Motivation for Becoming More Systematic

Dave shares his experience about when it became crystal clear that getting more systematic was going to pay off in a big way.

Creators & Guests

Host

Dave Mabe

Host

Michael Nauss

What is Line Your Own Pockets?

A weekly show for systematic traders who want to make more money from their trading strategies.

Michael Nauss: 00:00

Okay, everyone, and welcome to the Line Your Own Pockets podcast with myself, Michael Nas.

Dave Mabe: 00:07

And I'm David Mabe.

Michael Nauss: 00:08

Dave, welcome to episode 2. So just getting started here still, and in this episode, we're gonna talk a lot about why we got motivated to get into systematic trading of, all the different ways to trade. You know, systematic trading may be one of the rare forms out there, so you generally find with people there's, like, a moment that hits and you go, okay. Now I'm gonna go and I'm gonna, you know, start taking a little bit harder to look at the numbers, maybe a little bit less of a look at the charts or the fundamentals or whatever that is. So, Dave, why don't you get started?

Michael Nauss: 00:39

Why don't you tell us our story about why you why you turned to the nerd side, I guess?

Dave Mabe: 00:45

Yeah. It became very clear to me. It wasn't a specific moment, but there was a course of several days that it kinda dawned on me. So at the time, I was trading a system manually, and it was very sort of systematic. Like, there were rules, but I was doing it manually.

Dave Mabe: 01:03

So the way I would do it is I had a trade ID scan that would generate my watch list for the day. So when a when a, alert came in, I would add that symbol to my watch list, and I would and from that point forward for the next few minutes, I think it was the first half hour of the day I was doing this, I would watch for a specific candle pattern in the chart. So, you know, I've got some I've got an alert window coming in. I'm adding those symbols to, charts on my screen, and I was watching for a candle pattern. And if the candle pattern occurred, I would take the trade.

Dave Mabe: 01:41

And if it didn't, I would just wait and wait until it did occur. So over you know, some days, I would have 2 or 3 symbols on the list. Some days, I would have 20 symbols on the list and trying to keep track of watching all these charts. And at the end of the day, what I would do is review all the symbols that came through, look at the charts for every one of those, and see what the setups were and what I actually ended up taking. And when you trade a system like this, you quickly realize that the big winners you have to be in.

Dave Mabe: 02:23

You have to capture. You have to be in those big winners. Otherwise, you're gonna end up with a flat day or a losing day. And, I mean, it's really all about catching those big winners. So in my daily review, I would see, gosh, I missed this trade.

Dave Mabe: 02:42

Here's the chart. I what was going on on my screen at the time? Why did I miss that? So I saw that happened a few times and I said, okay, well, I have to be able to get these. What's going what am I doing that's making me miss these?

Dave Mabe: 02:59

So I ended up taking video of my screen during the trading day. Mhmm. And, actually, at the time, there wasn't like, a computer wasn't powerful enough, and software wasn't out there to do that very easily like it is today. So it takes screenshots. I have this automatic screenshot taker called Irfanview.

Dave Mabe: 03:22

It's a software, and I would take screenshots. And then I would go back at the end of the day and go back to those screenshots and see exactly what was on my screen so I knew what I was looking at, where my mouse was, what was I actually doing. And I would see, gosh, you know, I missed this trade. Here's why. Like and then I would maybe adjust my layout to sort of where I could have

Michael Nauss: 03:47

Yep.

Dave Mabe: 03:48

Things more easily visible so I wouldn't miss these big winners. And I did that for a while, and then I said, well, you know, some days there were a whole bunch of trades. So I said, okay. I just need more monitors. So I ended up getting, like, a 4th monitor, and so I could have more charts on the screen.

Dave Mabe: 04:10

So more and more, charts that I can see without, you know, minimizing certain windows, like, everything was on the screen. So I was trying to capture all these, And that helped a lot, but still there were some that I would miss. And just doing the math about missing those big winners, I realized, like, this is a very expensive problem. Like, I could it became very clear. The cost benefit analysis was very clear.

Dave Mabe: 04:44

Like, this was multi 1,000 of dollars that it was worth to me to do something more systematic with the way I was trading and with the system. And that was all the motivation I needed. It was very clear at that point. The math was very clear. And that's really what got me started here.

Dave Mabe: 05:07

It's like I I knew there were different things I could do to get out of this click trading mode and go more toward systematic, more automated. And I just knew I would miss fewer of these, big winning trades.

Michael Nauss: 05:25

Yeah. And it's funny. There's gonna be a whole lot of that that that sounds familiar. I was laughing as you were talking just because there's the same, kind of this a lot of the same idea. I did the same thing with the screen recording and then going through the recording and then, you know, trying to figure out, and I remember changing my my chart a 1000000 times over to, oh, no.

Michael Nauss: 05:43

If I have this here, I'll see it better. If I can move this here, I'll see it better, and all of that. For me, it was it was a lot of the same, but it was also, had a lot to do to when I started trading. I was young. Right?

Michael Nauss: 05:56

I was, like, 18 in university when I started trading. And I remember at, you know, trading purely discretionary and purely by feel, at the end of the day, just being like like I hit by felt like I got hit by a bus. Like, I was just exhausted at the end of every day. So, you know, everyone else is going out to the bars. They're having a good time, and I'm, like, you know, in bed by 5 and, like, sleeping the whole and I'm just like, this is just crazy.

Michael Nauss: 06:21

Just the amount of information that you're trying to bring in and then process and then output. So I made a lot of the same steps where, you know, there's a while there where I had just 2 alert windows from trade ideas on the screen and, you know, trading off 15 minute charts, and it was my job was just to sit there and wait for one of those to print and then look at the chart and and make the trade if if I liked it. And, you know, it's gonna be credit to my wife on this one. I remember her walking by the office, and I've got my feet up, and I've, you know, got a stream on one thing, and I'm just, like, hang out. And she's, like, what the hell are you doing?

Michael Nauss: 06:55

And I'm, like, well, there's nothing's coming through and I'm trying to distract myself so I don't get stupid and just you know take a trade for the sake of taking a trade. She's like well couldn't you get a computer do that? And then just kinda like walked away which is one of those just a subtle and I'm like you know what I could and this is back in the day so it's gonna be credit to you Dave where you had a I was trading with a prop firm that you Sterling trader and you had a bot that would link Sterling trader to, trade ideas And I'm like, oh, okay. Well, why don't I do that? And this was even before I had I was able to fully back test the strategy.

Michael Nauss: 07:30

I was just I had known it worked because I've been trading it personally, and I said, well, why don't I just plug it in? And then what really really got me sold was for I decided I was gonna sit down for, I think it was either 3 or 6 months. I was gonna write down the changes that I made because, of course, I still thought I was smarter than the system, and I'd go in and change things, and then what would happen if I didn't, and then just a regular journal. I haven't been ever been one for a big data journal, but I've always been one for the personal kinda journal. And I found when I went back through those few months, the days that I wasn't even there, that I had the computer on, and I had the system running, and I was gone.

Michael Nauss: 08:11

I was doing something else. I was at the gym. I was walking the dog. Those were the most profitable days. So that that was kinda my light bulb moment to.

Michael Nauss: 08:19

Okay, I am very good at making strategies and coming up with those. I am very bad at the execution side of things, so I just need to remove myself. Now, lastly, what what kinda clicked to me is is I spent about 10 years in the hedge fund space, And I I really noticed that it was never the portfolio manager who placed the trades. Even in the smallest little rinky dink hedge funds, they always had an execution trader. And that's what I started to think of when it came to the bot or even something as simple as using alerts to to send to your your phone or your watch or something when it something occurs is, you know, the the manager, the guy who says I want to buy Apple is always detached from the guy who buys Apple, and I think that, you know, there's a very good reason for that is is, a, it takes a lot of mental capital to watch it, and, b, you end up you know, you're you're not doing your job.

Michael Nauss: 09:14

So when I kinda started to look as my job as as a trader, as someone who comes up with ideas and, you know, read studies and and watches other people's presentation, stuff like that, it kind of allowed me that freedom to to say, okay. I'm gonna let the robot handle at least most of the rest.

Dave Mabe: 09:32

Yeah. That's interesting. So so you it sounds like you also had took a video of your screen as you were trading and went back. And I think that's such a valuable exercise because there's always something you will pick up, and it's it's something it's always something pretty small and concrete that you can fix and make better and streamline your routine. Did you, have specific things that you remember finding in in those videos you took of yourself?

Michael Nauss: 10:02

Oh, yeah. It was, you know, one one of the the big sayings out there, right, is that if you, if you wanna learn about yourself, start trading. Right? Because you you get and I think you get to see all your demons, and then at the same time, I think if you record yourself doing it you get to see all your demons like I don't know how many times I would like ever watch interstellar the moment where the guy sitting and watching and he's just like screaming for not to go in the the bookshelf thing behind That's random rule we were after, but I remember watching the video saying, why are you doing that? Right?

Michael Nauss: 10:35

Why are you placing a trade there? That's not part of your rules, but you're, like, recording it. You're able to watch yourself back going, like, seeing yourself doing the dumb thing. And I think a lot of that just reaffirms that if right. It's it's gonna be me that's the problem which I would say in most people when they're system traders it's the human that's the problem, you know, again thinking you know something, but, yeah, it it showed me all of my demons which were, boredom trading and revenge trading.

Michael Nauss: 11:02

That's that's what I did. So, by watching that I was able to kinda see myself in real time do those bad things and say, okay. Well, I need to I need I need to kinda cut that out. So you were even before you said recording because back then, you know, I remember those days where, you know, GPUs weren't really a thing. Right?

Michael Nauss: 11:21

So you couldn't you couldn't do a lot of that. So would you kinda watch these back as a slideshow, or would you actually just go screen picture by picture to to see what you're doing?

Dave Mabe: 11:32

It was a slideshow. So, you know, I would take this I don't remember. Probably every 10 seconds or something, I would take a screenshot, and then and you can set up the software to automatically do that. Mhmm. So you'd end up with this folder of images of your screen, however you, define that and however you set up the parameters to do it.

Dave Mabe: 11:52

And then I would just go through and see, you know, what exactly was on my screen at each moment, and it would have the time stamp in there. So I could see, you know, what charts were on my screen, you know, what setups I was looking at. And I was able to piece together and, you you know, figure out also all sorts of stuff that I was doing wrong or not seeing because of something I had on my screen or didn't have on my screen. I think one I remember at one point, I was I had a little Excel spreadsheet to compete my position size. So I punch in the numbers as quick as I could to figure out the position size to use.

Dave Mabe: 12:35

So, of course, there's that that that guy, my wheels turning and, okay, I could create some software to do that quickly, more easily. So there was just it it wasn't a it wasn't a quick shift to full automation, but it was tiny little pieces that I knew that I noticed from looking at these that I would just streamline that part of my routine. So I'd never have to compute the position size. I had a program that would do that automatically for me. And just slowly, methodically continue to streamline my my routine so that it and what I realized, it was it was coming closer and closer to systematizing to to full automation.

Michael Nauss: 13:19

Yeah. And it funny. That was one of the things I use trade ideas for too is I created a custom formula. So as it would come through the alert, it would say, you know, trade this much. So, eventually, the alerts just looked like buy here, buy this much, put a stop loss here, and that was all in the, the line of the alert.

Michael Nauss: 13:36

And then it's essentially just like, okay. Well, why don't I get a system, and and and I found yours to do that. And, you know, another thing that I had noticed is that, again, in the hedge fund world I spent 10 years in, the the ones that had the most consistent returns were were 2 fold. 1 was multi strategy funds, right, where they would basically get different hedge fund managers, and they would all participate in 1 hedge fund. So they had different strategies, and the other one was ones that had full automation.

Michael Nauss: 14:04

Right? I remember, we would see one that he was done 15 minutes into the day. I I wasn't experienced enough now. I don't really know what he was doing, but there would be, you know, 50,000 orders that would take place off the open and, you know, 10,000 or so trades, and then they would all liquidate 15 minutes in, and and that was it. And same, there was one that did the same thing overnight where he entered all of his orders on the close and then exited them all in the next morning, and then he was in cash.

Michael Nauss: 14:32

And you would go to these hedge funds, because I spent a lot of time going to the hedge funds and and talking to the managers as part of my job, and they were they seem to definitely have the best life. They were the most, like, laid back. They were the most, they were most chilled where, you know, you'd walk into one who was like a a global macro and he has, like, 4 TVs on and he's, like, screaming into his phones and he's talking on and he's just going crazy. And then you walk into one that's more systematic and the guy's in there in shorts and he's, you know, reading some papers or academic studies or whatever on something, and, you know, way less overhead because he didn't need a whole bunch of costs to do something like that. And even though the returns weren't always the best, they were always way more consistent.

Michael Nauss: 15:17

Right? And as someone we we charge, you know, based on kinda AUM and things like that, we love that because the firms that blew up out of nowhere and then completely crashed, they didn't make us a lot of money, so these systematic guys. So I was always I was kind of I guess, like, you were talking about I was exposed to it slowly over time, and then it was only later when I said, oh, you know, it makes my life way easier if I just, you know, forget everything and and do kinda what my system has and free my brain up to do other things. That and, again, the the fact that I just couldn't that, you know, I was getting I was exhausted by the end of every day, and I'm like, this isn't, you know, a way to way to live. Another saying that I love is that trading is, the hardest way to make easy money.

Michael Nauss: 16:02

By the end at the end of the day, you're clicking buttons and and if you do well, you make money, But, yeah, I was just you know, I had a a buddy who would dig who's digging ditches in the summer, and I was trading. And he had way more energy at the end of the day than I did.

Dave Mabe: 16:17

Yeah. Well, there's you're right. I mean, digging ditches is really hard. But when you go back and look at your trading day, like you're saying you're exhausted at the end of the the trading day

Michael Nauss: 16:28

Mhmm.

Dave Mabe: 16:28

At every point, each task that you're doing is not super hard. Yep. But it when you look at it in total, there's a lot of cognitive things you're you're doing. It it's repeated.

Michael Nauss: 16:42

Mhmm.

Dave Mabe: 16:42

It's it it's it is draining, but there's not, like, one smoking gun. If you could just get rid of this or automate this part, then everything goes smoothly. It's like a whole bunch of little things that that add up over time. And each one of those is an opportunity for you to make an error, like, you to do it a little bit wrong and and have disastrous results or, you know, you you put the wrong, price in for your order. I mean, all this stuff is not hard, but it's easy to make mistakes doing it.

Michael Nauss: 17:16

Well, and it's it's emotional. Right? And, you know, I remember reading a study a while back about, you know, why everyone eats garbage at night. Right? And the the fact that, willpower is it works like a muscle, And it, you know, the the more you exert willpower over time, the better, you know, you get as as someone using willpower.

Michael Nauss: 17:35

But throughout the day, that tires. And they've done all these studies where, you know, you can you can hit people at different times a day with things that would tempt them, and later in the day, always works better. And so it just shows that every decision you make, drains some of this kind of willpower battery. So then, right, by the end of the day, you end up, you know, doing dumb stuff. And it's the same thing with your trading.

Michael Nauss: 17:58

Right? You can come in, sit down, and be and be perfectly disciplined for, you know, maybe the first 10, 20 minutes of the day. But as time goes on, there's more of a chance that you're, yeah, either gonna make a mistake or just do something that's, you know, completely rogue and off book. And both those will be kind of equally detrimental to your your p and l. And then, you go in you go in the next day.

Michael Nauss: 18:19

So you end up being mentally drained, but then also kind of emotionally drained after that. And then, you know, all the work of recording your trades and and, you know, doing all this stuff after, I find that that's one of the main reasons why a lot of people skip it, is because at the end of the day, the bell rings at the end of the day, and they're just toast. And, you know, then you're like, okay. Well, now you should journal what you did and learn from this and do that, do the other thing, and they're just like, no. It's, you know, I'm tired at this point, so, I think that helps out.

Dave Mabe: 18:52

Yeah, man. And if you if if you imagine all the mistakes you make in the course of a day doing click trading

Michael Nauss: 18:59

Mhmm.

Dave Mabe: 18:59

Doing all these, you know, competing position size, putting in orders, you're gonna make mistakes. Maybe it's not a ton on any given day, but if you go back and look, of all the trades you've missed, all the mistakes you've made, and add that up over the course of time, I mean, it becomes a very expensive problem. And if you could solve that, then that's a lot more money in your pocket.

Michael Nauss: 19:23

I I I like that. I did wanna hit on that again, your your, comment on how, you know, you miss 1 or 2 trades, and that makes up so much. And it it really is hugely important in trading, and you'll hear this all the time from different traders and, especially trend followers. I mean, I was listening to something with Jerry Parker, who's one of the old turtle traders, and he always said the same thing. He's like, at the end of the day, you know, you call it the 80 20 principle or the plateau, whatever.

Michael Nauss: 19:53

You know? It's going to be a handful of trades for him a year because, you know, he's he's trend following for the long term. It's gonna be, like, 1 or 2 trades a year that give him that relative outperformance to to the market. And if he misses those trades, then, you know, he ends up just not doing anything or even losing money. So for the example this year was Coco.

Michael Nauss: 20:14

Like, Coco went absolutely you know, looks like a meme stock if you bring up the chart of Coco. And, you know, they're asking about that because generally speaking, it doesn't trend. And he's like, well, I'm a systematic trader, so I follow the rules and it said to buy cocoa. And I bought cocoa, you know, 30 times in the last handful of years, and I didn't do anything, and I was out for small losses. And then I get cocoa now, and then the price, like, triples, and that makes up my entire year.

Michael Nauss: 20:37

So, I think even if you're not experiencing, you know, many mistakes that you can find, even if you're not experiencing being tired and all that kind of stuff, that missing of the trades is huge because that one trade could be the difference between a great month and and a losing month. You know, if you get that one that one system, especially, again, I'll say if you're a trend follower because that's that's if you look at all trend following systems, they bat usually around 5050, maybe a little bit better, maybe a little bit worse, but they're all that that risk reward goes crazy because you get these these outlier kind of, fat tail type moves.

Dave Mabe: 21:15

Yeah. For sure. That's, definitely.

Michael Nauss: 21:19

Alright, Dave. Well, again, these are these are fun. I like these. Now don't worry, guys. We're gonna get, we're gonna get real nerdy and real deep soon, but, laying this framework, I think, is is hugely important.

Michael Nauss: 21:30

Right? We we wanna make sure that, you know, a, that you understand why we do what we do, and, b, if any of these stories are ringing true, if you're sitting there nodding your head, either me or Dave speaking saying, oh, this is, you know, yes. You know, I make all those mistakes, or, you know, yes. I I miss these trades, and they would make up my day, and you're not into systematic trading yet, then we hope we're slowly guiding you guiding you in that direction. And, yeah, I'm super excited.

Michael Nauss: 22:02

You know, we started episode 1, which is introducing us, and and now we're into this, and and we have a whole framework and a plan going forward. So if you've liked what you've heard so far, make sure you're, you know, subscribing and sharing and and clicking out all the links in the description and all of that so you can make sure that you can follow us. Do you have any parting thoughts for the the people, Dave?

Dave Mabe: 22:24

No. I think this is a good, good episode of Fun Talking. We'll see you next week.

Michael Nauss: 22:30

See you next week. Talk to you then.