Discretionary Trading Method-----Outliers Discussion Thread

[nizar]

.

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.

1) risk at 2% is $500.
500/0.06 = 8333. You can buy 8,333 shares ($13,749) to maintain 2% risk with a 6c stop.

2) with which average R/R?? I havent sold the stock yet! (?)
But say i sold it the next day for $1.89. Thats 1.89-1.65=0.24*8,333 = $1,999 profit. Profit is 24cps, stop was 6cps. So R/R = 4:1
If i won 4 out of 10 trades then win/loss is 40%, return/risk = 4:1.

Does that at least get me a pass ?

 

[BSD]

3/ What sort of hole gets blown in your 'portfolio' when:

a. The Dow drops 2% overnight, the SPI is down 200 points on the open and the first bidder in your hot stock is 8% lower than your planned stop.

b. Your hot stock goes into a trading halt due to a placement and re-opens at a 10% discount with profitable placement stock getting slammed into the market.

c. Your company is being towelled and there is insufficient volume on the bid to knock out $30,000 worth let alone a decent line - you have a decent sized line and cannot unload without slamming the price to silly levels.

In these situations, do you slam the bid with your stop or 'hang in there'?


I am not saying money management isnt important, it is very important - my point is that this sort of precision is a bit too 'perfect world'.

This type of position sizing (and anything to do with using historical vol in position sizing) opens punters up to the risk of excessive confidence and ugly gaps.

This is particulary the case in stocks that are not liquid, trade OS with big gaps and/or involve leverage (derivative or funded).

Imagine the feeling of 9 months of regular small gains getting whipped in a day

 

[nizar]

correct BSD, u remind me of a mate of mine. he likes property very much, i ask him why doesnt he get into share. he says too risky. i say really, he says yeh, if i buy a stock and the company goes bankcrupt it could go to zero, and i lose everything, if u buy a house, and the house burns down, at least i still have the land

as for a) i plan never to hold stocks that i trade intraday overnite - ever. For exactly that reason. i leave myself open and vunerable to too much overnight risk.

 

[tech/a]

3/ What sort of hole gets blown in your 'portfolio' when:

a. The Dow drops 2% overnight, the SPI is down 200 points on the open and the first bidder in your hot stock is 8% lower than your planned stop.

A sizable one,has happened and will happen again.

b. Your hot stock goes into a trading halt due to a placement and re-opens at a 10% discount with profitable placement stock getting slammed into the market.

Same again.

c. Your company is being towelled and there is insufficient volume on the bid to knock out $30,000 worth let alone a decent line - you have a decent sized line and cannot unload without slamming the price to silly levels.

That never happens --well to me atleast Ive never traded thin stocks In 12 yrs never had a problem.

In these situations, do you slam the bid with your stop or 'hang in there'?

A,B Im out.
C Im stupid.

I am not saying money management isnt important, it is very important - my point is that this sort of precision is a bit too 'perfect world'.

Fortunately the "Perfect" world tends to dawn over 98% of the time. While the events do occure and worse (delisting) they arent a norm.I would rather have them in place that not at all.

This type of position sizing (and anything to do with using historical vol in position sizing) opens punters up to the risk of excessive confidence and ugly gaps.

Where did or are you getting that I/we are using historical volume? Volume one can purchase is being calculated from risk Ive not mentioned the volume of the stock being traded.Its not required for the calculation.
trading anything with less than $500K traded in a day in smalls is crazy.

This is particulary the case in stocks that are not liquid, trade OS with big gaps and/or involve leverage (derivative or funded).

the style introduced here is based around hopping on momentum.
I doubt that any of those in the examples could e classified as illiquid.

Imagine the feeling of 9 months of regular small gains getting whipped in a day

Man that would be ugly I would have to lose in one day my entire initial capital base all stocks would have to drop at least 50%.

I wouldnt be the only one having a bad day if that were the case.
Id have plenty of drinking buddies.

NIZAR

(1) Listen carefully.

(2) Learn to trade LONGTERM before you even attempt SHORT TERM you are on the road to ruin---short term is NOT for you.
Im being VERY serious.

(3) If you do not understand (3) please re read (2).

Your calcs are fine.

 

[wayneL]

3/ What sort of hole gets blown in your 'portfolio' when:

a. The Dow drops 2% overnight, the SPI is down 200 points on the open and the first bidder in your hot stock is 8% lower than your planned stop.

b. Your hot stock goes into a trading halt due to a placement and re-opens at a 10% discount with profitable placement stock getting slammed into the market.

c. Your company is being towelled and there is insufficient volume on the bid to knock out $30,000 worth let alone a decent line - you have a decent sized line and cannot unload without slamming the price to silly levels.

In these situations, do you slam the bid with your stop or 'hang in there'?


I am not saying money management isnt important, it is very important - my point is that this sort of precision is a bit too 'perfect world'.

This type of position sizing (and anything to do with using historical vol in position sizing) opens punters up to the risk of excessive confidence and ugly gaps.

This is particulary the case in stocks that are not liquid, trade OS with big gaps and/or involve leverage (derivative or funded).

Imagine the feeling of 9 months of regular small gains getting whipped in a day

None of these issues are exempted by other investing/trading techniques. Therefore, this is a moot point.

 

[barney]

Good thread here guys (Good advice as always Tech) Keep those questions firing Nizar ............... Cheers Barney.

 

[MichaelD]

c. Your company is being towelled and there is insufficient volume on the bid to knock out $30,000 worth let alone a decent line - you have a decent sized line and cannot unload without slamming the price to silly levels.

Funnily enough, I had this exact situation very recently with one of my long term positions which had punched through its stop loss (it's in the ASX300). Clearly everyone was in this for the very substantial dividend, and come EX dividend time, it was "last one out shut the door and turn out the lights".

Since I use a very wide stop, *I* was probably the last one out, and with 8,000 to unload I had an interesting dilemma.

With the Buy/Sell spread at 4.50 / 4.65 or so and basically no trading going on, dumping at market would have taken out buyers all the way down to 4.41, so I parked a limit order at 4.64 and watched to see what would happen.

I was lucky enough to have a few nibbles at 4.64 before a small seller hopped in underneath my bid, so I popped underneath this to 4.62. They then dropped to 4.61 and I decided to wait - 'twas only one person with a very small parcel and there was clearly no wild rush out the door going on.

Anyhow, the plan was to leave the offer at 4.62 unless more sellers appeared under my offer, or dump at market if no one else nibbled by about 3pm. Fortunately, the rest got bought up at 4.62 by about midday. Come 3pm the stock tanked again.

'twas nice to be on the right side of the slippage bogeyman for once. (But of course this anecdote has no statistical significance whatsoever, even though it was a fun psychological game.)

 

[nizar]

(2) Learn to trade LONGTERM before you even attempt SHORT TERM you are on the road to ruin---short term is NOT for you.
Im being VERY serious.

remind me, why am i all of a sudden on the road to ruin??

uv cut me deep tech, uv cut me deep, LOL

what made u come (jump?) to this conclusion all of a sudden??

i think im gonna paper trade for a while. My stats will let me know in what sort of "ruin" i will be on the road to.

cheers for your help though tech

 

[MichaelD]

remind me, why am i all of a sudden on the road to ruin??

i think im gonna paper trade for a while. My stats will let me know in what sort of "ruin" i will be on the road to.

Oh, dear. Just promise Tech/A and I ONE thing; DO NOT TRADE WITH MONEY YOU CANNOT AFFORD TO LOSE.

You're about to learn market psychology the hard way. Good luck (sincerely).

 

[nizar]

Oh, dear. Just promise Tech/A and I ONE thing; DO NOT TRADE WITH MONEY YOU CANNOT AFFORD TO LOSE.

You're about to learn market psychology the hard way. Good luck (sincerely).

Sorry if i hit the wrong buttons somewhere peoples, a minute ago u were very helpful but now all of a sudden not...

But thats cool....

Good luck to you as well, though i can see you wont need it, your a champion and will destroy the markets Michael, tech u already have, and i sincerely mean that. Id rather not talk down people, especially when i do not know their potential.

Let me tell u both something, i will not just go out there and throw everything on a trade, risking more than i can afford to lose. NO

And EVEN IF I DO, it would not matter. Everything i have amassed now in money, if i lose it, who cares, it will only be about a half a years salary in a few years time. My best earning years are ahead of me and this is the time when i can take on the most risk. But of course i dont plan to. So i will paper trade, bit by bit, review every month, maybe for at least 3-6 months minimum, and tweak my strategy until i think iv got it about right. And then tip my foot in the water. If it takes a year than so be it, 2 years who cares, but i'll find a strategy that suits me and i will make it to the very top.

Let me tell u a thing or 2 about statistics, i THRIVE on them. 95% of traders fail?? Even if its 99.99% i believe i can make it into that 0.01%. Damn it wasnt easy for me to get into my course, its about the top 3% of applicants who get in. Did i think oh my god 97% miss out? NO, rather i said EVEN IF THERE IS ONE PLACE AVAILABLE, it will be for me. Will i need to invest time to succeed in trading? YES. But guess what - im 22 years old - I'VE GOT NOTHING BUT TIME.

And therein lies the edge.

Doubt me at your peril, good luck on your endeavours and we just mite meet again someday.

 

[tech/a]

Sorry if i hit the wrong buttons somewhere peoples, a minute ago u were very helpful but now all of a sudden not...

Strange I still see the tone EXTREMELY helpful.
To why.
You simply dont have the experience to trade short term.This is evident in your answers to BSD.Nor do you have at this point the mindset.

I initially lost around $30-40k trading short term,at 22 you are Time Rich asset poor.
So use it to your advantage its hard enough to get and easy to lose.

Still helpful we are ---like a good trade you just have to be able to recognise it!

 

[Porper]

Sorry if i hit the wrong buttons somewhere peoples, a minute ago u were very helpful but now all of a sudden not...


Doubt me at your peril, good luck on your endeavours and we just mite meet again someday.

Nizar, I don't think Michael D or Tech A are suddenly not being helpful, they are telling you in strong terms to be careful, and not to short term trade before getting your feet wet.

I have been through the cycle of being fairly successful trading a weekly, monthly time frame and thought I would make more by using similar techniques in a shorter time frame.After all with the same money management skills, risk/reward, tight stops etc it must be easy, right ?

WRONG.It is a quick way to lose a lot of money.The most difficult thing is the psychological effect day trading can have on you.If this gets the better of you, and it will to some degree, then it is goodnight Vienna.

Maybe we all need to go through the big lows to really understand, you certainly learn best when losing money.So if you are determined to give it a go, start with a very small capital base because I can guarantee at first it will not go to plan.

 

[BSD]

A,B Im out.
C Im stupid.

Fortunately the "Perfect" world tends to dawn over 98% of the time. While the events do occure and worse (delisting) they arent a norm.I would rather have them in place that not at all.

Where did or are you getting that I/we are using historical volume? Volume one can purchase is being calculated from risk Ive not mentioned the volume of the stock being traded.

Its not required for the calculation.
trading anything with less than $500K traded in a day in smalls is crazy.

the style introduced here is based around hopping on momentum.
I doubt that any of those in the examples could e classified as illiquid.

Man that would be ugly I would have to lose in one day my entire initial capital base all stocks would have to drop at least 50%.

I wouldnt be the only one having a bad day if that were the case.
Id have plenty of drinking buddies.

Wayne, I don't think my examples create moot points, they should identify to people the possibilities of massive losses if you get too aggressive in staking size. My belief is that these methods have people getting too big in their trades and getting terrible prices on exit from having no discretion.

Someone willing to lose $2,000 of their $100,000 bank on a trade using a 4% stop they could feasibily put 50% of their capital into the one trade.

They may gear up and have $300,000 to play with across 6 similar situations - but only $100,000 is actually theirs.

I was interested to see that the discipline requires the seller to hit the bid and trundle the stock lower to 'protect' capital.

In my ungeared example above, an 10% break down loses the punter 5% of his entire stake and a 15% slip loses 7.5%.

Leverage could make it a lot worse. Losing 5% of the bank's stake means losing 10% of yours.


If these events happen only 2% on the time (50-1), assuming 250 trading days, one of these events happen five times a year.

The situations I highlight are real and not doomsday stuff.

My point is that they are rare occurances, but the magnitude of the potential losses are significant enough to be very wary and maybe even, to apply some discretion from time-to-time in exiting under these scenarios.

I mentioned historical vol because some use this in calculating their stake size based on the potential for the daily vol to lose them their accepted loss.


Much comment on this thread surrounds highly volatile stocks or at least stocks going through an extreme event on the upside. I am commenting on the potential effects of being excessively aggressive in position sizing with extreme downwards breaks in mind.

From page one - AUZ, ITE, CSM, MBP...

Finally, liquidity can be very fleeting. $1bn stocks can often dry up and on days like those 2% days, trying sell a decent line of stock can take a very long time. $500m traded can turn quickly to $50K traded on a bad day.

I remember having an order to work in MBP that took 2 weeks to unload. If we were pulling the trigger on that one 'at market' on a bad day - there wouldnt have been sufficient bids to fill half the line at any price.


I havent mentioned losing your entire bank in any of these scenarios - just wiping out your 15% profit from the last 6 months on one bad day because a trader:

a. Is too aggressive - basing their staking on the 98% scenario and not the 2%
b. Exercising no discretion
c. Is using an assumption of liquidity
d. May be using a strategy not suited to their actual parcel size
e. Investing in stocks that are sub-quality and full of day traders with the same idea
f. Are not diversified anywhere near enough

Not being critical; hopefully adding another perspective and helping people protect their capital

 

[wayneL]

Wayne, I don't think my examples create moot points, they should identify to people the possibilities of massive losses if you get too aggressive in staking size. My belief is that these methods have people getting too big in their trades and getting terrible prices on exit from having no discretion.

Someone willing to lose $2,000 of their $100,000 bank on a trade using a 4% stop they could feasibily put 50% of their capital into the one trade.

They may gear up and have $300,000 to play with across 6 similar situations - but only $100,000 is actually theirs.

I was interested to see that the discipline requires the seller to hit the bid and trundle the stock lower to 'protect' capital.

In my ungeared example above, an 10% break down loses the punter 5% of his entire stake and a 15% slip loses 7.5%.

Leverage could make it a lot worse. Losing 5% of the bank's stake means losing 10% of yours.


If these events happen only 2% on the time (50-1), assuming 250 trading days, one of these events happen five times a year.

The situations I highlight are real and not doomsday stuff.

My point is that they are rare occurances, but the magnitude of the potential losses are significant enough to be very wary and maybe even, to apply some discretion from time-to-time in exiting under these scenarios.

I mentioned historical vol because some use this in calculating their stake size based on the potential for the daily vol to lose them their accepted loss.


Much comment on this thread surrounds highly volatile stocks or at least stocks going through an extreme event on the upside. I am commenting on the potential effects of being excessively aggressive in position sizing with extreme downwards breaks in mind.

From page one - AUZ, ITE, CSM, MBP...

Finally, liquidity can be very fleeting. $1bn stocks can often dry up and on days like those 2% days, trying sell a decent line of stock can take a very long time. $500m traded can turn quickly to $50K traded on a bad day.

I remember having an order to work in MBP that took 2 weeks to unload. If we were pulling the trigger on that one 'at market' on a bad day - there wouldnt have been sufficient bids to fill half the line at any price.


I havent mentioned losing your entire bank in any of these scenarios - just wiping out your 15% profit from the last 6 months on one bad day because a trader:

a. Is too aggressive - basing their staking on the 98% scenario and not the 2%
b. Exercising no discretion
c. Is using an assumption of liquidity
d. May be using a strategy not suited to their actual parcel size
e. Investing in stocks that are sub-quality and full of day traders with the same idea
f. Are not diversified anywhere near enough

Not being critical; hopefully adding another perspective and helping people protect their capital

Gotcha'

Agree

 

[MichaelD]

Someone willing to lose $2,000 of their $100,000 bank on a trade using a 4% stop they could feasibily put 50% of their capital into the one trade.

Any trader who puts 50% of their capital into one trade is assured of blowing up eventually courtesy of the rare but inevitable outlier black swan event. For this reason, an essential part of robust position sizing is setting a limit for any one given position, so that even if your basic money management calculation says put 50% of your capital on one trade, you downsize this to less. Personally, I won't put more than 15% of my capital into any one trade. Some would go as high as 25%.

A corollary of this is that using wide stops pretty much mandates small risk % position sizes.

 

[Porper]

Any trader who puts 50% of their capital into one trade is assured of blowing up eventually courtesy of the rare but inevitable outlier black swan event. For this reason, an essential part of robust position sizing is setting a limit for any one given position, so that even if your basic money management calculation says put 50% of your capital on one trade, you downsize this to less. Personally, I won't put more than 15% of my capital into any one trade. Some would go as high as 25%.

A corollary of this is that using wide stops pretty much mandates small risk % position sizes.

Trading with a normal share trading account, I agree, eventually you will get caught out.Especially if you are having a good winning run, it is tempting to put up your normal 2% to say 5% risk, and as we all know your biggest loser is sure to follow your biggest winner.

However now with guaranteed stops with CFD'S, you can have a big play with a volatile stock.Some of the stocks IG offer have pitiful volume at times and have wild swings.

 

[MichaelD]

Good luck to you as well, though i can see you wont need it, your a champion and will destroy the markets Michael, tech u already have, and i sincerely mean that.

"Everyone gets what they want from the markets" - Ed Seykota.

I do not want to "destroy the markets", and nor can I. Neither does Tech/A. The market is bigger than all of us and does not care a whit for us. Also, the psychology implicit in your statement is wrong - the market to be "destroyed" is within ourselves.

The road you have chosen is the hardest to traverse of all in learning to trade the markets. The market will continually surprise you and continually do things you never anticipated and it will do them for longer than you ever thought possible. You have more chance of survival if you learn these things over a period of weeks/months rather than minutes.

 

[tech/a]

Its all part of the Money Management equation.

The example given was/is on a singular trade basis.
I and Im sure all reading see where BSD is coming from and as such would agree that placing everything in a single trade particularly on small caps carries inherent risk.

However the 2% I refer to is general market no individual trades.
Youd be amazingly unlucky to have 5 go belly up in a year that your trading.

Having said that those with small capital bases have the dilema of under capitalisation and at times will need to place themselves at more risk (in general terms) than those who can spread the risk.

Would I take that risk.
If in their position AT TIMES yes I would.
The risk is in my veiw that small that the potential reward out weighs that risk. However the trade and its risk would be quantified and if trading short term you maybe exposed to it in any singular trade for a day or matter of days.
As your base became larger then you should then mitigate risk even further.

Unfortunately the new trader with a smaller capital base has few options.
Minimise YES eliminate---not possible.

 

[barney]

Any trader who puts 50% of their capital into one trade is assured of blowing up eventually courtesy of the rare but inevitable outlier black swan event. For this reason, an essential part of robust position sizing is setting a limit for any one given position, so that even if your basic money management calculation says put 50% of your capital on one trade, you downsize this to less. Personally, I won't put more than 15% of my capital into any one trade. Some would go as high as 25%.

A corollary of this is that using wide stops pretty much mandates small risk % position sizes.

110% correct Michael .......... I am living proof of what you say, but in the words of a famous individual .......... "I'll be back" (I hope

 

[MichaelD]

However now with guaranteed stops with CFD'S, you can have a big play with a volatile stock.Some of the stocks IG offer have pitiful volume at times and have wild swings.

Please tell us more. I have not thoroughly researched the use of CFDs with a GSLO yet, and my question would be;

What is the outcome if you compare a sequence of 30-50 trades in volatile stocks using a positive expectancy system WITH a GSLO versus WITHOUT.

I have a niggling suspicion that despite the black swan and slippage protection, the overall bites at your account of the GSLO costs will outweigh the benefits - after all, why would a CFD provider give US something? Despite this cynical belief, however, I would be happy to be proved wrong.