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Outliers---where true profit lies

Discussion in 'Trading Strategies/Systems' started by tech/a, Dec 13, 2008.

  1. tech/a

    tech/a No Ordinary Duck

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    Outliers.

    Events which are outside the norm of a data set (Which can be any chart of any commodity).
    These are the true profit churners.
    I remember having a look at some of Trembling Hands stats and it was very clear that the few outlier moves he managed to get on really turbo-ed
    his profit.
    In my own trading the REAL profits come from these outlier moves.The rest---the consistant churning of profit and loss keep us in the game.

    Even when I look back on Property its been the Outlier moves in the late 90s and 2003 areas which have really made the investment in property so good.
    If you managed to get on these moves then the rest IS history.

    In Business its the larger projects (for me) which make the Big $$s,and they dot come around every week. The smaller projects keep the doors open for the times when the bigger projects do come around.

    Ofcourse the challenge is to be in the best position to take advantage of an outlier move.
    But more than that---realise when its highly possibe that there is a parabolic move occuring and belting it as hard as you can as early as you can--- with sound M/M in place to protect you when you fall.

    Outliers are so powerful that one can set you up for life.(For me that was property). Ive also seen traders here who managed to get on the Outlier move Of Flinders Diamonds some time ago and if the number of shares traded were true would have been life changing for these traders.(What happened to that stock?)

    FDL.gif

    Just imagine $20,000 investment.

    So my topics for discussion are.
    (1) How do you recognise the characteristics of a pending outlier move.
    Sure some you cant FDL may well have been one of those.
    BUT the massive slide DOWN in world economies could be forseen and those who were savvy did take advantage of the moves on the short side.

    In property it was clear to me.
    Interest at all time lows.
    Housing cheaper to buy established than new.
    Massive rent demand.
    It was nearly IMPOSSIBLE not to buy a home and positively gear it.

    (2) How do you get on one even if you dont forsee it.
    What can you do to set yourself up to be able to take advantage of one when it comes along---Lasting from a day to a few weeks (in stocks).
    I remember ADY clearly in June/July last year.One I managed to get on.

    (3) How do you know when its over--- how do you make the most of Outliers!
    I have my own way of dealing with these both in and out and happy to share.
    But initially what do others think of the topic and do any attempt to take advantage of possibly the most powerful---and overlooked---profit generator in investment!
     
  2. MichaelD

    MichaelD Not fooled by randomness

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    Re: Outliers---where true profit lies.

    Excellent topic. Here are my thoughts.

    It is my view that the term Outliers from the outset is a psychological trap. Outliers implies that they are something unusual, something out of the normal distribution. This then presumes a normal distribution for whatever dataset the outlier is in.

    Returns from the market (and from life) are NOT often in a normal distribution.

    Why care about the semantics? Because it impacts the way you view trading. Yes, these moves are what make your profit, but THEY WILL COME. They are not out of the norm. They are part of the spectrum of returns.

    The questions of how to deal with them then turn around from "how do I recognize an outlier" to "how do I maximize my return from a market which includes these sorts of moves".

    There are two approaches to making money from the markets; take a little bit of profit often (profit stops) and miss the big moves or wait for the occasional big moves (let the profits run, cut losers short).

    Can you recognize an outlier before the event? I don't believe you can.

    eg You can decide that you want to trade breakouts. Some of these will turn into big returns. Most will not. Can you tell in advance which will pay off? Backtesting emphatically answers this with a NO. All you can do is to arrange your exit and money management to minimize your losses and maximize your profits and provide an overall positive expectancy.

    As an example from my own personal trading; all my short term profits for the financial year to date have come from 6 wins in a row about 2 weeks ago, including a couple of outsized returns. Did I expect these trades to go the way they did? No - the entry setup was exactly the same as it has been for the rest of the year. Did I know the outcome in advance? No. All I know is that this method has a positive expectancy and it makes most of its money from the outsized returns when they come. All the other trades are just about surviving with minimal damage to trading capital.
     
  3. mazzatelli1000

    mazzatelli1000

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    Re: Outliers---where true profit lies.

    IMHO

    As has been quoted by many, trading is a business.

    And like any other business, one can have an excellent or catastrophic year due to an "outlier" event.
    In some cases your outlier could be where "true losses lie".

    As you have stated tech/a, it is the day to day operations that one wants nail as this will bring in the bread and butter. Relying on an outlier to bring in the bread and butter is not optimal.

    Like any business model, one is constantly assessing internal strengths and weaknesses, but many forget or do not devote as much time to scanning for opportunities and threats. I believe it is in the scanning of opportunites and threats where you can position yourself to hopefully profit from an outlier and/or avoid a catastrohpic outlier event.

    BTW, I am pretty sure I would take TH's day to day P&L as it looks pretty darn good to me!!!
     
  4. prawn_86

    prawn_86 Mod: Call me Dendrobranchiata

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    Re: Outliers---where true profit lies.

    Wouldn't the losses be negated due to stops?

    Also, TH tends to have 'worse' (but still profitable) results if you remove the outliers from his data, from what i have seen
     
  5. Garpal Gumnut

    Garpal Gumnut

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    Re: Outliers---where true profit lies.

    This argument is akin to Nick Taleb's ideas,

    90% of capital in Treasury bonds.

    10% in out of the money options.

    Recognising outliers, Taleb is a bit hazy on.

    He thinks the Bell curve is a load of codswallop anyway.

    gg
     
  6. mazzatelli1000

    mazzatelli1000

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    Re: Outliers---where true profit lies.

    So how about large sudden gaps????

    But it will depend on the circumstances - and I emphasize the word COULD
     
  7. jonojpsg

    jonojpsg

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    Re: Outliers---where true profit lies.

     
  8. skc

    skc Goldmember

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    Re: Outliers---where true profit lies.

    Looking at the FDL chart I personally would have been stopped out multiple times. It moved from over 0.15 down to ~0.07 on the second day big red bar. Even if you could live with seeing your profit halved, 2 weeks of consistent falls at start of Jan would also likely shake most people out who got in at 0.01.
     
  9. motorway

    motorway

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    Re: Outliers---where true profit lies.

    have a look at the work of Peter L Swan

    From the School of Banking and Finance, Faculty of Commerce
    University of New South Wales





    OK trading is a buzz people are attracted to it... And stocks that have liquidity see traders
    flock to participate.. Volume attracts volume.. And any discount against value evaporates

    He is saying the more illiquid,, the less volume... The more real value will be discounted.
    It will be a buyers market ... They will set the price and require significant discount .

    For every 1% increase in liquidity the return from holding a security as an investment
    declined by .54% PA

    prices disperse information.. significant volume and liquidity.then. Information Known by everbody...Fully priced... quick transition with new information fast dispersal ..
    Low Volume low liquidity,then,, Buyers demand discount.. And information disperses slowly new news has a delayed effect and will always be under priced


    His conclusion
    BLUE-chip stocks may be unsuitable holdings for personal investors, says a Sydney professor who has produced a theory explaining the differences in returns produced by various assets.

    So maybe look in the right place to start with is step one.


    motorway
     
  10. motorway

    motorway

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    Re: Outliers---where true profit lies.



    Given the obvious preliminary steps ( trend of market etc )

    Here is a possible second step

    The changing trend in relative strength

    Here is the important suggestion

    Not whether it is + or -
    over a look back period ( always non optimised ? )

    relative strength will find a bottom BEFORE
    absolute strength...
    ( as it will in finding a top )

    because (all that matters ? )

    Accumulation & Distribution

    Ralph wanger is well known small cap investor
    -Manager of the Acorn Fund

    Clay Allen is a Point and Figure practitioner
    with an emphasis on Relative strength

    DYOR
    motorway
     
  11. It's Snake Pliskin

    It's Snake Pliskin

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    Re: Outliers---where true profit lies.

    Tech/A,
    We need a better definition of the word. If outliers are relied on for regular income and profit, then should they be called outliers? If they are common then they may not be outliers. And only the mother of all moves may be considered outliers because they happen rather rarely.

    So is there a better and more concise interpretation of what an outlier is?

    Why not just call them percentage moves and grade them with broader grades as they get bigger?
     
  12. It's Snake Pliskin

    It's Snake Pliskin

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    Re: Outliers---where true profit lies.

    I agree too.
     
  13. It's Snake Pliskin

    It's Snake Pliskin

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    Re: Outliers---where true profit lies.

    By having a good understanding of what you are looking at and then letting luck play its role.
    Congratulations. Would you like to share how you got onto it?
    I don't see how you can foresee something that is not foreseeable, but perhaps only in the hindsight reality of results viewing which would lead one to think it is foreseeable. Semantics? Yes.
    But in short find the two types of money.
    Have a way of knowing when the dumb money is pumping.
     
  14. weird

    weird

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    Re: Outliers---where true profit lies.

    Interesting post, but I don't think there is anything special about outliers except making oneself available for them, good and bad (unfortunately) - they appear unexpectedly - but it is the old mantra which steads u good in the end - cut your losses , and let your winners run - which really comes through there - which may answer part of the question -that is possibly the the best way to deal with them and ensure that they do occur for u - however there is a tendency to bank any available profit and then hope a looser will come good which works against positive gains from outliers.
     
  15. Trembling Hand

    Trembling Hand Can be found on the bid

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    Big wins are a funny thing,

    My trading became consistently profitable when I stopped chasing the so called "Out-liners". It even became more focused & painless (relatively:() when I stopped beating myself up on missing the big moves after they have happened.

    The great thing about not chasing the next big move is that you develop trading methods that are profitable with out relying on the lucky trade. And as already stated by others being able to stay in the game you greatly increase your chances of snagging the big moves.

    Another trading paradox- don't chase them and you will get them. :rolleyes:
     
  16. cuttlefish

    cuttlefish

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    This is very useful insight. I think I've been starting to see some of this effect in my options trading.


    Great thread too - lots of interesting contributions.
     
  17. MRC & Co

    MRC & Co

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    I think some moves are possible to forsee to some extent.

    Like the 1% unexpected rate cut like 3 months back. Or even the tank on Friday, global markets fell off a cliff a while after the rejection of the bailout and SPI actually followed (my god, but with that ferocity, the likelihood was very high).

    Then there was the Friday at the low, where global markets took off all at the same time for no reason. Someone was obviously buying up SPI big time.

    Moves like these, while of course you don't KNOW, if you grab your nuts and get on them early with a bit of size, are pretty good chances of outlier profits. Other than that, I wouldn't have a clue, one reason I think it's important to scale out.
     
  18. It's Snake Pliskin

    It's Snake Pliskin

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    Seeing it like that then by taking a position in the AUD/JPY when the AUD was down to sub 60yen would mean an outlier result in the future if global fundamentals can pick up to allow the outlier result of above 90 yen per dollar. I know a few who have taken the position of waiting for the rise to where it was a few months ago.

    However there could be an outlier in the opposite direction of loss.
     
  19. MRC & Co

    MRC & Co

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    No idea about Yen. Don't trade it.

    But some INTRADAY moves happen after big news, or on HUGE and sustained volume, allow you to bet a bit more aggressive as the flow is pretty damn clear.
     
  20. tech/a

    tech/a No Ordinary Duck

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    Snake as I said I'm happy to.

    Ive had this interest in Outliers for over 10 yrs now and know of only ONE way to get on to them consistently and WITHOUT sitting in a trade hoping.

    Before I go into it in detail I need to make a call tomorrow.
    All will be clear soon.

    By the way 530 stocks rose between 100% and 300% at sometime over the last 12 mths.

    There have been some god points made in the posts above.
    Motorway in his initial post hit the nail on the head.

    And while his suggestion of Relative Strength has merit (Something I have looked into in some depth)

    Relative strength in illiquid stocks can jump around all over the place.

    The trick is to find these Possible prospects when they are in the initial throws of taking off.
    This equates to ON THE DAY and often IN THE HOUR.

    I only know of ONE way of doing this and will let all know tomorrow.
    Sorry need to get the info correct---and yes all will be able to do as I have in the past.
    Its the exact same way I found ADY.

    TH
    For me its not about chasing Outlier moves but putting myself on the train as it leaves the station---with the biggest opportunity of not having the train return,also with the greatest possibility of loading more of my luggage(Money) on the train as it increases speed,and dumping it all off when it hits its inevitable brick wall.
    There is nothing wrong with consistent profits but you have to admit that if you could be reasonably consistent hoping on potential outlier moves,that can be traded with relatively minimal risk and massive R/R potential---that you'd at least have some interest.

    Recognise potential
    Minimise risk both initial trade risk and opportunity risk (Not sitting in a trade doing nothing).
    Get on board--when you know with relative surety
    Get off when you know with relative surety.

    Weird
    They do appear unexpectedly but if you KNOW when they HAVE and ARE going then the un expected may not be so unexpected.
     
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