The use of "wide" trailing stops

[Chorlton]

Hello All,

For all those who have developed Trading Systems which have included wide trailing Stops, approximately how long did you have to wait until your system started to become profitable, and how did you cope during this initial time?

I ask as the wider the stop, the longer it would take for positions to be closed out. Assuming then that one is letting profits run (by using a wide stop in the first place) and also cutting losses quickly then it seems apparent that until the winning trades start to appear, the system would steadily lose money. With a longish-term system, the win rate would probably be reasonably low (around 35-45%) which would result in a large percentage of losing trades appearing during this time.

Then, if for example the Average winning trade for one's system is over 12-18mths (which is reasonable given the Bull Mrkt over the last few years) then for most of this initial period one would need to have the confidence to keep trading through it.

Although one would have probably carried out sufficient testing to create some level of confidence in the System, how did you still cope with it from a psychological point of view?

In addition, was this issue ever considered when choosing which Stop you would ultimately use for the System?


Just interested...

Chorlton

 

[nizar]

Hello All,

For all those who have developed Trading Systems which have included wide trailing Stops, approximately how long did you have to wait until your system started to become profitable, and how did you cope during this initial time?

I ask as the wider the stop, the longer it would take for positions to be closed out. Assuming then that one is letting profits run (by using a wide stop in the first place) and also cutting losses quickly then it seems apparent that until the winning trades start to appear, the system would steadily lose money. With a longish-term system, the win rate would probably be reasonably low (around 35-45%) which would result in a large percentage of losing trades appearing during this time.

Then, if for example the Average winning trade for one's system is over 12-18mths (which is reasonable given the Bull Mrkt over the last few years) then for most of this initial period one would need to have the confidence to keep trading through it.

Although one would have probably carried out sufficient testing to create some level of confidence in the System, how did you still cope with it from a psychological point of view?

In addition, was this issue ever considered when choosing which Stop you would ultimately use for the System?


Just interested...

Chorlton

Hi Chorlton,

Not sure what you mean by "wide"?

On my weekly set-up, I use 2*ATR and thats the exit that worked best during testing. What I mean by best is the highest value in terms of CAR/max.DD.

Though average time for a winner was about 7-8 months and 3-4 months for losers, so not quite the 12-18 months as you mention above. Although the huge winners do tend to run for 1-2 years.

As to the psychological impact, it was quite okay for me as I expected my core long-term trend following system to be exactly that, long-term. It was never supposed to make money in the short term.

And though I would prefer a bullmarket, I do understand that markets are cyclical but as long as the stockmarket maintains its historical bullish bias, then in 20-30 years time, I should be okay.

 

[It's Snake Pliskin]

Hi Chorlton,

Not sure what you mean by "wide"?

On my weekly set-up, I use 2*ATR and thats the exit that worked best during testing. What I mean by best is the highest value in terms of CAR/max.DD.

Though average time for a winner was about 7-8 months and 3-4 months for losers, so not quite the 12-18 months as you mention above. Although the huge winners do tend to run for 1-2 years.

As to the psychological impact, it was quite okay for me as I expected my core long-term trend following system to be exactly that, long-term. It was never supposed to make money in the short term.

And though I would prefer a bullmarket, I do understand that markets are cyclical but as long as the stockmarket maintains its historical bullish bias, then in 20-30 years time, I should be okay.

The market is biased to the upside unless it is retreating in size and intensity. Japan is still not past it's high set back in the 80's. Is it biased to the upside? No, not yet. Are other markets biased to the upside? Yes, but not currently.

http://www.portfolio.com/views/blogs/market-movers/2008/10/17/learning-from-japan

 

[nizar]

The market is biased to the upside unless it is retreating in size and intensity. Japan is still not past it's high set back in the 80's. Is it biased to the upside? No, not yet. Are other markets biased to the upside? Yes, but not currently.

http://www.portfolio.com/views/blogs/market-movers/2008/10/17/learning-from-japan

Yeh well if we do a Japan that system is screwed.
But thats the risk Im willing to take.

I can take comfort in the fact that I only have $50k in there and Im in the process of designing other short term systems and if they are successful they should (more than) make up the difference.

That said though, Japan had a MASSIVE run up before it collapsed. Nikkei went from 2000 pts in 1972 to the 40,000 peak in 1990. Thats 20-fold in 18 years.
http://www.chartsrus.com/chart.php?image=http://www.sharelynx.com/chartstemp/free/chartind1CRU.php?ticker=^N225

In the last 18 years to our 2007 peak, we've gone up less than 5-fold.
http://www.chartsrus.com/chart.php?image=http://www.sharelynx.com/chartstemp/free/chartind1CRU.php?ticker=^AORD
So hardly a fair comparison.

Though, I admittedly know very little about the economics side of the things. Im more than happy for you (or others) to educate me if you want. Is Australia's economic state at the moment similar to Japan in 1990?

 

[kam75]

I think without doubt the best resource I've ever read on how to place a trailing stoploss is in Stan Weinstein's Secrets for Profiting in Bull & Bear Markets. Your stops should be trailed either just below each progressive swing low, or, just below a longer term moving average.
cheers

 

[weird]

I think without doubt the best resource I've ever read on how to place a trailing stoploss is in Stan Weinstein's Secrets for Profiting in Bull & Bear Markets. Your stops should be trailed either just below each progressive swing low, or, just below a longer term moving average.
cheers

Is it Mark or Stan, I now get confused after reading the latest S&C magazine ... doh ?

 

[acetrader]

Hello All,

For all those who have developed Trading Systems which have included wide trailing Stops, approximately how long did you have to wait until your system started to become profitable, and how did you cope during this initial time?

I ask as the wider the stop, the longer it would take for positions to be closed out. Assuming then that one is letting profits run (by using a wide stop in the first place) and also cutting losses quickly then it seems apparent that until the winning trades start to appear, the system would steadily lose money. With a longish-term system, the win rate would probably be reasonably low (around 35-45%) which would result in a large percentage of losing trades appearing during this time.

Then, if for example the Average winning trade for one's system is over 12-18mths (which is reasonable given the Bull Mrkt over the last few years) then for most of this initial period one would need to have the confidence to keep trading through it.

Although one would have probably carried out sufficient testing to create some level of confidence in the System, how did you still cope with it from a psychological point of view?

In addition, was this issue ever considered when choosing which Stop you would ultimately use for the System?


Just interested...

Chorlton

For me, I never place a wide stop. A wide stop only gives you a painful but longer death.

What I'm doing is to try to catch the immediate and pure trend. When it does not go the way I'm expecting I'm out, keep my money at a safer place. When it goes my way, I adjust my trailing stop close to those S/R level. I also close partial position at those key level to lock some profit which will keep me cool and give me confidence to let the profit run.

Good luck!

 

[wabbit]

Depending on your position sizing computations... assuming you have one:

The trader needs to balance the probability of getting stopped out vs. the benefits of position size in the market. i.e. if you have a narrow stop you have a higher probability of the price hitting the stop, but you can have a larger position size because you can have a small risk per share; the probability of a wider stop getting hit is less than the narrow stop, but because you have a higher risk per share you must take a smaller position. The capital risk is the same for both situations. A small position might make less profit than a larger position, but as I said, the tight stop might not give the trade the opportunity it needs to get into profit if it is stopped out too soon.

Each trader has to weigh up the values and make their own decisions.


My $0.02


wabbit

 

[beamstas]

If you find low risk entries and use an appropriate stop loss, you should be ok, and phycologically you will be able to cope with the fact that you will only lose what you were prepared to lose.

From a point of giving back open profits because of a downturn in the price being slow to cross the MA, this is something you'll have to plan for before hand when setting your stop loss. The wider the stop, the more you can ride a trend with less "noise" affecting it, but the downside is giving back open profits when the price falls.

If you are having trouble coping with giving back open profits, think about it like this

You can't make a big profit by taking small profits