In a follow-up to last week's interview with Marsten Parker, Dave and Michael discuss the key to being successful for a long period: adapting.
Whether successful traders realize it or not, they'll eventually have to completely reinvent what they do to stay relevant.
Annie Duke's book Quit: The Power of Knowing When To Walk Away.
Whether successful traders realize it or not, they'll eventually have to completely reinvent what they do to stay relevant.
Annie Duke's book Quit: The Power of Knowing When To Walk Away.
Creators & Guests
What is Line Your Own Pockets?
A weekly show for systematic traders who want to make more money from their trading strategies.
Alright, everyone. Welcome back to another episode of Line Your Own Pockets. Had a great episode, last week where we talked to Marston, who was the creator of RealTest and the Market Wizard. And it was a great conversation about systematic trading again from from a master. But also one thing that stood out a lot to me and Dave was just the idea of reinventing yourself as a trader.
Michael:You know, we we talked about Morrison's story from discretionary trading to, trend following trading to mean reversion trading and then maybe back to trend following trading in in what he's looking to do next. So, you know, this episode is gonna be us kind of talking about what we've learned and and some takeaways from from that prior interview, which I thought was fantastic. So, Dave, a market wizard. Right? That was fantastic.
Michael:That was a good get by you. I know you were the guy to reach out, to get that going. I thought it was an amazing interview.
Dave:Yeah. I thought it was great. He's, an awesome guy, and you could tell what struck me was just how humble he was. You know, he he's had a lot of success, but he almost wouldn't know it just from hearing him talk. Well, I think that's He's a great guy.
Michael:I think that's, that's a good thing to talk about too because that's pretty common, I think, when looking at, real traders versus the kind of furus and and finfluencers, which we did another interview on on podcast. If you're talking about how amazing you are all the time, then, you know, I think you've gotta be a little bit worried. Because I think real traders, it took us so long to kinda get where we are, and we're constantly always struggling to to get better that we realize that we've never there there is no figuring it out. Right? And you never kinda hack the system.
Michael:So you're you're you're always kinda pushing from there. And and and I definitely heard that in him too where he's like, oh, yeah. I did okay sometimes. I'm like, no. You're a market wizard.
Michael:Right? It was, what, 25% year over year growth for, like, 20 years. It's it was amazing. But, yeah, very, very, very humble.
Dave:Yeah. Totally. You're right. That is a pattern across, good traders. So there was a couple things that there were actually three things that stuck out at me about when I zoomed out and thought about, what he told us about his career.
Dave:And the the first one, which I thought was it was brief, but I'm sure it's notable, and I'm sure he would say it's a notable part of his career. And that's when he developed this friendship with Gary b Smith, who was the chart man at the time. I don't know if you remember him, Michael.
Michael:I think it was one of my time. Yeah.
Dave:Yeah. He was a pretty popular guy. He was on, CNBC, I think Fox Business. He had I think he even had a show on there. Okay.
Dave:I I remember I interviewed him, at the time for a stock ticker interview. Super nice guy. But I think, you know, like we've said in the past, networking is a trading skill. And when you have the ability to connect with other people and have a little partnership, even if it's brief, that can have a huge impact on your trading.
Michael:Mhmm.
Dave:And the fact that he did that then with somebody that was such a big name at the time tells me he is a networker. And Yeah. Really and and the big part of networking is thinking about what the other person needs, not thinking about what you want
Michael:Mhmm.
Dave:Which is which is hard for a lot of people. So the fact that he did that, I bet, is a big part of the trajectory he ended up on. Like I said, it didn't it didn't last long, but it seemed to change the way he thought about things, and I'm sure he learned a lot from that.
Michael:We especially because he hadn't really had much interest in markets before then to go with someone who was, you know, technical in nature and and kind of that well known made a lot of sense and then probably helped that he didn't need to unlearn a lot of habits. You know, it's not like he went to a fundamental guy first and and, you know, spent a lot of time reading Warren Buffett's work or something like this, and then had to go technicals and then into into quantitative. The fact that he jumped right into that, technical world, which I always think leads to much more quantitative thinking anyway. Just it it it makes a lot of sense, and it it was probably a really good and, and lucky get, you know, to to able to get someone who is technically minded. Because back then, you know, as a I haven't been around that long, but as someone who's been around for a long time, technicals are are becoming more mainstream now, but especially back then were really, really shunned.
Michael:I remember it was it wasn't really much. People weren't talking about charts as much as they are now and and all of that. So so to find that in back then, I I think probably did a really good setup for him to keep going.
Dave:Yeah. And the other so I always encourage traders to develop these partnerships and, you know, trading groups with other trusted people, and it takes time. I always I've got this road map product that I've, it's a custom road map for people to get to from where they are to being successful trading. And I always put in a section in there for developing a trading partnership with others and and a and a to do list for how to do that. And one of the things I include in there is you for a good partnership to happen, you have to have some differences.
Dave:You can't be exactly similar to the other person. It sounds like this was a good partnership because you you remember you might remember how they sort of went their separate ways is Gary was a chart man. He was on TV Mhmm. With the ability to read charts. So that was sort of orthogonal to the way Marston was going with, you know, complete automation.
Dave:So I think they had this partnership. They learned from each other. It went on for a certain amount of time. It ended. But I think they're both were better off as a result of it.
Michael:And and something, you know, that we talk about a lot that how much easier some aspects of trading has gotten over time, that's one that's it's gotta be way easier now to get into groups and to to, you know, learn and to to mesh with traders now than it ever has been. You know, we we talked a little bit about social media and how not to use it, which is following other people's trades and and falling for influencers, but I mentioned how to use social media. And for me, it's it's a lot of that. I share a lot of my thinking and, and analysis and everything on the markets. And what I find is you you generally attract certain people that think, you know, that that are in that same kind of realm as you.
Michael:So, yeah, it's way easier to find chat rooms and forms and and all of this. The problem is, you know, like you mentioned you mentioned trusted people. Right? The problem is is filtering that, but it's gotta be way easier now than it than it was before. So, what really struck me is that not a lot of people would have found someone that was that successful and traded a certain style and had the kind of self reflection or or wherewithal to say, you know, might work for you, but it's not gonna work for me, and I'm gonna go this different route.
Michael:So I guess that's gonna be, the first time he kind of reinvented himself as a trader. So it's very interesting, and I think it it gets to a really good lesson as well where, you don't want to be somebody who you you end up joining a group and you end up saying, well, I have to trade like the people in that group. It's good to take that knowledge and then, again, reinvent yourself and he and something that he did where he said, okay. Well, the technical stuff doesn't really work for me as much. I'm gonna go more quantitative.
Michael:Take what I learned from there and then and then kind of apply it going forward. So that was very interesting to kind of break out of that mold and to and to to do something different.
Dave:Yeah. Totally. So the other takeaways takeaway number 2 was he spent 10 years, at least at least 10 years creating basically trend following strategies. Yep. And it sounded like basically 1 or 2 big ideas.
Dave:So if you think about that, you know, I I get a lot of traders coming to me, and they all you know, very a good number are bouncing between strategy. They they trade something for a little works for a little bit, stops work, and they move on to something else. So it just struck me that here, the successful person, it's no accident. He was successful because he spent a decade on these two strategies, basically. So there there's something to be said for that just to dig in for a long time, think about it day in and day out, and dig deeper and deeper into 1 or 2 big ideas.
Michael:Well, in that, I that's a whole another podcast topic that we should we should go into, but the, the psychological phenomenons that make people jump around between strategies that much. And and I think people underestimate the mental discipline required, to stick to rules like that. I I listened to an interview recently with Jerry Parker, who's one of the original turtle traders, and and still going. And he talks about this all the time that people think it's it's easy to do the same thing even when there's gonna be days or weeks or or months in in the case of longer term trading where where that's not occurring. So, yeah, the ability to do that, you know, you say it 10 years, but to actually feel it to do go and do the same thing every single day, for that long of period of time.
Michael:1, the the fact that there is no way that that always worked. Right? That he had just the straight up equity curve, the ability to sit through draw downs and and sit through periods of time where, you know, underperformance probably of of the markets and all of that. Yeah. I just think you really have to give props to that mental discipline to be able to say I'm gonna continue to do the same thing, again for 10 years before reinventing myself again, which we'll get to later, but, I I really do I a 100% agree that that was probably the key to his success is that you you built something that was that worked and was simple that it worked and, you know, you spend your time just going through the motions, which, again, people underestimate how hard that is.
Michael:It's just I'm gonna place my trades. I'm going to, you know, capture my trades. I'm gonna record and and do all that. But, you know, I'm not going to just hop to the next strategy the second that something doesn't work. Right?
Michael:And and I think that's the biggest plight of a lot of traders. Right? They may have a good strategy that just doesn't do well for a month, and then all of a sudden they're off to, you know, trading crypto or or options or or, you know, completely off what they were doing before. And probably at the worst time, probably right before the strategy starts to turn around again and do well.
Dave:Yeah. Yeah. It's, you can tell from somebody that trades a strategy that long that they they have a path to confidence. You know? It's it's easy to it's easy to trade a strategy with a trivial amount of money when, you know, the money doesn't matter.
Dave:Yep. But to really scale up a strategy and trade it with meaningful amounts of money, you have to have a path to confidence, and that confidence comes from just experience trading it over and over. Or and, also, it comes from backtesting. So and all those those are part of your process. And the better your process is, the better a path to confidence you have and the the bigger you can create a strategy.
Dave:So it's to to to do it that long, you have to have that because, yeah, you're right. It's not gonna be up into the right that whole thought period, the way a lot of people think it probably is. You know? Hey. He's an automated trader.
Dave:He's, he traded this for 10 years. It was just up into the right. Sounds easy. Right? But I know just from experience that that, you know, that's not the case.
Michael:Well and there was one, one question you asked that I liked and, you know, kinda leads, I guess, to him having to reinvent himself again was talking about how, you know, you do something for 10 years, there's no way that you're not starting to get maybe overconfident a little bit with what is working there. Right? You know, you end up doing the same thing and and you're getting amazing results from it. It's the whole if it's not broke, don't fix it. And you kind of asked and alluded to and he agreed that should have probably spent some time and some energy when that was working looking for for other things because, you know, as we go down his his kind of path here, what ended up happening was eventually those trend following systems just stopped, performing well.
Michael:He didn't make it seem like they entered in a massive drawdown and lost a lot of money. They just stopped doing anything, which in my experiences, and and I I'd love to hear your thoughts on this too, is that's generally what I find happens to a lot of trading strategies. They don't just all of a sudden you're making money and then they just completely fall apart. It ends up being this the edge is gone. So your your equity curve instead of going up and tanking, it just goes up and then just moves sideways for a long period of time.
Michael:It looks at what like, what happened to him. So the one kind of took takeaway I have for myself when I was when I was listening to that is that if I end up finding something that ends up working beautifully for that long period of time, I I need to always stay on my toes looking ahead and building what I think will be the next thing, not knowing when I'll ever need it. Hopefully, maybe I never do, but, you know, having that in the back burner is is super important.
Dave:Yeah. So there's 2 things that come to mind here. One is my favorite quote that I I came up with, which is the only thing harder than creating your 1st profitable trading strategy is creating your 2nd profitable trading strategy. Mhmm. And there's a good reason for that because you you know what?
Dave:You know, imagine trading something for 10 years. That's what you do. It becomes part of your identity. It's it's it's who you are. And to give up on that is really hard.
Dave:I mean, it's not you can't just do that overnight. You have to sort of plan for that and have, other strategies in place. But I can tell you, it's much easier when you have other strategies to fall back on. It's way easier to to, give up on the one strategy that's been paying the bills for a decade when you've got other ones that you've been working on and and are scaling up. I mean, I so, yeah, I went through this exact situation, about a decade ago, and it's just really hard.
Dave:I was trading these these ones basically, this one idea. This strategy had worked really well for several years. You know, I bought a house with the profits from this strategy. I put a couple of my daughters through college. So this strategy meant a lot to me.
Dave:So when it stopped working, when it tails off, that's really, really hard to deal with because, you know, you've had such history with it. And looking back, you know, I I wish, like like he mentioned, you know, I wish I would have worked on other strategies and had had other ones ready to go earlier than I did.
Michael:Yeah. And that, you know, we talked a little bit about RealTest, the software you created, and that's the one of the main reasons that I use it is that it does, it's built from the ground up to do this multi strategy testing, right, where you can always implement a new strategy and see how it affects and how it changes versus your other one. But and I wonder if some of that was because of that lesson where he said, okay. You know, I should have taken this existing strategy that I had. And then if I had implemented a new a new strategy in as well, that would have helped that transition because that seemed to be a bit of the hardest part, which kinda leads, I guess, to the the the next kind of reinventing that he did where it's, it was a 180.
Michael:It was from trend following to mean reversion. There's no, you know, opposite sides. For for those who may be newer traders, essentially, trend following just means I'm gonna buy things that are going up and and hope they continue to go up, and I'm gonna sell things that are going down, and then hope they continue to go down. And mean reversion is the exact opposite. I'm gonna buy things that are going down and and hoping that I'm getting somewhere near the bottom and vice versa.
Michael:And I just think, you know, props to him, but that just seems like I could see someone going from, know, shorter term trend following to longer term trend following or a different asset and trend or a different method of trend following. But to take a a kind of a clean sweep and a big 180 and just trade a completely different style seems, you know, it must have been very mentally hard.
Dave:Yeah. There's a great quote here from Annie Duke, famous, professional poker player. She don't play poker anymore, but she's, she was, well known, and she's written a couple books. And this is from her book called quit, which is a good book. It's the quote is this.
Dave:When your identity is what you do, then what you do becomes hard to abandon because it means quitting who you are. Yep. So it's really I I totally resonated with that because I know he sort of glossed over or he didn't allude to how difficult that time was making this huge adjustment and huge switch, but it had to be totally difficult because I I I've been through that before, and it's miserable. It's it's really hard, and you I'm sure he thought about quitting at that time rather than, you know, changing what he does. I I just know he would have because he kinda glossed over that, but that's really that's really the hardest part of trading, having to reinvent yourself completely every few years.
Dave:And it's that's definitely the hardest part. And, you know, a lot of people, aren't cut out for it, but there's a lot of things you can do to prepare for that ahead of time.
Michael:Well, I think, I think one thing that would make perfect sense is, you know, we're talking about how, right, defining yourself, and then you have to kinda redefine yourself. And I remember learning this in business school way back in the day that when you're creating a mission statement for a business, I'd I'd make it you know, and it's probably the same if you're trading. You don't wanna make the mission statement too narrow because then you box yourself in. So, for example, if you're looking at this now and you're saying, well, you know, I'm a revision to the mean trader, and I'm worried that, you know, this reinvention may may cause a lot of this kind of mental toll that that Dave and and Michael are talking about. And just define yourself as I am a systematic trader.
Michael:Right? And and then from there, that broad definition ends up helping you helping you do that. Right? Because one thing that it made me think of when you were talking, Dave, is the whole we shared an article or I shared an article with you that the NYSE is thinking of going almost 247 with its trading, and how that will affect people who are like, I'm a day trader versus I'm a swing trader. Those lines are gonna slowly over time, over 5 or 10 years from now, I think are gonna get very blurred.
Michael:And if you're someone who's you're dogmatic about saying, I am this type of trader, again, I I think that becomes problematic because, you know, as someone like myself who trades crypto, there's no such thing as a day trader or swing trader. Right? It's it's just you you trade. So I think that's one great way to do that is just to say, try not to define yourself too tightly into any one niche, and and that may make letting go of that a little bit easier when the time comes.
Dave:Yeah. And it's it's sort of ironic that we started out this podcast saying, how it was awesome that he focused so, so much on one strategy for 10 years. Mhmm. And that's sort of an opposite to what you just suggested, which, that that go just goes to show there's not one it's not gonna be an obvious answer when you're in these situations. You're gonna you're gonna have to use your head, and you have to think about it for a long time.
Dave:How am I too pigeonholed here? It's good to be pigeonholed at some point at at some points like he was for 10 years. Mhmm. But, also, as a parallel effort or an effort at the same time, you know, doing something completely different, researching something completely different, you know, broadening your horizon, but still, you know, figuring out when to to bore deep into a problem. It's really hard to figure out, but, you know, as you get more experience, your intuition starts telling you and suggesting what what the right path is.
Michael:Well, I think and I think you nailed it there where it's in parallel. Right? So as this again, the more I get into systematic trading, the more I try to think of, you know, I'm someone who has kinda 2 hats. Right? One hat is the trader side of me, which the more you get systematic trading takes less and less time and less and less energy and and mental capital.
Michael:And then there's the research side of things, which grows. Right? If you're someone who's a discretionary trading, you're spending your entire time trading and looking at charts. If you're systematic, you're just waiting for the system to trade for you or an alert to come in or however you've offloaded that work. And I think you have to think of that as kind of 2 parallels is that, you know, you spend all of your trading time doing the thing that you know that works over and over again the the way Marcin did in the beginning with trend following.
Michael:But then you have to open up another parallel pathway in which you're spending other mental capital that you're saving, not by discretionary trading all the time. And that has to be research and kind of exploration into into new things. And I I think that's gonna be the the best answer that you can ever come up with is running running those and and making sure that you're not crossing from one to the other too quickly where you research something and it sounds cool and it back tested great for a second, and then, you know, you're switching to trade it. But you have that kind of working in the background and ready to come in and replace, if and when if and when you need to.
Dave:Yeah. So, yeah, the more we talk and the more we do these podcasts, the more ideas I come up with for new podcast episodes. So, I mean, there there's a lot to talk about here. The as you're as you're talking there, the one thing that it reminded me of that it's a that that also struck me is there's a tendency for some systematic traders to get to to spend all their time in backtest world. So they're always in the data.
Dave:They're, you know, looking at correlations, looking at equity curves, in in their backtest. But, really, a a a very, lucrative place and lucrative thing you could be doing instead of being in backtest world is to be looking at charts for all of these trades because that backtesting is powerful as it is. It hides a lot of details that you can easily see in a chart just by going through, seeing what the trades were. One thing that I would suggest if I was, talking to Marston back in that 10 year period, I would say, look at your look at the charts for every trade that that happens into your system, and imagine if you had to do the reverse. So imagine you have had to trade the opposite direction of what your system's trading.
Michael:Mhmm.
Dave:How would you even think about that? What would you what sort of rules would you put in place to to literally trade the opposite direction? And when you think about that, you should be familiar enough with your system and familiar enough with the charts from you the trades that your system's taking that you should be able to identify the profitable, areas for taking the opposite side. So that's that's one that's one good way to come up with some new edge that is opposite of what you're doing, is to think about that. Go through that thought exercise and think about that all the time.
Dave:Look at trades that almost met your criteria but didn't, and figure out why. Is there is there some are there some of those trades you can include? And if they're not in there, maybe you could trade them the opposite direction. Like, that's a that's a useful thing to think about.
Michael:Yeah. And, you know, as someone who's newer to the the systematic side of things, I think that's what I enjoy the most, to be honest, is the, the the more that I offload the trading to systems or alerts, I spend less time staring at things. It's the it's this what's next mentality. So I I think people should, you know, look at that almost as play for for lack of bedroom, especially if you have something that's working. You know, you'll be very motivated if you're not making money to to to go and and do this exercise of trying to find something that's working.
Michael:But the way I do it is I I kind of book off, some time every single day to and, again, I consider it kind of very playful in nature where, you know, I'm watching, listening to podcasts or or watching other people's trading styles. And I'm I'm kind of trying to play and experiment with the what am I gonna do next, when and if this thing doesn't, continue to work. And, you know, try to try not to think of it as as something that you have to do. Try to think of it as you're exploring. Right?
Michael:It's the best way to do it because most of the time, you're not gonna be end up doing anything with it, and it's not gonna be something that does well. But every now and then, you're gonna hit something, and it may be a new strategy, or you may unlock something in a current strategy. So I think that's the one way to make sure that you don't have to do these hard switches that, Marston had to do is because if he had already been thinking about mean reversion and everything as well and slowly implementing that into his system, then as his trend following systems dropped off, he would be assigning more and more capital to his mean reversion systems anyway and just make these transitions, I think, a little bit smoother. And and I'm sure if if he was here looking back, that would be something he very much appreciate is every time he had to do this change, if he had already been implementing something, it just makes it a way smoother transition as opposed to, you know, I'm gonna stop trading and and take 6 months off and think about it and then start training again.
Michael:If it's, I'm just gonna apply a little bit more capital to strategy a and a little bit less capital to strategy b, again, you're you're less of a binary switch and more of a a gradient.
Dave:Yeah. Yeah. It's always good to be planning ahead, thinking about how you can improve your the the strategies you're trading even if they're doing great. How can you make more money with them? How could you make them more profitable?
Dave:How could you make more trades with them? Mhmm. Because, you know, it's not only when the the strategy, quote, unquote, stops working that you have to change. Sometimes the market changes the rules. Like, literally, the, you know, the architecture of the market has changed, which totally gets rid of an edge.
Dave:That that happened to me. Like, overnight, something stopped working. It's really rare that that happens. Usually, it's a much harder situation to recognize. Usually, you know, the profitable strategy is going up into the right, and then maybe it fades a little bit.
Dave:Maybe it's not quite as profitable. Maybe, maybe the time between draw downs is a little less. Maybe the draw downs are a little bit steeper, but maybe the back test still looks really, really good. And that's there you're not gonna be in a situation where, like, it all of a sudden just goes completely flat or completely down. So you're always gonna be in the situation where, like, man, is this just another little drawdown?
Dave:Is this right before it picks back up again? Is it broken? Like, you're never gonna be able to tell that definitively, and there's not gonna be you can't go to the end. They'll give you the right answer because you're you're it's just unknowable. It's really hard.
Michael:It is. And and I think what we've kind of both agreed on and landed on is that, you know, a lot of people talk about diversification as diversification across assets. It seems like diversification across strategies seems to make more sense. And to, you know, and this is what I really like when we do stuff like this that dispels the systematic or automatic trader being the guy who lets a robot completely runs for him and then just goes on the beach and drinks Mai Tai's because that would work. If you have a strategy that works, you could in theory do that, and it'll work for a while.
Michael:But, eventually, at some point, right, that strategy is gonna have some sort of a problem, and you're gonna be kicking yourself saying, well, I should have been, you know, working, and I should have been in the office, and I should have been preparing for what would happen when this occurs by building another strategy or coming up with some refinements in the wings that that could happen. So it just really helps us kind of push towards towards this as well. So, the last reinvention that I it was awesome because I didn't know this until we were interviewing with him that he talked about is his plan to to do it again. And he's, what did he say, 65 at the time, and he's planning on doing the whole thing again where he's thinking, trend following for futures and then mean reversion for for stocks and and testing those strategies as well. And it seemed like something that he was he was interestingly expanding out of, and I thought that was really cool because how many 65 year olds do you know that are are willing to say, okay.
Michael:Well, I'm gonna completely change the way I I do things. It just shows that, you know, whatever as long as you have the data, you can test it, then try new things. Right?
Dave:Yeah. And and it's, you know, it's it's important to have your own process that you're constantly improving to be able to do that, like your own back testing process, your own process for evaluating strategies, your process for looking at the market that doesn't rely on anybody else. You don't wanna have to rely on somebody else to, you know, happen to be in their trading room that day and tell you
Michael:what to do.
Dave:Yep. I it's much more powerful. You're gonna be much you're gonna be in the game a lot longer the more you work on your workflow and your process for improving everything about what you do.
Michael:Absolutely. So that was an amazing interview. I know we have some more interviews already on the docket, and we're gonna we're gonna look to do, more of those as well. And and, hopefully, we'll be getting better at doing these these interviews, which I I think we're already off to a great start there. You know, is there is there any other takeaways that we're missing on on, you know, again, the the honor, I think, to talk to a market wizard is is fantastic and all of the different things that we can, we can learn from them because it's one of those that we don't need to reinvent the wheel when it comes to trading.
Michael:We just need to find the people who have been doing that with some success and then and then grabbing on. So is there is there anything we're missing here, Dave?
Dave:I just sort of reiterate what what we said at the very beginning, which was how open and humble he was. Mhmm. You know, very open about you know, he didn't say, hey. I had all these great years. I never had any draw downs.
Dave:You know, life was great. He he went into detail about the actual changes he had to make, the draw downs he had, the reasons that, you know, he had to change. So I just loved, yeah, I just loved everything about that interview.
Michael:Absolutely. And, yeah, we're looking forward to the next one. We won't spoil it here, but we do have another one already on the books, and we'll be expanding out from there. So, listen. Thank you all for tuning in.
Michael:As always, we're loving, you know, everything that's happening with this. I'm looking forward to to recording these, every time. So, again, I appreciate everyone coming out and giving a listen, and I am Michael Noss.
Dave:I'm Dave Mabe, and we'll see you next week on Mind Your Own Pockets.