Initial Stop -- When is it required?

[nizar]

HERE is an interesting paper on trend following in stocks. I think this is a simple way to overcome the n-day breakout suggested above.

The above is an article posted by Nick several days ago.

I notice that in this study an initial stop was not used.
Essentially its a long-term trend following system with alltime high close as the entry and 10ATR as the exit (very loose).
Now win% is 49% and R/R is 2.56.

I still cant get my head around why such a longterm trend following system would have these sort of stats??
You would think win% would be closer to 30-40 and R/R maybe 4-5+ ??
Any ideas?

What sort of impact do you think placement of an initial stop would have on the results of this system?

In general, when is an initial stop required for longterm trend following system?

 

[Nick Radge]

Now win% is 49% and R/R is 2.56

Not sure if you've read my book but I did a small study showing that on any given day the market being up or down was 50/50. It may well be that on any given day market breadth is also 50/50, therefore in any given year market breadth will be 50/50. I have never studied the impact on market breadth but it may be something to think about.

The 49% win rate is also interesting in that it shows, yet again, that the entry is nothing but random and that the reason WHY the system is making money is because losses are being cut and winners run.

Not sure why you would assume the win rate to be lower?

 

[Porper]

You would think win% would be closer to 30-40 and R/R maybe 4-5+ ??
Any ideas?

What sort of impact do you think placement of an initial stop would have on the results of this system?

In general, when is an initial stop required for longterm trend following system?

Hello Nizar,

I haven't read the article yet, will later when more time.

As far as the win % & win /loss ratio are concerned it seems logical that the longer time frame used the higher the win % will be.Simply because over any given points in time, and talking years not months the general direction of the stock market is up.

As for the (win loss ratio) this does boil down to stops, if no stops are used at all (seems a strange method) then R/R (I think you mean win/loss ratio) ? will be lower as you will have some large losers diluting the large winners.

 

[nizar]

Not sure why you would assume the win rate to be lower?

Thanks Nick.
I was hoping you might reply.

I thought it was common for longterm trend following systems to win below 50%.

From what Iv read, 30-40% is rather commonplace, eg. turtles and all those other guns, John.W.Henry, Bill Dunn, Ed Seykota, Keith Campbell, i think win less than 50. And also explains all the references to Babe Ruth. Or is that only for commodities and currencies??

Nick, would you think that R/R should be higher for a longterm trend following system?

 

[nizar]

As for the (win loss ratio) this does boil down to stops, if no stops are used at all (seems a strange method) then R/R (I think you mean win/loss ratio) ? will be lower as you will have some large losers diluting the large winners.

Yeh, make sense now, thanks for that

So placement of an initial stop for this system would increase the R/R.

When I say R/R i am referring to (average win/average loss).

 

[Nick Radge]

niz,
the reference to the standardized trend following system used by those guys is commodities rather than equities. Making another common sense assumption that equities trend following involves "growing companies" then we may also expect that an equities based system will have a higher win rate than a commodities based system.

 

[nizar]

niz,
the reference to the standardized trend following system used by those guys is commodities rather than equities. Making another common sense assumption that equities trend following involves "growing companies" then we may also expect that an equities based system will have a higher win rate than a commodities based system.

Oh I see. Those common sense assumptions are gold. Keep them coming.

Nick, can you please answer the thread title question?
Do you use an initial stop in your systems?

Thanks.

 

[nizar]

Tech and ASX.G and others.

It would be great if we could get some discussion on the thread topic and my initial post questions.

Thanks.

 

[Sir Burr]

Initial Stop -- When is it required?

It's required to adjust your position size for risk.

SB

 

[theasxgorilla]

It's required to adjust your position size for risk.

And whether you use a fixed initial stop of x% of the position size, or some volatility measure, like a multiple of ATR, is up to you. The 10 x 10% with 10% stop is usually quite easy to code because it assures you that you are only risking 1% of equity per trade.