Re: % trailing stop

[Thomas Brun <TDBRUNkkkkkkkkkkkkkkkkk>]

Thanks Gary and Jim,

Several years ago I tested and traded a system with Point & Figure
charts that also used Trailing Stops.  The second day when I turned on
the computer the loss from the previous day was gone and in its place
was a profit. 
I just couldn't recall if the problem was caused by P&F charts or
Trailing Stops as seen by TradeStation. 

Its all coming back to me now.

Thanks for the review,

Tom

Gary Fritz wrote:
> 
> > However, I've noticed that trailing stops get triggered even when
> > the position is a loser. Consequently, assuming they're accurate,
> > they may not produce the intended result without modification.
> 
> The big danger with trailing stops (as I understand it anyway) is
> when a significant portion of your profits (or losses?) come from a
> single bar.  More precisely, you have to be careful if the Maximum
> Favorable Excursion and the trailing stop are hit in the same bar.
> In that case, TS doesn't know what happened inside the bar, and it
> "assumes" the best possible case.
> 
> For example, let's say you have a 2pt stop, and the bar has an OHLC
> of 106/110/100/104.  Since the open is closer to the High than the
> Low, TS assumes the price went smoothly from 106 to 110 to 100 to
> 104.  It reports you got stopped out at 108 with a trailing stop.
> However, in reality the market might have gone from 106 to 100, and
> you'd have gotten stopped out at 104.
> 
> If this trade had been open for some time, and 4pts was a small
> percentage of your open equity, the difference between 104 and 108
> wouldn't make a huge difference to your reported results.  E.g. if
> you went long at 50, 4pts is a reasonably small amount.
> 
> But what if you went long at 106?  Then 104 vs. 108 makes a big
> difference.
> 
> This behavior can be exploited to create bogus results.  If your
> system has a lot of 0- or 1-bar trades, you can't trust the results.
> Basically you're using this TS behavior to "pretend" you could have
> squeezed the best possible results out of each bar's volatility.  But
> in reality you almost certainly couldn't have traded it that way.
> 
> If you're going to use trailing stops, make sure the trail amount is
> larger than the typical bar.  That way it will usually take several
> bars to go from the MFE price back to the stop, and you can be sure
> that the price really DID move like that.
> 
> Gary