[00:00:00] It's going to be back, it's been a while. I have, I can kept busy with my two kids and some products working on. But I wanted to talk a little bit today about something that Brent and I
[00:00:11] are working on which is we have been, once this GPT came out, I all of a sudden had the ability to program some stuff because I've always been interested in programming, I didn't have any
[00:00:22] knowledge on it. But with GPT-4, it's been easy for me to quickly put stuff together and Python and do things that I never really thought was very feasible for me to do before. So
[00:00:34] that's been awesome. I got a lot done, I was able to buy a lot of historical data and test things. And it went down a lot of rabbit holes with doing that which has been pretty fun to
[00:00:44] pick up that skill set quickly now. And the point I want to bring up today was that when you're trading, when you're at the, I'm walking right now so if you hear me, I'm puffing that's
[00:00:55] what, but on a discretionary trading game plan, like a lot of us are doing. There's busy periods and there's still periods and when it's busier, generally it's weird because when it's busy,
[00:01:06] I want to eventually trade bigger because I feel like I do better. But the losses are a lot larger because of the volatility is increasing so I actually trade smaller to start my day and then
[00:01:16] I'll pile into some certain trades or ideas and I feel like people are stuck or I have momentum and that flow is happening and I'll start to get bigger. So it's, it's strange when it's larger
[00:01:26] or sorry when it's busier, I will actually be smaller but also be larger at the same time if that makes sense. So, but when you're trying to scale that, it doesn't necessarily work so well
[00:01:35] because when the market slows down, let's say you try to trade bigger because you were doing well, you boosted your account. Well now the conditions are different and it's a shitty or trade and you're giving back money trading larger as a making sense. You should actually be trading
[00:01:50] last for trading smaller, waiting for it to be busy again and it's just the mood of the market is so different. So, as a discretionary trader, there's things that work and then you're completely
[00:02:02] you're completely changing that and moving to new things based on how to market tech and and then if when you go through years and years of it, I have decades of it, certain things come
[00:02:13] in and out of style. And sometimes there are years of part different ways of trading breakouts, mean reversions, fed panic market like the pandemic or 2008 or events in numbers matter which we just
[00:02:27] had a lot of it's still important but a little less important than it was last few months with all the inflation data. So you keep recycling those things when they kind of play. But my point
[00:02:36] now here today is so looking at one thing I learned is when I'm looking at system trading. So our brinth and I had some ideas so we tested them. And one of our ideas that we landed on
[00:02:47] that worked out the best was slightly positive over time. Maybe like 52 to 55% of the trades were winners, slightly positive. So that's not good enough because even though it actually over 1000 trades during the year, that's how many had I think in 2022 which is a lot because it was
[00:03:06] busier. It didn't okay that ratio but the drawdowns come stuck because the nasty prides are maybe 50, 60% of your profit comes back which is just for me if you want to trade bigger that's just that's tough to swallow and happens from time to time but to have that happen
[00:03:22] right earlier than which was the case. It's very difficult to stomach so we thought how can we fix that. So we started to look at times during the day where like this is trade work better in the morning
[00:03:33] does it not work when there's a fed day or how about only have AM numbers, pre-market numbers, 9 o'clock IAS numbers, Federal Reserve Minutes to be started testing around the numbers, pulling out the numbers. We did all these different things and then we thought okay well,
[00:03:46] we found that only pulled out certain days certain volatility periods. We can boost that ratio a little bit so we got up to like I don't know, 55 to 58% which fairly significant over 1000 trades.
[00:03:59] So still though the drawdowns are unacceptably high for us to just run this like a robot missed this system. Now keep in mind we're doing this around our we're still doing our discretionary
[00:04:08] trade and this is just like a discretionary idea that we liked that we tried to systemize. So okay so then from there we had this thing that's a little bit better now when we're using
[00:04:19] these time periods filtering that skipping certain days like we skipped the fed because it's so crazy tripping stops in and out that that was not good for us. So but we ended up figuring out
[00:04:32] how much we're doing now is that the whole thing is just an exercise to scale larger, meaning that when you're a discretionary trader it can sometimes be hard to get a lot bigger
[00:04:42] because you got to get big and then you got to get small and you got to get big and you got to get small and if periods stick at big but they don't happen all the time. So you're always like
[00:04:49] walking up and down however with something like what we're doing with this discretionary mix with the system is what if for us the system produces trades accuracy of 55% 50% and we have
[00:05:04] all the historical data we went back to like 1999 looked at all kinds of data and we did tons of hours of work on it and we couldn't really get it a lot better. So what we decided to do
[00:05:17] is to use the framework as a way to scale by saying okay when the system fires we're going to talk put our heads together, use our 20 years of experience and all the things that are different
[00:05:29] about that particular day and the themes that are driving the market and we're going to decide if we do a bit trader not and we're going to decide to skip the trade. So then we kind of
[00:05:39] write down the reasons we skipped write down the reasons why we did it and then we analyze how our decision making is going over time but a lot of the trades we won't take but if we can take
[00:05:48] a not how the trades to have maybe two thirds of them win versus the 55% of whatever over time the drawdown is very low compared to what it was which means that you can trade much larger
[00:06:01] so you start end up doing this thing where you're actually pulling from your old skill set but you're doing it in an over like a cookie cutter if you think about raw cookie dough and
[00:06:12] you're cutting pieces out so now you're cutting these pieces out and you can start cutting bigger and bigger pieces trading larger because you have a defined target defined profit and defined loss for every trade so that's the system part of it whereas discretionary stuff you
[00:06:26] have that but sometimes it changes and there's so many different variables that it can be come hard to determine you know exactly where to do that but with this it's always the same
[00:06:38] when it loss so it's just a matter of can you get good enough at taking something that slightly works and making a lot stronger by by analyzing each trade and that's that's the direction we're going and it's kind of funny because it's so simple and because it's like
[00:06:56] well big deal you know what you describe is not that it's label but the thing that hit us in the face was like wow this is the way that we could trade bigger and we could scale up because we have rules
[00:07:05] of specific rules that don't change and it's a the type of trade that we're doing is something that how we consider it more longer term day trading if you know some trades can last for minutes
[00:07:16] and some from last for an hour but that allows you to keep going bigger and bigger and not really worried about getting flipped out all the time or things like that which we were not interested in
[00:07:24] we also weren't interested in holding overnight for this particular thing so that's kind of what's happening right now that's one of the ways that we're trying to evolve around just the regular trading that's always happened and kind of a side conversation for me is like I've been working
[00:07:42] a lot on stocks the last few years and I've talked a lot about it and I still an interested in that but I put that a little bit on the shelf right now because this has just pulled my attention
[00:07:51] since the program made stuff has popped up online I'm able to test a lot of these things so I'm kind of working with with the future future stuff more right now until I kind of get that iron
[00:08:01] doubt and see how this is going to play out for us but we need many months to kind of keep testing and working hard so that's kind of where I've been at lately and I'm going to keep going
[00:08:10] down that road and if it works out well I'll look at doing it in other markets right now I'm sticking to the S&P 500 because I just have such a deeper understanding of things that move that market
[00:08:19] because that's what I've always traded so it's just an evolution and I remember going through Brent came from the floor and then he went to the computer screen stuff and then the computer
[00:08:31] screen stuff went through all kinds of changes I mean when I started back in 2001 2002 you could read the order flow and see people buying and selling and so you'd study tapes of your screen rewatched the
[00:08:44] moves and outs it just doesn't work like that anymore everything's hidden in icebergs or machines and it's just the moves are abrupt and people are stuck squeezy and there's zero day expiry options and the dynamics keep changing so you have to keep changing so this is an effort
[00:09:01] by us to adapt a little bit to the conditions but also use some of the stuff that doesn't go away which is strategic thinking general themes for the day I know we're driven by taxol off or like today
[00:09:16] I think Drunken Miller came out in the morning and talked about AI and it pumped us back up when we made a failed high and then we kind of blew off down all day so it's just like after that happens
[00:09:28] usually the pressure just stays on the downside it's something we've seen in the past so we're talking about how to be given short and use that to our advantage with what we're doing and it's just constantly analyzing things like that pulling up old patterns of thinking that
[00:09:45] still work but they're just not the same as they used to be they're working a different way and I think even with all this AI stuff it's going to be hard for for those things to not work anymore
[00:09:56] just general supply and demand the way people think different different market moves that but it's still going to do the same thing from A to B it just doesn't have different fashion
[00:10:07] it moves in a different way and I'm not sure that that's ever going to change the logic of how it goes from A to B will likely never change but the way that it does it will change because it has been
[00:10:18] changing and I think that's the challenge is to figure out how do you move yourself when it moves that you used to see maybe you don't see the same way anymore and I'm not sure in the stock market if
[00:10:31] that's I don't know enough about short-term stock trading the no-fest the same or not but in the future is it certainly has moved around and changed a lot but then you also get periods where it
[00:10:41] goes back to the way it used to be when it's very busy in it and quickly will slow down and we'll move back to kind of what more of a normal market where you know it would be harder to read when you're
[00:10:51] trying to stare at an order book which you know I'm sure there's someone who is staring at an order book and finding it useful but I certainly don't find it that useful anymore I used to
[00:11:01] so for whatever that's worth but that's what I've been doing and it's been exciting so I I'm kind of blown away by the all the AI stuff because I got in their right away I love getting
[00:11:15] on and trying new things and quickly realized that I was like oh I'm gonna watch these videos on YouTube and learn Python and then quickly I was like this is a waste of my time I can just go in there
[00:11:25] hack around making mistakes copy things that are similar to what I want to do and just start finding ear codes and getting fixes for them talking intelligently prompting intelligently figuring out
[00:11:40] kind of in a backwards way how to get them but I wanted to and I got done stuff that I never thought I could have done in the years honestly and I learned a ton in the process about how to do things so
[00:11:50] I really opened my mind up to you can really do almost anything now with technology that you want to get done with this stuff which is really cool I'm sure there are limits but you can find
[00:11:59] most of the medicine and get people to help you which wasn't really available a while back so many months back even so that's been pretty cool I think that interest in the sea how that
[00:12:12] changes the market and I think it will change it that much because the stuff's put out there for a while in financial markets but for each one of us it's like there's no limit to creative
[00:12:21] expression we can have with computers now which is pretty cool you just have to be willing to get in there and break the learning curve and try some stuff so yeah that's kind of where I'm at right
[00:12:31] now and I have some other ideas and things I want to talk about but I'll say that for another one I'm adding a little segment here after the fact to the end of that last podcast because
[00:12:40] I want to hammer home the point that I was making I felt like I might not have been clear enough so the point is that if you're a discretionary trader and you're doing swing trading and you're thinking
[00:12:49] oh well I'm risking one to make three the reality is a lot of times you get messed up in the head and that's not really the case you think you're doing that and you just keep losing one every time
[00:12:58] you think you're being methodical but a lot of times it's very it's a very it's an art project you know it's very just touching feel it's intuitive what what I'm describing is you've tested something
[00:13:12] that works a certain amount of time and now you're adding a discretionary flare to how you're going to do that so the profit and loss is always the same every time but you're now just deciding
[00:13:26] when you're going to take those trades or if it's an actual system you're taking every single trade but in my case I found that it's better to use my experience to siphon off trades that I just
[00:13:35] know are probably not going to be good and then I'm going to see how good am I doing that and I test myself versus just the basic the robot system so after I have an initial idea of something
[00:13:46] so the initial idea actually doesn't matter that much it matters a little bit but if I can just get something that's not terrible so imagine that imagine if I just have something that works 50%
[00:13:54] of the time right it's 5050 and I just but in that 5050 I have rules so I have guaranteed loss and guaranteed profit let's just say 3 points and 3 points just for an example whatever and then
[00:14:06] now if I can figure out how to cut out certain days or double up once in a while on things that I really like or whatever it is maybe I don't change my size at all until I have you know I take
[00:14:17] move maybe all the trades with the same size whatever you want to do but my point is I get really good I decide when that system might not work and then I I can cut out just a few losers all of a
[00:14:28] sudden now it's a 63% chance of winning and the drawdowns go way down and in the meantime I'm continually able to trade larger as I prove that works whereas when I'm discretionary trading it's just it's not quite that simple it's a lot more arty and that's the difference between
[00:14:44] having something that's a little more systematic but I'm still using a discretionary filter on it after after trying hit the other way that's I feel like I was not using a lot of my knowledge
[00:14:56] by just taking trades at the system told me to take that we're not things that I would ever do normally so that's kind of how I got to this and Brent and I working this together so hopefully that maybe I made
[00:15:06] that point well before but that was kind of the benefit that that's the whole benefit I got out of this is the ability to scale