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Bill Vedder wrote:
>
> Steven Buss wrote:
> >
> > There appear to be at least 3 concepts for thinking about stop placement:
> >
> > 1 Place a stop at a fixed dollar amount based on how much money I can
> > afford to lose <G>
> > 2 Place a stop at some market price level that is determined by a
> > technical indicator (e.g., a level at which support/resistence is broken
> > (i.e., a breakout), moving average crossover, momentum indicator turn, etc.)
> > 3 Place a stop at a fixed dollar amount based on trading system
> > backtesting and then doing MAE analysis (see Sweeny, "Campaign Trading" for
> > a discussion of MAE, Ruggerio for TS code that exports data for Excel graph
> > of MAE, Omega's new Portfolio Maximizer does MAE) (Also, Pierre sometime in
> > the last several months posted some TS code related to MAE)
> >
> > Are there other CONCEPTS around which stop placement may be thought about
> > that I've missed?
> >
> > Obviously, listing #1 above is a joke for the oft stated reason that the
> > market doesn't care about my personal capital requirements.
> >
>
> > I have a question related to concepts 2 and 3 above.
> >
> > - One reads that trading systems should first be backtested without
> > stops. I assume that what is meant by this recommendation is that stops are
> > coded into the system based on technical indicator concepts (i.e., by the
> > kind of concepts in #2 above). Am I right in this assumption?
> >
> > Steven Buss
> > Walnut Creek, CA
> > sbuss@xxxxxxxxxxx
> > "There's nothing more practical than good theory."
>
> I can think of two more; stops based on time and stops based on statistical
> methods.
>
> I don't know how time periods are selected for time based stops. Others on the list
> are much more knowledgable about this method and may care to speak to this.
>
> I've not tried the statistical method (and it's been a long time since I read the
> paper) but it was based on measuring the size of all reactions against prominent
> trends and fitting a distribution to the data. The authors used an exponential
> distribution. You then selected a probability level and calculated the size of the
> stop from the distribution. If interested, I can dig around and find the reference.
>
> Regards,
> Bill Vedder
Cynthia Kase in "Trading with the odds" describes (partially) a
statistically derived stop. Her stop is placed at a distance to
withstand "2-bar reversals". She measures a mean value and the standard
deviation and places the stop at (mean + n*sigma) away fro the price
action. However the exact formulas are not given. I'm not sure if she
is measuring historical reversals and averaging them or just saying a
2-bar reversal is 2 times the current avg-true-range. If the latter,
you would just get the average and sigma of ATR and then you could
calculate the stop. (This was an interesting book, but i had the same
"complaint" in various places: while the general idea was explained,
actually formulas or procedures were rare; i guess to have that you have
to buy her software. Maybe that's only fair, but....) In any event,
she recommends using 3sigma for staying with a trend and 1 sigma if
warning signs of the end of the trend exist.
Al Gietzen in "Real Time Futures Trading" does use a stop that is:
avgRng/2 + n*sigma. He uses an exponential avg to get the average range
and suggests n should be 1.8-2.5. He smooths the stop and then places
the stop this distance away from the daily price midpoint. It should be
noted that this was in context of a system trading cycles and he
anticipated many trades would be reversed by a signal, not stopped out,
so these stops (or at least the suggested n) may have to be modified if
the stops are the primary exit.
I have to wonder if it's worth the trouble to do statistical analysis to
the point of finding sigmas. Sure, you are finding the distribution of
the last 15 or 30 days or whatever but the next ten days may be a
different "population". Certainly basing stops on current volatility
makes sense. But is calculating the stops to be a distance of avgrng +
n*sigma away, any better than just using n*avgrng?
Colin Alexander in Five Star Futures Trades, suggests chart-based stops
but with certain modifications when the stop would be too far away. For
example, never more than a limit move away, or in markets without
limits, never more than n*margin. He suggests looking at 60 min. charts
to see if there is a chart based stop on that timeframe near where you r
desired distance is. Of course, now we are getting into a considerably
more discretionary mode or at least one that is harder to test with TS.
Conrad Bowrers
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