Backtesting is all that I can do to test a system. The alternative is to trade an untested system and hope. I find using an optimized system seems to reduce the volatility and drawdowns overall. Just my feeling, I do not have side by side comparison data.
Instead of specifying stops that are determined as a fixed percentage of capital, number of ticks, etc., consider using stops based on the average true range (or a similar volatility-derived measure). The market doesn't know or care about the price at which your equity is down by two percent. However, determining your potential risk as a measure of volatility is in-step with the recent behavior of the market, and if you get stopped out it's generally a pretty good indication that the original basis for your trade is now invalid. Of course, sometimes your stop will get hit to the tick and then the market will reverse course and promptly hit your profit target -- that's life. The two percent rule (or whatever percentage you prefer) can come into the picture in establishing the position size for a given trade once you've determined your volatility-based risk. Good luck. Regards,
In my experience stops almost always reduce system profitability. That's just how it is. Here is what I do (and what i think you need to do to): graph all "max losses" for each position. This is sometimes called max adverse movement. For instance, you'll find that most position moves no more than 1.2% against you. In that case, you should set your stop at 1.5% and you can be fairly sure that any potion getting to your stop would have gotten worse. Trading is a game of probability, where your primary objective is to make sure that no single or small number of trades get out of control. Hope this helps.
Exactly. Some s/w has ths feature built in. Bascially the concept is that almost all your winning trades will go no more than "x" points against you. All your big losers, by definition, will exceed "x." So you put in a stop in your system that hopefully will eliminate the big losers and not too many winners. My experience mirrors vikana's that stops reduce the profitablility of a good system. However, your system is based on limited data and you never know what might happen in the real world. So you must have some sort of disaster stop. The question is where to put it.
I agree that backtesting has little value with basically OHLC data as the input. Paper trading and token real trading do have practice value if you have first worked out a sound methodology. Stops are more a function of unreliable, chancy or unsound approaches or systems to play the market.
I think backtesting can be good and bad. Good because you can see what the probabilities are. Bad because people backtest and it looks good so they jump in with both feet without considering the psychology of actually having your hard earned money on the line. My suggestion is to backtest then start small and work your way up. The good thing about the markets is that there is always time on your side. Just people don't have the patience to wait. We all want to start at 5K and be millionaires next month.
I never understand this concept. What do you ppl do when your 'informed' buy goes against you and halves it's value. You just sit there waiting? There must be some point at which you exit too. And isn't that your stop? I don' see the problem with stops; you expect a certain behavior of your position, based on TA or FA etc.. There is always a point at which you have to admit you guessed wrong. That is where you put your stop. I feel that the problem ppl have with stops is purely psychological and of the same order as fear for taking losses/profits and fear of opening the trade. Ursa..
I never exit a trade simply because the price is going against me. But, I never enter a trade based on technicals alone, so why would I exit a trade based on techncials alone? I might exit on adverse news, but that's not a stop. Martin
Well, the markets won't let you trade historical data. So backtesting outcomes have little bearing on the present price, or for that matter, the next price. There are geek suckers born every minute that will backtest for years, all the while avoid trading, searching for the Holy Grail. These types are generally risk averse, cause they rarely trade, and look for certainty. I am sure I will get ragged on for saying so, but backtesting's benefit isn't in finding profitable systems (or avoiding unprofitable ones) as much as it teaches a trader to define his/her rules of trading in a systematic way.