Discretionary Trading Method-----Outliers Discussion Thread

[CanOz]

RPT - under offer of takeover? Can't find the notice though.

 

[MichaelD]

Michael, would you mind sharing some of your enlightenments? I do find this way of trading fairly taxing as well - being glued to the screen.

The major issue I had with my system was that it relied on outliers to make its money. There's nothing wrong with that per se - that's how long term trend following makes money.

The trailing stop method I had come up with was excellent at controlling losses to less than 1R, other than the odd >1R loss due to slippage, however the Achilles heel of the system was in profit giveback.

The nature of a trailing stop is that it relies on a share going up, peaking and then coming back down before exiting - you only know when the stock has stopped going up when it starts going down. The problem with this sort of short term trading is that these movements are too quick for an EOD stop to be totally satisfactory in capturing profitable moves.

For me, the solution was in an in-market profit stop as well as the trailing stop. This turns many small R losses into small R profits and increases the win %. The key to the system is keeping losses at substantially less than 1R on average whilst capturing lots of 1R profits.

This would appear to break the cardinal rule of trading, viz "let your profits run", but the goal of taking a bigger bite out of the average breakout move before it regresses to the mean is certainly met. So far, the numbers are very good in backtesting - 50% return on capital per annnum or so with 10% drawdown - but I don't have enough real test trades in the system yet to see if it performs in real life as well as it does on paper. I'm also comparing the old exit and the newer exit to see what the overall results at the end of the day will be. So far the new looks very good indeed, and certainly seems to be a new point at which to keep improving from.

Once this system is proven to work satisfactorily, I'll next work on capturing the outlier multi-R trades better.

 

[nizar]

Not for the majority and Im in the Majority!
A Bugger of a way to trade if you ask me.
Why do/did I do it? +75% in 2 mths.
Ive had enough for this stint.

tech/a,

dont the figures alone make it worth it?
75% in 2 months is unreal.
Why dont u like, trade this system for 2 months a year or something?

 

[tech/a]

tech/a,

dont the figures alone make it worth it?
75% in 2 months is unreal.
Why dont u like, trade this system for 2 months a year or something?

Well yes thats why I do it.
Having a ticker on my desk doesnt help either.
Often I'm to busy to trade,and almost everyday see opportunities fly past on the scan screens.
Pretty soon you see ones that keep re occuring.

I actually trade it when it screams at me---"Idiot buy me!!!"

One thing I will say is my developement in self discipline has over the years been immense. I can honestly say that I'm very mechanical,buy sell no hesitation.If Im too late Ill let it go.If I sell to early and miss a run I let that go as well with little thought other than Bugger.

There is ALWAYS another trade

On DYL bought it yesterday from an EOD search at 18.5c
Wish to run this a bit longer.Applying some Elliot to the analysis--thats interesting.

 

[nizar]

tech/a,

i saw some interesting stocks today, namely FNT and BUY

For FNT:
Im liking wat i see with this.
Opened modestly 10-11am pretty quiet. But at 12:05pm, boom 1mil volume, and the price 15c, this would be confirmed as a breakout. Usual volume is 100-200k. This wouldve been my entry.

%move scan on etrade would've picked this up (+15%)

At 12:12pm the price hit 22c. Thats the quickest money youll ever make in your life. ANd even if you didnt have the quickest finger on the trigger, up until 12:30pm you could still have got your shares sold for 19c. Thats 26% from a 15c entry, which i think is reasonable (eg. not like if i said i would buy at 13c, sell at 22c)

The potential is massive. I reckon with this kind of system a really tight stop even 1-2 ticks and you'll be set. Heaps of small losses but the occasional winner would do it for you.

25k parcel @ 15c = 166k shares
Sell at 19c = $31,600
Stop loss @ 14.5c (1 tick): total risk = $830

This wouldve been a ripper.

But really you have to be there at the PC the whole day to get these trades. It peaked 12 mins after it started running!!!

But from that half mil trade at 14c at about 12noon it didnt go down even by half a cent until it hit 22c then slow decline.

For BUY:
Im liking the potential for this one as well for a quick trade.

%change wouldve picked it up at 1pm at 3.6c (20%) and volume about 1mil (not massive), so i probably wouldve waited.

At 3pm another 1mil volume and the price now 3.9c. Both price and volume, breakout confirmed. I wouldve jumped on probably and it never ticked down at all until it hit 4.5c an hour and another 1mil volume later.

Though obviously picking up a 25k parcel of these wouldve made me the biggest trade for the whole day, and i wouldve had to chase. I probably would have got less (about 10k) after looking at the depth and the parcels that were going through.

But i mean even a stop at 1-tick NEVER would have got hit at the right place (3.9 or 4c entry as stated above). But at other times you wouldve, but i mean if your gonna be at the PC all day watching realtime movement then u could control your risk much better.

What do u reckon tech, this could actually work? I mean, as in if im gonna be watching it all day.

Its probably my psychology i gotta be careful of more than anything, gotta learn to buy and sell LIKE A MACHINE.

 

[tech/a]

Yes it can work but trust me you'll be frazzzled.

Hint.
Learn to use support and resistance on 1 min or Tick charts.
I often set buys at the closest support.
I set stops 1 tick below support.If you get stopped and it runs LEAVE IT ALONE.Find another.
Learn with small parcels even $5k lots.
Dont be greedy getting the meat in the sandwich wont give you indigestion.

1 tick is to close 2-3 and set your risk based upon that IE Fixed Fractional position sizing.

Be decisive buy or sell. If your right its some profit if your wrong its a cost of doing business.
Be very aware of your NETT profit if your not nett the majority of weeks your stuffing something up.
99% of the time it will be YOU stuffing up.

Have days off dont be greedy.

Have fun.

 

[nizar]

Yes it can work but trust me you'll be frazzzled.

Hint.
Learn to use support and resistance on 1 min or Tick charts.
I often set buys at the closest support.
I set stops 1 tick below support.If you get stopped and it runs LEAVE IT ALONE.Find another.
Learn with small parcels even $5k lots.
Dont be greedy getting the meat in the sandwich wont give you indigestion.

1 tick is to close 2-3 and set your risk based upon that IE Fixed Fractional position sizing.

Be decisive buy or sell. If your right its some profit if your wrong its a cost of doing business.
Be very aware of your NETT profit if your not nett the majority of weeks your stuffing something up.
99% of the time it will be YOU stuffing up.

Have days off dont be greedy.

Have fun.

Thanks tech/a for all the advice and the thread.

I reckon overtrading is a a trap most traders fall into. I see nothing wrong in trading once or twice a week. If i make a loss, i wont go into revenge mode, rather take a few days off. I reckon the more pro u become, the less u trade, and the more profitable u become.

MichaelD if you are around id be keen to hear your take on my above strategy and if u think it could work, same with anybody else.

 

[Bobby]

I actually trade it when it screams at me---"Idiot buy me!!!"

.

Hello Tech,
Can you answer a few questions please :

Loved the above analogy ! but can you translate it into words I can understand better .

What P.C. requirements do you recommend to run Marketcast.

If you buy a stock that rockets up , only to be suspended, and you still hold, whats the plan .

An evolution of trading is now happening, past T/A techniques seem to be superfluous, do you agree.

Regards
Bob.

 

[nizar]

Learn with small parcels even $5k lots.
Dont be greedy getting the meat in the sandwich wont give you indigestion.

1 tick is to close 2-3 and set your risk based upon that IE Fixed Fractional position sizing.

yeh i reckon 5-10k parcels and 2-3 tick stops gives me a better chance. we'll see how it goes.

 

[MichaelD]

MichaelD if you are around id be keen to hear your take on my above strategy and if u think it could work, same with anybody else.

I think you'll blow most of your capital.

Why? Your psychology will kill you, along with your lack of a complete trading plan. Entries and exits are not enough. Thinking about what you would have done trading the left side of the chart is not enough.

Your plan looks at the problem from the wrong viewpoint. Your plan says "find a stock going ballistic by doing X and hop on with a tight stop. Make much money. Easy."

TOTALLY WRONG.

What you SHOULD be asking is more along the lines of - if I find 30-50 entries by doing X and I trade them according to my plan, what ACTUALLY is the outcome - how much do I make/lose. How many will instantly reverse when you enter? How much slippage will you incur getting in and out? How often will a black swan event occur? How many winners will I have? How many losers will I have? What's my win/loss ratio? How will I prepare for trading psychologically in this way? What psychological blocks will I encounter which will prevent me from carrying out my plan? What happens if I have 2 losers in a row? 4 losers in a row? 8 losers in a row?

Until you've done it with real money, you have not the slightest idea of how psychologically taxing this sort of trading can be. The market will caress you and whisper sweet nothings into your ears - it'll be the greatest high you've ever experienced as you see your profits increase by the tick...and then the market will take your head and smash it against the floor until you're knocked unconscious and bleeding from the mouth and ears. Then it will kick you while you're down, all the while laughing at you as it goes along its merry, omnipotent way to do the same to the next trader.

Eventually you realize that the market has no emotions, and that your real enemy is within. But I digress.

90% of traders lose. Pretty much 100% of day traders blow up their accounts within a few months.

Find out the answers to these questions by thorough and proper backtesting. Then find out the answers by paper trading. Then try one or two tiny positions with money you REALLY can afford to completely lose. Then slowly scale up if you can show that the method is profitable and you can handle the psychology of trading this way. Take care of your losses and your profits will come.

Tech/A may make it look easy, but read into his posts - the battle to get to where his method is today is all laid out for us to learn from. It did not come easily. The lessons to be learned here are not in the successful trades, but in the failures and the journey.

Whilst every trader needs to find his or her niche, limited capital, inexperience and day trading are pretty much invariably a fatal combination. It is in every trader's best interest to learn to make money over a longer time frame first before looking at shorter timeframes. There's less adrenaline involved, but good trading is by its very nature boring. If it's exciting, you're doing something wrong.

 

[tech/a]

Nizar.
I actually agree with Michael. Without pumping my own tyres its a long journey and I doubt that many would make it.
This isnt trading for beginners but it is where the majority of beginners begin
There are 3 trades running at the moment that I think would be more the style Id be looking for as a beginner.
WSA BKP and DYL. I havent updated WSA or BKR for a while so I'll do them on the other thread.

 

[CanOz]

Isn't the general idea of Techs strategy more risk management than anything? If you can jump on the coat tails of a rising stock, who cares how you identify it, as long as it gets you in early, with a low risk entry and you protect your capital quickly.

If you could pick a couple odd days a week, where say a particular sector was looking good to fly, you would limit this kind of trading to days where there was more choice and liquidity in the market, giving you sharper rises and easier exits.

I will look to play with this as i find time using small parcels as well. I'll post a score card after a couple of weeks.

 

[nizar]

I think you'll blow most of your capital.

Why? Your psychology will kill you, along with your lack of a complete trading plan. Entries and exits are not enough. Thinking about what you would have done trading the left side of the chart is not enough.

Your plan looks at the problem from the wrong viewpoint. Your plan says "find a stock going ballistic by doing X and hop on with a tight stop. Make much money. Easy."

TOTALLY WRONG.

What you SHOULD be asking is more along the lines of - if I find 30-50 entries by doing X and I trade them according to my plan, what ACTUALLY is the outcome - how much do I make/lose. How many will instantly reverse when you enter? How much slippage will you incur getting in and out? How often will a black swan event occur? How many winners will I have? How many losers will I have? What's my win/loss ratio? How will I prepare for trading psychologically in this way? What psychological blocks will I encounter which will prevent me from carrying out my plan? What happens if I have 2 losers in a row? 4 losers in a row? 8 losers in a row?

Until you've done it with real money, you have not the slightest idea of how psychologically taxing this sort of trading can be. The market will caress you and whisper sweet nothings into your ears - it'll be the greatest high you've ever experienced as you see your profits increase by the tick...and then the market will take your head and smash it against the floor until you're knocked unconscious and bleeding from the mouth and ears. Then it will kick you while you're down, all the while laughing at you as it goes along its merry, omnipotent way to do the same to the next trader.

Eventually you realize that the market has no emotions, and that your real enemy is within. But I digress.

90% of traders lose. Pretty much 100% of day traders blow up their accounts within a few months.

Find out the answers to these questions by thorough and proper backtesting. Then find out the answers by paper trading. Then try one or two tiny positions with money you REALLY can afford to completely lose. Then slowly scale up if you can show that the method is profitable and you can handle the psychology of trading this way. Take care of your losses and your profits will come.

Tech/A may make it look easy, but read into his posts - the battle to get to where his method is today is all laid out for us to learn from. It did not come easily. The lessons to be learned here are not in the successful trades, but in the failures and the journey.

Whilst every trader needs to find his or her niche, limited capital, inexperience and day trading are pretty much invariably a fatal combination. It is in every trader's best interest to learn to make money over a longer time frame first before looking at shorter timeframes. There's less adrenaline involved, but good trading is by its very nature boring. If it's exciting, you're doing something wrong.

Great advice champ. Thanks

 

[nizar]

Just adding to my last post.

But see the problem with having limited capital is that u cannot set a stop loose enough that will keep you in the majority of trades. Having 1% stop if your capital is 15k, will have u stopped out about 95% of times. Thats why i was thinking of taking on more risk, but like u said that would probably wipe me out. But really - wats the probability of having 20 losses in a row?

Probably not high, but i guess it differs with every individual plan. Ill just have to papertrade for a while i think. Then i can quantify all the parameters u said, that wont do much to increase my capital, but i guess SURVIVAL is more important.

 

[tech/a]

Just adding to my last post.

But see the problem with having limited capital is that u cannot set a stop loose enough that will keep you in the majority of trades. Having 1% stop if your capital is 15k, will have u stopped out about 95% of times.

No I think if you have a look at the examples used here of about 6 or so have been stopped out once. So a 2-3 tick risk is workable--I do it all the time.

Thats why i was thinking of taking on more risk, but like u said that would probably wipe me out. But really - wats the probability of having 20 losses in a row?

You dont need 20 in a row to have a significant dent in your capital and there comes a point where you need to double your expectancy to break even or have just as amazing run of wins as you had losses.
Do you understand fixed fractional position sizing---how to caculate position sizing using this method.I can explain it if need be and this may help you get a grip on how many of what to buy.

 

[ezyTrader]

Hey tech/a,

Are you watching AUZ?

 

[MichaelD]

But see the problem with having limited capital is that u cannot set a stop loose enough that will keep you in the majority of trades. Having 1% stop if your capital is 15k, will have u stopped out about 95% of times. Thats why i was thinking of taking on more risk, but like u said that would probably wipe me out.

You've answered your own question.

1. Limited capital
2. Can't use a loose enough stop

You can't change 2, so you must change 1 or find a methodology where you CAN use a loose enough stop and trade safely.

But really - wats the probability of having 20 losses in a row?

If you don't know the answer before you trade a wild short term ride method like the one proposed then you shouldn't be trading it with real money until you find out. You can get a good idea of this once you know your win %. Indeed, your question implies that "20 losses in a row couldn't possibly happen to me". Think again.

Really, you shouldn't be trading any method without knowing the answer to this question.

i guess SURVIVAL is more important.

YES!! You can't play if you lose all your money.

Better to play in the toddler's pool before swimming with the sharks.

 

[MichaelD]

This isnt trading for beginners but it is where the majority of beginners begin

A very salient point. Beginners look for the quick profit, the gravy train they "deserve" from the stock market. If they start in a bull market, they may well get the high of a couple of wins in a row...but then come the uncontrolled losses and the pain. Mountains of pain, and there's nowhere to hide, no one else to blame.

 

[nizar]

Do you understand fixed fractional position sizing---how to caculate position sizing using this method.I can explain it if need be and this may help you get a grip on how many of what to buy.

Can u please elaborate on this if u have some time tech.
I dont quite understand, though Michael did give an example the other day, i could do with a few more.

Thanks

 

[tech/a]

Nizar

Fixed Fractional position sizing

Lets say for the example you have a capital base of $10,000
and you wish to trade a $1 stock with the lot.
You dont wish to risk more than 5% of your capital on the trade.
So maximum risk is $500.

You like the stock and think that a 5c stop would be best.
So $500/. 05c = 10000 so you CAN buy 10000 with a 5c stop no problem.

Lets say you think its going to fly so you only have a 2c stop.
so $500/.02c = 25000 so you could maintain the same $500 risk and invest in $25000 of shares had you the capital.

OK lets say you wish to use a wider stop can you still buy 10000 shares?
So $500/.20 = 2500 obviously no you cant you must buy 2500 ONLY to maintain the same 5% risk with a 20c stop.

So same maths applies to any position you take.

$15300 5% risk how many shares can I buy of a stock trading at $1.92c with an 18c stop?

S 15300 x .05% = $765.
765/.18c = 4250 shares 4250 x $1.92 = $8160 so you can ONLY buy 4250 shares at an 18 cent risk to maintain the same 5% risk to capital.

Ill go further and talk about Reward to Risk or the R/R ratio.
If you buy and then sell the $1.92 stock for a 54 cent profit you have returned on that trade a 3:1 R/R ratio.
This is calculated by 54c (the profit)/18c (The risk) = 3 so 3 times the risk has been returned.
So if you win 2 out of 3 trades with this sort of R/R ratio then your doing well.

Lets see if you have caught on?

1) I have 25000 and wish to buy a stock trading at $1.65. I wish to risk only 2% and my stop is 6 cents.How many can I buy?

2) How would you be doing if you won 4 out of 10 trades with that average ratio of R/R?

Ill check back tommorow and see how you and or anyone else went.