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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?
>
One possible meaning behind this that ideally you want your basic system
to make money without money management stops first.
In other words, you test to see whether your idea has any predictive
value first eg if I buy a 4 bar high will the price generally go
higher? Then apply simple exits like exit after 3 bars. You can think
of this as the return or reward side of the equation.
After you are satisfied that your basic premise is valid and it has a
positive return(and not due to curve-fitting etc), then begin to apply
stops to reduce drawdown, largest loss to make the system more
tradeable. Think of this as the risk side of the equation.
Usually you will find that adding MM stops will reduce returns but of
course your risk is being reduced at the same time - classic reward/risk
tradeoff, no free lunch . . .
Faced with choosing from so many potential inputs, I find starting with
the return side of the equation a practical solution to system
development . . .then build and refine from there . . .
My 2 cents
Peter
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