Hey everybody. So yesterday we were talking about trading in and out of baskets and offsetting risk at peak equity. Near term peak equity. I don’t have financial relationships with firms, so there’s no conflict of interest here. That’s one of the reasons also why I don’t have people who want to come on and talk about their good or their service. First of all, I don’t know them as people. If I have guests on, it’s usually people that I know, of course they’re going to be friends and I’ve known them all for 20 years. That’s the model that I kind of prefer to stick with. I’m not the kind of show where I’m interested in introducing new people. I’m very protective of my audience and I’m unwilling to share my audience, my humble little audience with anybody for someone else’s gain. Now, they’ll all come to you saying, I just want to help your audience.
The reality is that they want want free marketing and they’re usually not so helpful. So I’m like, go build your own channel. Don’t be lazy. If you have a good or a service, you should have your own platform anyway or go buy some traffic. So that’s probably not going to happen. If I do have guests, like I said, they will be friends and people who I trust. That’s the key thing is I got to trust them. If I don’t know somebody, I don’t care how much money they’re going to dingle at me, dangle at me. I don’t need the money, and it’s not like it’s a hit to my reputation, but I have a good reputation. I’ve made good choices. I understand the letter of the law versus the spirit of the law. So likewise, as it relates to the show, don’t expect me to have a guest where I’m like, Hey, how’s it going? So tell everybody where you’re from. That’s not the type of show I have.
So having said that, there are again what you would probably consider pro, at least Sumer on the low end to professional grade trading engines out there that you would need a data feed for too. So you really have to buy two things. One would be trading blocks. BLOX is how they spell it, and they have varying versions of it. The one that you’d want to get is at least over a thousand. And then there’s mechanica, which was kind of built and designed by the same folks who did trading recipes back in the day, and I think that one’s a couple thousand bucks. Again, the price is not really relevant because ultimately you get what you pay for. But what you do need to know is those things kind of are like, they’re not like spreadsheets proper. They’re not spreadsheets, but they do need data. Your spreadsheet is a spreadsheet, but if it doesn’t have any data, what the hell do you need a spreadsheet for? And the same thing with the trading engine. They might give you five or 10 years worth of data to work into the system so you can see the moving parts, but the data might be from 2000 to 2010
And they’ll probably have to have gotten permission because usually the exchanges are the people or the entities that actually own the data. So you’ll need to go to a place and there’s several data providers out there where you can buy the data and then connect it to the simulator so that every day automatically in the background, your database, which will be on your machine, will update. And it’s not terribly big. You’re just talking about a cr. It’s like an ASCI file. So it’s just open, high, low, close volume dates, that kind of stuff. So the data doesn’t grow. It would for video for example, where you’re looking at every minute of video such as this on 4K, you’re probably looking at 10 megabytes per minute. Audio only is probably a megabyte a minute. The data you can have years and years of data and it won’t take up that much space, but it is a database. Nonetheless, you have to tell the simulators where the data is on your machine and create what we used to call the path on Windows machines and then so it could tag in, harvest that real data and then run the model to see how it would’ve done on.
Again, I don’t have any, I know the people because I’ve been around a long time, and when you’ve been around with other entities who are several decades in the business, you all kind of know each other. The last man standing, everybody else fell by the wayside, so it becomes very, very thin at the top. At any rate, you can use those to check ’em out, see if there’s pros and cons for sure. Obviously knowing, I wouldn’t say that they’re predictive the results, but they do give you an idea of how your ideas would’ve worked over a longer period of time. And so the rules can be robust. You don’t get into things like cherry picking trades, data mining, curve fitting, all the pitfalls that you might use. You could actually see the efficacy of macd, for example, and know for sure does it actually help you it, but you can actually test it and kind of see and know for sure how the thing would’ve worked in the past, in my experience, although the models that you might create are not predictive, they typically don’t turn on a dime. In other words, it’s not like the thing could make like 20% compounded annual growth rate with 10% drawdown over 20 years and then all of a sudden stop working the next day. I guess it’s possible, but it’s highly improbable. That would be the case. So you could expect, again, especially if you have rules that aren’t with things like indicators or otherwise, and they’re super simple, those models typically work very, very well, and they work for the long haul, and they’re also easy to execute in both good times and especially in bad.
You can really take a look at that. I would recommend those as opposed to trying to back test one idea. Of course, there are pros and cons. The purchase of the trading engine or the simulator is usually a one-time purchase. The data feed is kind of cable subscription or any streaming service that you’ll have to pay a monthly subscription for. But again, it really depends what it is you’re trying to do. I’m a guy who likes to look at data. I like to evaluate the data because then I can evaluate the data and then conjugate my emotional constitution with what the data’s showing to me. It’s a very different process than trying to be a chart reader. I mean to me, if you’re a chart reader, you can very, very easily and much more easily let your emotions overcome better judgment because you might be emotionally invested in a particular thing.
Any of the cryptocurrencies, like anything in the ai, you want to see a reason to go long because fanboys typically are that way. So that’s one of the pros of the software is that it forces objectivity. So if you know that you don’t want forced objectivity, certainly don’t spend the money, but it can help you understand things and all of your hunches. How would my hunches have worked over the long haul? Sometimes you might make money, but in the short run, you don’t know if you’re lucky or just have good timing. It might not have anything to do with analysis. And so you don’t want to get into what we call resulting where you put on a trade, you make money, and you’re like, aha, I’m onto something. I’m just going to replicate that process because you could have done something very, very stupid and made money at it, and now you’ve taught yourself a bad habit that eventually is going to cost you money.
And in the future, the way it looks is you get away with doing something like trading in meme stocks, and then you start to bet bigger just in time for the collapse, and you give it all back and then you’re kind of bitter, probably have blame. But so I guess the cons could be depending on your budget, you could seem as it being expensive, which is a very subjective term, expensive to somebody, one person. It’s not expensive to the other. And then again, like we was saying before, you have to look at it. Is it like an expense or are you really looking at something that’s an investment for your future that you could better understand what you know how to do? And then how do you know how to do it emotionally, right? Because two things, even if you’re a systems trader, you still have to take into account your emotion because ultimately you could look at someone’s trading rules and find them very difficult to follow and say things like, this doesn’t make sense. Whenever I hear someone say that in the trading space, I know they understand intellectually what they’re seeing, but what they’re really saying is this would never feel good inside
My body to execute. As a trader, that’s what that means. It doesn’t make sense. So you really need to know who you’re speaking with. So again, there’s pros and there in my opinion, you’d want to look at simulators that allow you to test at the portfolio level and get what we would refer to as robustness so that you could really use those rules to make money both in good markets and in bad markets. Now, that doesn’t mean that you’ll always make money, but you can have an idea, and this is where I think one of the most underrated things about understanding your rules from a systematized standpoint is that whether you’re working on science or whether you’re working on hunches or anything in between, you can see how that would’ve done over time and take out the randomness as much as possible and say like, well, these times I had hunches, I would’ve lost here when I had hunches, I would’ve made, how did it work net? Because if net net, you’re a breakeven or loser as a losing trader, I mean your hunches aren’t serving you, so you think you’re onto something, but it doesn’t show up in your p and l.
The other thing that I can help you with is also understanding that if you’re looking at your p and l during the day, that’s probably the worst thing that you could do because it’s going to instigate you to do something that’s not in your financial best interest and talk about that maybe tomorrow or the next day as to why that happens. But as far as I’m concerned now, when again, we think about systems and backtesting software, you’re looking at forced objectivity. So it doesn’t take into account, there’s no variable to say, well, when I’m up $200, insert a variable for extreme amounts of anxiety because my account’s underfunded. I got a thousand bucks. I’m trading the Dow futures or something. It’s two bucks a tick, and I’m just happy to be there in the first place and I can’t take the pain of winning. So there’s no variable for that. In the backtesting software, it says you’ll need to know and pick and exit.
So you can say, I can backtest and say, okay, every time I put on a trade, if I’m up 200 bucks, if I’m risking 50 or 75 and I’m looking for a three to one, four to one kind of a deal, show me all the trades where I take my gains at three R, and you can just see how flat the curve might be. There’s virtually not a lot of growth there. So again, it’s eyeopening in that you can really call yourself out on your own BSS or what you think you know about trading because you’ll see the numbers, you’ll see the data, and over a 20 year period of time, that’s terribly
Robust information. No one caress about two years. So I find that stuff super valuable, especially when you think that trading, even if you’re purely systematized, you still have to deal with your emotional constitution because those feelings are still running through your body a hundred percent of the time. How does it show up? Well, you go tweak your system. You don’t like the results, you don’t like the near term results. You go back in, and so you start changing your rules. You start adjusting the rules so that your stops are below where they should have been because you’re tired of getting knocked out of trades. So no matter to me how you slice it and dice it, you can always find a way to have your emotions hijack your trading rules. Doesn’t matter whether you’re a chart reader or using a simulator to come up with your own trading rules, or if you have an idea of trading rules from a discretionary standpoint and you’re smart enough to overlay them on a chart without needing the simulator, you can do it that way too. I think I did a video on it.
I’ve been around a long time and I’ve built these things by hand before the simulators even existed. So I know all the intricate parts and the ins and outs of building systematized rules versus being a discretionary chart reader. You can’t look at the marketing language and actually believe that because most of those people are trying to sell you something, so they’re going to tell you features, features aren’t benefits. Just understand that. So make sure you know what you’re getting into, and that’s why I say, what do you want out of your trading? What do you want it to do for you? How much are you willing to invest? Not to go off on a tangent, but also know what is research. It’s not doing web searches looking at Yahoo Finance or going to Seeking Alpha or putting on the tv. That to me is all infotainment.
So how do you define research, right? One of the reasons why I look at the data, because it takes into account every jackass who’s been on tv, myself included, and distills all of that into the data, the open, the high, the low, the close, the volume, the open interest. Again, there’s no variable to say, well, when do Abby Joseph Cohen speaks, or whoever the prevailing guru is of the day, or find the stocks that Warren Buffet’s spoken about. The price and the market captures all of that and discounts it, right? It’s a discounting mechanism. It’s also a voting machine. So you get to see in a very objective sense, all of that stuff that you might emotionally think is super important. You can see the results of did it matter despite what you think is important or how important those people are, they’re not that important in the grand scheme of things. So hope that helps. Long-winded
Answer perhaps. But the thing is, I don’t know for those of you who are watching what angle you’re coming to this situation from, so I try to put out a few different answers so that any of you can kind of sink your teeth into it and go from there. There’s really no, as in life, there’s really no one answer that’s uniform that fits for everybody. So I know that there are varying levels of needs out there. There’s varying levels of capital in your trading accounts. I know I’ve got big hedge fund folks watching, and I have small timers who were just starting and everything in between. So it’s hard to segment an answer just to one particular person, but everybody that I know that’s like at a legit prop firm where they’re like paying the bills, not these brokerage arcade places where you have to use your money.
They’re all simulating on some level, and in fact, they have people in-house who write the software to help test the ideas. If they can’t use something that’s more generic, more generic is probably fine for the majority of people. It’s just that when you have billions of dollars under management, there’s an overall risk management profile for the company, right? That’s what Aaron Brown used to do at AQR. Every big firm has a chief risk officer that helps control the risk on a per trader basis, but also from the overall portfolio of the company, because even though there might be traders down the hall that you don’t even hardly know their positions, your positions, it all gets edited into what looks like a portfolio. So you have to manage the risk. Otherwise, you could have, imagine if you had a room of 50 people who didn’t know each other, they all could have the same trades on.
So it’s all one over levered position, so that puts the entity at risk. So a lot of this software goes to help that in the grand scheme of things, so in the very rich experience. Anyway, I hope that helps you understand the nature of what those things are like a lot of things in life, I think you get what you pay for, so you can’t really look at it as being expensive or not because there’s enormous amounts of value out there. Anyway, appreciate y’all being here. I’ll see you tomorrow with Ganja, and then I’ll be back Thursday and Friday. Take care.