He didn’t say “lucky”, he said “perhaps lucky” 
I agree that a system of which the profit is based on a few outliers is not necessarily a bad system. But it is important to know, because it means that you should not miss any single trade. Last summer extreme-os had a big winning trade (NILE), but some subscribers missed it, and this changed their performance for that quarter substantially. In addition you can get a double fill on a big loosing trade - as some of us experienced a few weeks ago. So if outliers are important, this tends to have the effect that the results in your real account are less predictable (and of course more likely to the negative side).
Jules hit the nail on the head. It’s all about “perhaps”. If a system has 99 trades with zero profit and 1 with 200%, and I knew for sure that the 200% trade was not due to luck (but an inevitable result of the system strategy) I wouldn’t mind trading the system.
Similarly, if a system has 99 trades with 1% profit, and 1 with a 100% loss, and I knew for sure that the 100% loss was due to (bad) luck (i.e. so bad that it could happen to any system with an equal chance, think “nuclear war”), I wouldn’t mind trading the system.
But in practice, I can’t exclude the possibility that the trade happened due to luck (first example), or due to characteristics of the system (second example). To play it safe, I therefore assume it was luck in the first example, and a characteristic of the system in the second one, and avoid both systems.
Wouldn’t it seem that in a world of “sell losses and let profits run” that most of the big wins would be “outliers”? Most of my trading analyses seem to run this way. I’ve also seen analyses by a number of stock market gurus along the lines of how “being out of the market for just these 5 weeks over the last 50 years” accounted for a majority of lost profits, etc.
I suppose that it depends on what kind of system you prefer. Some swing for the fences and others hit singles and doubles.
Personally, I am more interested in systems that outperform on a daily basis. I don’t need to pay monthly fees to a system that just plays money management games. (trail your stop and hope this is the big one).
An excellent point.
It should also tell you you will need to possess remarkable patience and the mental strength to trade such a system and not many people do. Most people have a ‘need to be right’ which is why high win percentage systems are so popular. I prefer to go the ‘avg wins more than avg losses’ route but only to a certain extent as I also know I would struggle personally to deal with less than 30% winners. That doesn’t make those systems any less valid, it’s just that they don’t suit my psychological trading profile.
Ross, Jon, & Bill,
You guys are having an interesting discussion.
Don’t you feel that a certain amount of luck is inherent in all forms of trading the stock market? I find it interesting that systems that experience good luck (a small amount of outstanding trades) are punished by being labeled lucky. And, if the system experiences some bad luck (one or two significant hits), then it is also punished by being labeled as irresponsible.
Is the Monte Carlo equity curve simulation supposed to represent the probability of being luckier/unluckier?
Cheers
"Don’t you feel that a certain amount of luck is inherent in all forms of trading the stock market?"
The higher the leverage the higher the luck factor. Keep your margin under control and it is no longer luck but skill.
Yes, “cut your losses and let your profits run” will create outliers in the profits. That’s why the judgement is asymmetrical: Outliers in the profits can be a matter of luck, but outliers in the losses almost always indicate bad discipline (e.g. a large position without stop loss). One exception would be a nuclear war, but a more common exception imho is that many beginning vendors make mistakes with the C2 interface.
With respect to outliers in the profits: it is no problem if such outliers exist, but it can be a problem if they are the only reason why the system is profitable, for the reasons that were discussed above.
What???
The more margin I use the more lucky I am? Even without using margin there is a component of luck in every trade me thinks.
I find it interesting that systems that experience good luck (a small amount of outstanding trades) are punished by being labeled lucky. And, if the system experiences some bad luck (one or two significant hits), then it is also punished by being labeled as irresponsible.
This is a wrong representation of what has been said. No one said that.
outliers in the losses almost always indicate bad discipline (e.g. a large position without stop loss)
Absolutely agree.
a more common exception imho is that many beginning vendors make mistakes with the C2 interface
I am personally well aware of this, unfortunately.
The problem with “let profits run” systems is that for a subscriber it is hard to judge if the few highly profitable trades were a result of skill or luck. There’s nothing wrong with such a strategy in itself, it’s just harder to sell through a service like C2.
To balance the argument, I would also be suspicious of systems that have 100% winning trades, each with small gains for a prolonged time. It’s just very unlikely that such a system (if it could be developed at all), would be sold through C2. More likely the system averages down, sells options etc. and one day will experience that one -100% trade.
When vendor A and B have the same profit, but A used 10 times more leverage for this, then I would tend to believe that B has better skills than A. That doesn’t mean that A was only “lucky” though. I agree, there is some chance involved in every trade. But that’s no excuse for big losses. So I would say: Outliers in the losses signify lack of skills (together with some bad luck). Outliers in the profits may be a result of skills, or they may be the result of luck. You should find out what happened and be aware that it may be hard to replicate the results of the system in your own account.
Although I am a strong believer in the C2 model, I think the biggest problem is that 95% of people who think they can offer a system, have almost no concept of what is involved in leveraged trading, risk and other issues.
In the WSJ today, was the pending crises when the carry trades unwind (It could slam many currencies and cause a crisis) and a respected figure in the leveraged industry, who is convinced that the hyper-derivations going on within the Goldmans and others, could cause a huge collapse when even something relatively minor hits - that is partly what caused the 1987 collapse in the markets. ---- Yet mention that to most system vendors, and you get a blank stare.
In spite of all the TESTED evidence of the uselessness of most tech analysis, Gann, Fibonacci, Elliott, and a host of other gadgets, they keep coming. They read a few books, and bingo, there is a C2 system.
Some wield leverage like a child playing with a loaded gun
Some try to cheat the system and complain when people call them out on it. I definitely miss Sam’s posts as well as Randy May’s. They generally knew what was going on .
Some latch onto a market trend (like the current one), and somehow attract subscribers.
I was dismayed that David O.?? had a rating of 990, with about 3 systems way under the S&P performance and 1-2 about the same as the S&P. What the heck good is that???
When Feb. 27 or mid-May 2006, or Oct. 19, 1987, or the Asian currency crisis, or Chernobyl, or the hedge fund collapse some years ago requiring US Federal efforts towards a buyout or a hundred other things hit, a vendor will blow up, and stop coming to C2 or just start another system under another name.
I was having a negative dialogue with Craig Bender yesterday. He basically blew out 2 systems, and is inquiring whether there is any fresh meat out there willing to bet it on a 10 day winning streak, that basically tries to carve out a point at a time with massive leverage.
It sometimes is amazing…
I find it interesting that systems that experience good luck (a small amount of outstanding trades) are punished by being labeled lucky. And, if the system experiences some bad luck (one or two significant hits), then it is also punished by being labeled as irresponsible.
yes, it is indeed “being labeled as”, it doesn’t necessarily have to be true. As a subscriber I prefer to err on the safe side, even though from a vendor’s perspective that might not seem “fair”.
There’s nothing wrong with such a [“let profits run”] strategy in itself
Yes, I believe Ed Seykota, one of the greatest traders of modern times (maybe of all time) agrees with you there. His trading tribe site is interesting as well. http://www.seykota.com/tribe/ for reference.
Paciencia
StarForex
Look at the C2 chart for system name: BurstTrading.com
Either he just accepted the national debt, or something’s wrong.
http://www.collective2.com/cgi-perl/systems.mpl?want=publicdetails&systemid=23693930
"Even without using margin there is a component of luck in every trade me thinks."
But when you aren’t over-leveraged then luck doesn’t dictate your future actions.
"The problem with “let profits run” systems is that for a subscriber it is hard to judge if the few highly profitable trades were a result of skill or luck."
I find it hard to imagine that a position that has been left to run for a considerable period of time can be viewed as luck as I believe to let profits run is actually one of the hardest things to do and requires tremendous discipline. I’m sure we’ve all watched a trade go well, taken our profit and patted ourselves on the back, only to later watch it carry on in the same direction for a gain twice as much as we sold it. Taking profits is the easy bit, letting them run requires discipline and I would say is more down to skill, not luck.
