Don’t shy away from your ‘outliers’ – those unusually good or unusually bad trades. They can be your best teachers.
The top 5% and bottom 5% of trades are often the biggest contributors to success or failure. We tend to pay attention to the 90% of trades that make up the norm, when the real pivot lies in how we manage our outliers.
Outliers are caused by many factors:
a) A strategy that has a certain probability of delivering big winners or losers
b) Lady luck
c) Flash crashes, market anomalies, or a black swan event
Here are my top tips for learning from outliers.
Look at how outliers are distributed between different facets of your strategy. What if your top 5% are Long trades, but your bottom 5% are Short?
Make better risk decisions with this knowledge. Consider making long trades slightly larger and short trades slightly smaller.
It’s incredible to see the impact of days of the week, or times of the day.
Action: Look for clusters of outliers - particularly at the end of the trading day, Friday afternoon, Sunday nights, or close to market Opens and Closes.
Certain patterns of behaviour increase the likelihood of outliers. Take the first trade of the day, where most traders show a bias. Some traders are fearful of their first trade of the day, requiring a long time and an overly perfect set-up before they can get into a position. Others are restless to jump into the market quickly.
Action: check your first trades of the day (I recommend having at least 100 first trades for this). Do they significantly outperform your normal returns? Then you have a perfect opportunity to use a larger size. If they’re poor performers, minimize loss by make your first trade of the day the smallest size possible.
(4) Market Volatility
Markets need different approaches depending on volatility. With low volatility markets, traders need patience to hold trades for a longer duration to hit targets. High volatility markets are exciting, and often trigger undisciplined trading.
Check your outliers to see if you thrive or perform poorly in different types of markets. Make sure your position size matches the returns you get in a different market type. If you return better in low volatility markets, then these trades can be bigger size; reducing size in higher volatility markets will help keep emotions on an even keel and reduce negative outliers.
We all have natural trading biases. If you measure yours, you can manage them intelligently to minimize losses and take advantage of your strengths.
Valutrades now offer free access for live account holder to the Chasing Returns platform for managing your trading strategy. See more here.
The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.