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Um,
Reading your recent post...Brings to mind what I call Outlier Trades.
Outliers have some unusual property, such as excessive profit or loss. The
amount
of excess is measured by the number of standard deviations away from the
typical ( average )
value. For example, if a system's average profit is $ 200 per trade and the
standard deviation
is $ 50, then a trade that produces $400 profit would be ( (400 - 200 ) / 50
) or 4 standard
deviations from average.
Outliers are usually considered to be 3 or more standard deviations from
average.
Essentially, they are aberrations that cause system results to be unfairly
positively or negatively
biased. By removing outlier trades from the evaluation process, a new net
profit figure can be
calculated. This new select net profit figure, devoid of all aberrations,
may offer a cleaner, more
realistic trading perspective. Obviously, Trend-following systems designed
to accept numerous small
losses to capture the infrequent big move rely on Outliers to be profitable.
Therefore, whether or not
it is better to remove outliers requires some thought.
In general, systems that are heavily dependent on outlier trades have
artificially inflated or deflated
net profit results. Since Outlier trades generally do not reoccur on a
regular basis, they should be
removed to present a more realistic trading perspective. The goal is to
find a system with a select
( nonoutlier ) net profit figure worthy of trading.
Example:
Is a system worth trading if it only generates $ 400,000 in profit without
outlier trades as compared
with its original $ 500,000 ?
Anthony
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