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Neo,
I don't know if you're referring to Chuck's 1992 book, Technical Traders
Guide to Computer Analysis of the Futures Market, when you refer to his
material. If you are, my apologies. For those that aren't familiar, in
that book, he sets up a really good framework for evaluating different exit
methodologies, including stops. His results as well as his insights are
very interesting and shed a good deal of light on different approaches to
exits.
I would also recommend his website, www.traderclub.com , for reading. He
has bulletins which go into a good amount of detail on stops and systems
approaches. If you have the time, the Forum part of the site has lots of
great discussion for reading. Many of those topics of stops and exits are
very thoroughly discussed and debated, all to the benefit of the reader's
greater understanding.
I think in general, you could say that a protective stop will improve the
winning percentage of any given entry method, but decrease the overall
profits. The benefit of this type of stop varies from a small improvement
for very loose stops to one of diminishing returns as the stop gets so tight
that the trade gets exited because of normal noise.
A stop on the closing price would be a type of Support/Resistance exit. I'm
not sure if you have Metastock EOD or the Pro version, but one of the nice
features in the Pro version is the capability to use OPTimization variables
in the Stops.... portion of the System Tester. I don't actually optimize my
systems using this feature. By separately constructing and testing entries,
then exits, you can establish their effectiveness and decide on their value
in your overall system. I use the optimization feature when I test these
separately to get a nice tabular set of resulting data for these tests. So,
for instance, I would take the stop based on a lookback of 1 to 20 days for
the close. The resulting table of data would give me a good idea of how
this stop behaves over a wide range of days, then decide if it's useful in
the system.
I am a big fan of using ATRs in my stops. By their nature, they are
adaptive to the volatility in a market. I know that Chuck advocates using a
second adaptation for volatility, and that is to apply a factoring based on
the ADX. The premise is that as a market trends, the True Range or
Volatility increases. So, for a system to have really good "holding" power
in a trend to allow you to really let those profits run, this factor would
increase the volatility that you would accept during the trend, but bring it
back into line during quieter or sideways markets.
Neo, I know you addressed your message directly to Chuck, but since it
sounds like he'll be out of communication for a while, I wanted to keep this
thread going because I find it extremely interesting and helpful in my
trading.
Dave Nadeau
Fort Collins, CO
-----Original Message-----
From: owner-metastock@xxxxxxxxxxxxx [mailto:owner-metastock@xxxxxxxxxxxxx]On
Behalf Of neo
Sent: Sunday, March 18, 2001 7:08 AM
To: metastock@xxxxxxxxxxxxx
Subject: RE: Profit Stops
Chuck
It would be great if you could write a book just on stops. This would
include all types of stops including the inactivity stop. Although I have
read your material on ATR's I still do not have a good feel for them and
exactly how they should be used and with what parameters. Should values be
different for low and high volatility stocks as well as MFs and ETFs or does
ATR take care of this?
I also used two types of trailing stops. One is a protective stop order that
I change daily, is looser, and can be triggered by the low of the day. The
other is based on the close of the day. Should these be approached
differently and with what ATR value? Would it be better to place the
protective stop order based on lows?
There is no book like this and we need one. Of course any insight would be
appreciate here and now.
Thanks, neo
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