Trade Ideas Blog

Outliers and Your Trading Strategy

Oct 2, 2013

Let’s see how Trade-Ideas looks at the market.  We’ll focus on one particular filter.  This histogram shows where each stock opened this morning, compared to the previous day’s range for the same stock.

I selected the range between 0 and 100%.  The selected stocks, shown in blue, all opened within the previous day’s range.  That is to say, they did not gap up or down at all this morning.

What I find most interesting about this histogram is how obvious that middle part is.  Even if I hadn’t selected anything, you probably could have guessed where yesterday’s high and yesterday’s low were.  The bars in the center are much higher than the bars next to them.

In particular, notice the blue bar on the far left.  This represents stocks that opened at or very slightly above yesterday’s low.  And notice the blue bar on the right.  That represents stocks that opened at or very slightly below yesterday’s high.  Notice how those extreme cases are so big compared to the near by bars.  What does that mean?  In means that numbers like yesterday’s high and low are important.  They aren’t random, and they aren’t fuzzy.  Prices in the morning could be anything, but they are at these exact positions far more common than random numbers would allow.

This example only looks at our Position of Open filter.  However, if you explore, you’ll notice that a lot of our filters look like this.  Feel free to check out other filters using our histogram feature for yourself.

If you move the track bars you can select other data.  For example, the picture below shows how many stocks gapped down by 0 to 45 percent.  Remember, we’re comparing the size of the gap to the size of yesterday’s range.  The blue bar on the left shows stocks that gapped down almost half as much as the entire size of their range yesterday.

But what about the bar on the far left, and the bar on the far right?  What do they mean, and why are they so big?  Let’s take a closer look.

Notice the min and max values for these bars.  The bar on the left goes from -45% all the way down to -248,407%!  The bar on the right goes from 145% (i.e. 45% above yesterday’s high) all the way up to  342,370%.  Those numbers are huge compared to the bulk of the values.

Why is there a big spike?  It’s because our software put all of these outliers into two groups.  “Way down” goes into the leftmost bar, and “Way up” goes into the rightmost bar.

What do these values mean?  What do these stocks look like?  Let’s take a closer look.

I have a pretty good guess at what we’re seeing.  I think these are stocks where yesterday’s range is tiny.  This filter is a ratio.  The value can be big because the stock moved a lot, or because the range yesterday was small.  When I see those ridiculously high values, I suspect the issue is with yesterday’s range.  It’s much easier to believe that a range was very close to 0, than it is to believe that a stock went soaring hundreds of thousands of times more than normal.

So let’s look at yesterday’s range next to this filter.  Yesterday’s range isn’t a standard filter at Trade-Ideas.  So I used our Formula Editor to create some new filters.  Now I can see yesterday’s range in dollars, and in %.

Now let’s put this all together.  I made a top list that sorts things by this filter.  This highlights stocks that gapped way down.  What do we see?  The top of the list is “Arca Test Symbol.”  I think it’s fair to say that you’re not trading this stock!  Most of the stocks near the top, the real outliers, all had a range of one penny or less yesterday.  So my theory was right; these huge values represent stocks that had a small trading range again.  And I bet must of you don’t trade these stocks, either.

I took a closer look at a couple of these stocks.  Look at how big the gap is for IBCPO.

The range yesterday was 15¢.  And that was ridiculously tiny compared to the size of the gap.  So the filter did what it was supposed to.  This is just an extreme stock.  Is this the type of stock you’re looking for?  Notice all the holes in the chart.  This stock is not actively traded.
Here’s another example, JJU.  It’s hard to even find the trades on this chart.  I didn’t see any need to go on.  These are extreme stocks, but they are hard to trade.

So, what have we learned?  There’s a lot of weird stuff out there!  If you just ask for the biggest, the fastest, the most, …, you’ll get strange stocks like these.  That’s why we offer both min and max filters.  You can easily say “I want stuff that gapped down a lot, but not stuff that gapped down a ridiculous amount.”  Based on the volume for these stocks, that’s what most people would do.  These outliers exist, but they aren’t traded much.

Of course, that’s not your only option.  We know that these crazy numbers appeared because we divided by yesterday’s range, and yesterday’s range was just really small.  Instead of this filter, you could look at the gap in dollars.  Or you could look at the gap as a percent of the stock price.

If you don’t like one of these standard filters, build one of your own.  Maybe you liked the idea of comparing to yesterday’s range, but you want to see thinly traded stocks.  What if you divided the gap in dollars by the average true range?  The average true range looks at 14 days, not one, so it’s the same idea but smoothed out a little.  The possibilities are endless.  We’re here to help you find what you want, not to limit you.

I hope this article helped you understand what we have to offer, and what the outliers mean.  Let us know if you have any questions.