Equidistant Trailing Stop Daytrader

Discussion in 'Strategy Building' started by profitseer, Jan 11, 2003.

  1. this ones for the guy who thinks he can guess right 50% of the time if it's going to be an up day or down day. It trades once a day and uses wide stops.

    1. Guess
    2. Set target and trailing stop to equal value.

    If you're right 50% of the time, and the times you are wrong the market moves at least a couple of ticks in your favor you'll make money.

    I suppose it would work for smaller moves, but I think you need a lot of ticks to let the trailing stop work it's magic. Probably a minimum of about 6.25 on ES right now.
  2. Eddy


    this is an interesting approach, but even if you are right 50 % of the time about the global daily market direction, you will most probably ends up losing money with this method because, at some times, the trailing stop during market congestion period will forbid you to reach your profit target. You only considered the "good" impact of the trailing stop on potential losers, but didn't mention its potentially "bad" impact on your existing 50% winning trades...

    Here is a clear example to illustrate that issue :

    Lets say first that you initiate your trades at the day session open having as possible exits :
    1) a profit target of 6 pt
    2) an initial stop loss of 6 pt
    and that your market direction assumption is right 50% of the time
    We will then assume (for simplification purpose) that guessing right 50% of the time means :
    1) you exit 50% of the time on your profit target
    2) you hit 50 % of the time your stop loss
    So we have defined a REFERENCE system which is a breakeven one (before commissions)

    Starting from this situation, it is true to say that replacing the initial stop by a trailing stop will improve the profitability of the system, but ONLY IF there are no intraday retracements bigger than 6 points !!!

    Indeed, as you mentioned, if a trade is going in your direction, but only by 2 point before going against you, a trailing stop will transform this - 6 pt loser into a - 4 pt loser.
    a) The "gain" versus the reference system is 2 point

    However, let's consider one of your previous winning trade (ie + 6 pt) but which had the following ongoing PL history : up first (+4) then retrace down til -3 before finishing at + 6. With the trailing stop in place, you would have exited the trade at -2 and not + 6
    b) The "loss" versus the reference system is 8 pt

    Even if a 6 pt + retracement against the daily direction (that you correctly guessed) should happen less frequently than a 6 pt - move (when your assumption was not correct), this is hurting more the stat of your system because of course, the minimum loss (vs reference system) in case b) is 6 point while what your maximum gain in case a) is by definition less than 6 points....

    Conclusion : in the case of an equidistant trailing stop daytrading strategies, to make money, you should be correct more than 50 % of the time, AND, know that
    => for your 50% of winners, your target of 6 point will be reached with an "intra-trade" drawdown of less than 6 point.....
    => or the PL improvement induced by the trailing stop on your losers will be higher than the loss induced by you former winners transformed into losers (because they needed to go thru a 6 pt + retracement before reaching their target)...

  3. 100 trades +/- 6 target/trailer

    50 wins = +300

    50 flat out losers = -300

    Net before commish and slippage = 0

    If the occurences of "if" that profitseer set forth are met, the worst case scenario is breakeven. If as he states, the trade moves any amt in your favor, the method will be profitable.

    I am unsure about your premise eddy. Your examples seem to disregard the basic assumption that 50% of the trades will reach the target, and of the remaining 50% that do not, some of those trades will move in the trader's favor thus decreasing the max loss.

  4. inandlong, are you inferring that it is possible to make money in a random market by adjusting stops/targets?
  5. No Mr Subliminal - but if what I am saying implies that I am, I don't mean to be. I mean to be speaking specifically about the premise that profitseer proposes, which is a guy is right about direction 50% of the time or more. The 6 pt thing was just to continue with the same numbers eddy used and not introduce new ones.

    For me, eddy's premise fails to recognize the primary requirement of profit's idea, that 50% or more of the trades will reach their target.

    Sorry for any confusion. I stay away from the random market discussions. My pea-brain thinks in terms of methods like this one.

  6. Eddy


    I agree with you : if we assume you get 50 % winners (whatever the trailing stop you might have included in your system), then this trailing stop might only help reducing the total loss figure by catching market move going in your favor.
    However, the 50% figure seemed to refer to the success rate of a general market direction assumption and not to the resulting system winning percentage... That is why I defined a "Reference system" and then tried to see the impact of adding a Trailing stop on system profitability...

    Anyhow, Profitseer, may be you could give us more details on your initial question/concern ?

  7. Like you, I also wasn't making any statement regarding the nature of the market(s). However, when profitseer says "this ones for the guy who thinks he can guess right 50% of the time if it's going to be an up day or down day", then for all intents and purposes the market is random for this particular "guy". Note also that nowhere does profitseer mention 50% or more - it is only 50%. Having said all that, I fully agree with Eddy's analysis and respectfully maintain that there is no "magic" in the trailing stop.

    :) :)
  8. Mr. S',
    I cannot speak to randomness so I defer to your judgement. And I too agree there is no magic in the trailing stop. I'm unsure where the idea that a trailing stop is "magic" is coming from.

    You are right about the 50% requirement and not more.

    Given that, my presumption is that by "right" profitseer means the target will be hit 50% of the time, regardless of market dynamics. He also states that the method is to use wide stops, presumably to account for the swings that eddy refers to. If that presumption is inaccurate, then all bets are off from my position, and eddy's analysis is in play.

    Again the key here as I see it is my interpretation of the method to mean that the guy profits 50% of the time, ie., his stoploss is not hit before his target. If profitseer doesn't mean that, then my premise is invalid.

    So profitseer, if you are out there, do you mean that it is a given fact that this guy is hitting his profit target before his stoploss 50% of the time?
  9. nitro



    For as long as I can remember here on ET, you have been discussing "random entries" into the markets and trying to use "technique" and "money management" to turn a series of trades made with such a "strategy" a profitable one.

    Have you actually traded any one of the 30 or so that you have come up with?

  10. inandlong, I agree with you. In fact, I now see where you got 50% or more from - for if profitseer meant "that this guy is hitting his profit target before his stoploss 50% of the time", then he definitely has an edge.
    #10     Jan 11, 2003