using the trackpad trying to figure out the the keys for it again just saves you know we're we're talking half a second, but it's half a second multiplied by however many actions a day, multiply that by however many, you know, days in a week, weeks in a month, a month in a year, and eventually, you've saved yourself maybe hours of time as opposed to, right, someone who's just kinda looking for that mouse every time they have to do something.
Dave:Sure. Yeah. A lot of times, it's not it's not really obvious that it's gonna save you a lot of time. And maybe it didn't save you a lot of time today. Mhmm.
Dave:But you're right. It adds up over time, and and soon it just becomes part of who you are, like, part of your routine, and it's you you get just so much more efficient. Yeah. So, yeah, that's great. Alright.
Dave:So the second one, in reviewing the video, I thought I was good at computing my position size for a trade, but when I watched myself going through that, I realized I could be better. So I think at the time, I had, you know, I was I I think I had an Excel spreadsheet where I would plug in some numbers, and it would Mhmm. You know? So I had some formulas in there. It was pretty easy to do.
Dave:But when I needed to do it quickly, when a trade was on the line and I needed to get done you know, get that done as quickly as possible, I realized, okay. This is not as efficient as I thought it was. So, look at that specifically. How do you compute your position size? Are you you should be varying your position size probably depending on the system you're trading, but you should be varying it based on the symbol and and the setup.
Dave:And at the time, what I did was I I was using Amibroker for charts at the time. Mhmm. And there's a way to program in all, some indicators on your chart. And what I did was the the the position size for the system I was trading at the time came directly from the bars on the chart. So Yeah.
Dave:Programmed in a little pop up to do that automatically. So it automatically can be the position size for every bar. So I would just hover my mouse over the bar. Boom. It would show me exactly how many shares I should use, and then I would plug that into above platform.
Dave:So it wasn't like I said, it was not until going back and reviewing as a neutral observer. For, like, what you were saying when you, you gave somebody a controller that had never used a controller before.
Michael:Mhmm. And you observe that, it's easy to see the things that they're missing. But that person in that moment may not really understand what they're missing. Being able to go back and review afterwards is super important. You'll you'll you'll spot lots of things to do.
Michael:And to, to talk to the the newer traders out there, the the importance of some sort of consistent or or methodology behind your position size. I just it cannot be understated. And I think the way a trader could easily know if this is the problem that's affecting them is if you're the kind of person where, all of a sudden you have one bad trade that wipes out a handful of good trades, that type of moment where maybe your equity curve, right, it's it's up into the up into the right. That's what you wanna see, and then all of a sudden has a big tick down. That means your position size is messed up.
Michael:It means you took way more risk on one trade than you did on the other trade, and I just can't kind of, talk about that enough that that's hugely important. Right? I think when it comes to, you know, risk management, position size, and all that, it it may be the most important factor when it comes to, trading successfully. Right? If if you're when you're right, you know, if most trades, you're risking a $100.
Michael:And then on one trade, you're gonna risk a $1,000, almost just like the universe talking to you that that one trade that you risk a $1,000 on is going to lose, and it's gonna wipe out a whole bunch of gainers. So super, super important that you, that you have that hammered out and that that that makes sense to you. And, yeah, there's a lot of tools you can use now for for sure. So, you know, some brokers will accept just basic math equations. So, you know, say, you know, say you're you're buying something, and generally speaking, you're putting the stop at the low of the the day.
Michael:It'd be very easy to, you know, do a little math equation that says, this is my account size. This is how much I wanna risk. This is the current price, and it's the low of the day. And with those variables, you can just it can just spit you at a number of this is how many shares you wanna buy. Another one that I liked, that that Dave was talking was basically just a an idea behind average range right?
Michael:You're just you're taking some sort of indicator and you're saying the average bar length is x So I'm gonna use that to to roughly do my position size. Again, it doesn't have to be super complicated, but anything that keeps you in that ballpark to make sure that you're risking the amount you wanna risk on every single trade, I I think is huge. Because at the end of the day, we're all trying to control the risk and then get lucky sometimes when something really, really works out. And if we don't have that size, then what will happen is you'll always notice that you are way too small in the great trades, and then you're way too big in in the crappy trades, and it's just gonna be the way it works. So that makes perfect sense.
Michael:I think a spreadsheet is fine for maybe someone like me who's a little bit more on the swing trading side of things. But, if you were in the heat of the moment and you're trading a little faster and more frequent than, I think it makes perfect sense to try to put something in the application that you're actually using to place your trades.
Dave:Yeah. For sure. Alright. The last one. This is a little bit more advanced, but I still think it's really important and something you can do right away.
Dave:And that is as soon as you're in your you enter a position, go ahead and enter all your exit orders and set them up in such a way that they automatically play out. Very, very important, and it it gets you out of the habit of, you know, just waiting and seeing and and, like, making a discretionary decision that you don't plan on.
Michael:Mhmm.
Dave:Getting those in immediately as your default, maybe you chain maybe you make some tweaks over the course of the trade, but having the defaults in place and setting those up within your platform and basically automate the grade from the point of entry all the way to the point of exit. Yep. So the other thing that does is it gets you in the it forces you to get you in the mindset of, figuring out why you're taking a trade. Mhmm. Why are you taking a trade?
Dave:What sort of system do you have for the exits? You're not gonna come up with them after the fact. Before you enter the trade, you should already have all that planned out. For whatever eventuality happens within the lifetime of that trade, you should already have that plan. So you should be able to do that right away, and that's it's a it's a big help for me to do that.
Michael:Well, especially the the stop loss order. Right? Because just from the law of averages, eventually, there will be a time where you will enter a trade, and immediately, the thing just goes it just it's going to happen at some point. Right? You're you're placing a trade.
Michael:You buy the stock. And then if you're trying to fiddle with where do I put my stop loss and all that kind of stuff, and then all of a sudden, some big news event happens. Right? Something you know, the CEO gets, you know, pulled out of the company in handcuffs or or something, and all of a sudden, the stock is just tanking. It creates that deer in the headlights.
Michael:It like, well, what do I do? Do what you know, do I just is this a weird tick? What's going on? Blah blah. And then you have that thing that we just talked about.
Michael:By the time you actually exit the trade, you are, you know, 10 times your your risk is is gone. And, you know, now you have to trade a whole bunch to get back. And whereas, if you would just if you have the ability to hit a button and your and you enter and then a stop loss gets put out immediately, then, right, you're you're you're no longer worrying about it. It's it would have been a, you know, a 1 hour or whatever you were risking would have got hit immediately, and you just would have moved on with your day. But, yeah, that's hugely important.
Michael:And then, for the exit, I I totally agree. Especially if you if you have a hard target, you might as well just put that out at the time. But, you know, if you're someone like that, if you're someone who is trailing a stop. So what I'll do quite frequently is, as a swing trader, I'll say a close below this moving average. That's that's my exit.
Michael:There's a lot of ways you can just set alerts nowadays and say, hey. You know, let me know when the stock gets below this, and then I set that out immediately after I I put on the trade, because you're right. It it takes a lot of the mental burden. And I think that's gonna be a theme that we're gonna go over over and over and over again for the reasons of systematic trading and the benefits of systematic trading is that you only have so much bandwidth in your head, and it's where do you wanna allocate that. Right?
Michael:Purely discretionary traders are doing a lot of that on the fly when it comes to entry and exit, profit target, and trailing stop, and all this kind of stuff. What me and and Dave are suggesting is that if you can at least automate some of that away, if you wanna be fully discretionary on your on your entries, that's fine. We'll then automate away the stop loss and the profit target and the the trailing stop or whatever. If you wanna be, you know, fully discretionary on how you manage a trade well then maybe you have a system enter the trade for you based off some parameters so it's it's all about whatever you can kind of offload from your brain to your computer and one example that I always use all the time is I'm when it comes to my work I'm a very much a list guy I wake up in the morning I have a list of things to do and I'm gonna I'm gonna get those done and I can then enjoy the rest of my day when they're done but if I think of anything halfway through the day, like last night, I was just making the kids supper, and I thought it was something I had to do tomorrow, as opposed to having that weigh on my brain for the rest of the night and being, like, remember that you have to do that thing tomorrow.
Michael:Open up your phone, open up your 2 app, you add it, you put it away, and then it frees up that mental space. And I think that's the same thing with a lot of this trading is, you know, it's like, what can I just offload to a system that then I can, you know, free up my brain to do more important stuff?
Dave:Yeah. It's really important, and, it does take a lot of mental energy. Like, a lot of this stuff, computing position size, is really the math is super simple. Mhmm. You can do it in your head.
Dave:Yes. But even something that simple, automating or systematizing that is gonna save a lot of cycles. I mean, it's like I said, none of this is when you look at it, it is really hard, but when you when you put it in aggregate and you look at it over the course of a day, you're gonna be exhausted by the end of the day the more of these even simple things you have to do. So to, to systematize it, yeah, it's gonna it's gonna make your trading better in the long run, and you're gonna feel better about it.
Michael:Well and then the, the brain can be used to do other things. Right? Come up with new ideas. You could be reading studies about, you know, oh, this study just launched about this style of trading. Let me you know, I now I have the mental capacity that I didn't waste by, you know, doing tiny little arithmetic equations over and over and over again all day.
Michael:Well, let me take and read that study, and maybe that's gonna or attend that webinar or or do something that I now have the brain space for. Because, yeah, you know, we mentioned this in the first episode. One of the reasons I got into systematic trading is, I was trading very young, but at the end of the day, I'm like, don't talk to me. Don't don't look at my brain is fried. I can't, you know, the girlfriend or wife would just ask me a basic question, like, where do you wanna go to supper?
Michael:And I'm like, I just don't have it mentally to to answer that that very basic question. I'm like, this is no way to live. So what can I offset, in order that, at the end of the day, I can I can do stuff, whether it's work related or or personal or or whatever?
Dave:So you have I love it.
Michael:So the the one kinda quick tip that I wanted to have, I know you had your 3, I think they're fantastic, and I agree with all of them, is, to try to offload as much as you can when the market is closed. That was one thing that that really helped me. When it comes to a lot of people, you know, they want to chase things intraday as as things are moving. You know, news event comes out. They wanna react to it, that kind of stuff.
Michael:One thing that really helped me down my kind of systematic trading journey is by kind of refusing to look at anything new that I hadn't looked at the night before or the morning of as soon as the market opened. Everything gets shut down. I I build a list based off my scans the night before. That gets inputted into my scanning software, and that will only show me things from that list. And, yes, I miss a whole lot of stuff, right, just a whole lot of stuff that goes on intraday, but that's fine, but for me and my personal issues of of, you know, FOMO trading and revenge trading and all that, it helped a lot.
Michael:So if you find yourself, you know, constantly chasing the dragon, I think that's a good tip is, you know, when the market closes and all the lights stop flashing and there's no longer, you know, your P and L ticking up and down, I just find I'm in a better space mentally and and just in more of a centered place. And I can I can build my list? I can look at the stocks objectively then. And then during the day, it's just waiting for the alerts to come in, that kind of stuff.
Dave:Yeah. I love that. It's sort of you know, there's no limit to the amount of information you could be looking at.
Michael:Mhmm.
Dave:And I like that it it sort of set the way you described it, it sets your default to the stuff you are gonna you're choosing to look at. You're not looking at everything and choosing what to filter out. You're starting from what you what what is important to you to look at, and that's your starting point. I I love that. Yeah.
Michael:And we'll get into more of that when we go, I think, deeper into our unique processes. But, yeah, for me, it's, you know, I run all the tests at night, have my list, watch my list during the day, and then then see what happens. So, I think those are some some great places to to get started. You know? I I would take a look at all of those things and see what you can apply to apply to your trading.
Michael:Do you have anything else that you wanna leave the kids with there, Dave?
Dave:I think that's good. I think I would be interested to hear if anybody has any other, if this sparks any thoughts about what other people have tried. I'd be interested to hear. So reach out if you, have any ideas about that. But, yeah, I think this is a good place to, to end it here.
Dave:Yeah.
Michael:I I love that idea. Always, I love chatting with other traders. You know, neither neither me nor Dave will pretend to be any guru that's figured it all out. So if you guys got ideas, just, you know, shoot them by and and we can create a conversation that way. So, again, thanks everyone for stopping by.
Michael:We appreciate you checking it out. Tune in next week. We're gonna keep going. We'll be launching these at the same time each week. So wherever wherever and whenever you found this one, you'll find another one next week.
Michael:I'll talk to you guys soon.