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At 8:18 AM -0400 7/25/98, Steven Buss wrote:
<snip>
>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?
I believe all normal exits should be programmed, that you should exit when
it becomes apparent that the original premise of entering the trade was not
correct. For example, if your system was designed to go long after the
price bottoms and starts back up, if the price then turns back down, the
premise of entering was not realized so exit and wait for the next time.
Deciding when the premise is wrong can be difficult. Many of the techniques
mentioned in these posts (MAE, etc.) are attempts to quantify this. In my
opinion, they are not fixed dollar amounts but depend upon the price
history so must be programmed.
I tend to separate exits and reversals. In my systems, the reasons to exit
a trade are usually not the same reasons that I would enter in the opposite
direction.
In addition, I think you should use a money management stop to protect you
from losing more money than you can afford to lose. Such stops always wreck
the performance of a system but it is stupid to lose more than you afford
to lose. If this stop gets hit other than very rarely, it means that you
are trading that market with too little capital.
Bob Fulks
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