Stops - do you want them?

Discussion in 'Strategy Development' started by mizhael, Jul 5, 2010.

  1. HI all,

    Lets say I have a diversified multi-markets system.

    When I backtested it on 15 years historical data with no stops, it has a Sharpe Ratio of 1.50.

    But when I backtested the same system with trailing-stops added in, it has a Sharpe Ratio of 1.51. And I then optimize the trailing-stop percentage number using a exhuastive search, the best Sharpe Ratio came out to be 1.52 ( I used the same trailing-stop for all securities, thus only adding one parameter to the system).

    Of course, if I allow different trailing-stop parameters for different securities/markets, I will obtain good Sharpe ratio but then I add a lot more parameters.

    I would like to consult with the more experienced people here:

    From 0 stop to 1 stop, the Sharpe Ratio went from 1.50 to 1.51, is it worthwhile to add that percentage parameter and optimize it?

    What do you think of allowing different percentage parameters for different securities/markets?

    Thank you!
  2. Oh, my, Mizzi! Whatever made you think the Sharpe ratio was worth a shit as an indicator of strategy goodness? Do you put Sharpe ratios in your bank account?
  3. Most of the consistently profitable trades don't use stops. Lescor and Don Miller both don't use stops. They manage the trade with size. The also average down aka scale into their trades. In trading what seems right is usually wrong and what seems wrong is usually right.
  4. That is a typical assertion of people who don't backtest.
  5. Perhaps we can draw a distinction here.

    If you have mechanical (i.e. program based) trading systems, an example of which could be mt4 etc, then you can look at stops and use them within backtesting environments for the purposes of overall analysis.

    The problem you have, is that brokers DO hunt for stops - as in almost all cases, they make money when you do not.

    That is why the first lesson I learned, when I started working with real traders, was to use a very different kind of stop.

    I have spoken directly to developers of software, working for brokers in the UK who specifically maximise the chances of stops being taken out.

    Now, to be clear, having NO stop is not very safe. There is, however, a way to reduce your risk without putting in mechanical stops.

    The group I work with now does help train traders to do this, but the problem really is that there are very few longer term students out there.

    Those that take the all too familiar ultra short term (well I made money today, or this week) approach - really do struggle.

    The very few that approach in a more long term thinking, well probably 95% of them make money ... and alot of it.

    People know where I am if they want to know more.

  6. Run some forward test and see what you find.
  7. When I run forward tests I am never surprised because I backtested.
  8. Preparation is the key. Sounds like you are on top of it. There are a millions ways to make a million bucks. I wish you much luck and continued success going forward.

  9. gaj


    i use stops, constantly.

    they're sometimes based on price, they're sometimes based on time, sometimes even based on things that 'can't work' like level 2. but i always have them.

    and i do use RTM as one of my strategies.
  10. wrbtrader


    Everybody uses stops...some use hard stops, some use mental stops, some use margin calls (stops), some use opposite trade signal, some use position close at end of day, some use time duration et cetera.

    However, I do understand that the thread starter is specifically talking about hard stops.

    #10     Jul 5, 2010