RE: Asking too much ??

[Bob Fulks <bfulks@xxxxxxxxxxxx>]

At 10:04 AM -0800 12/13/01, Brian wrote:

>I find that on many many systems I often have to trade off between profit
>and drawdown.  Generally, if I take a profitable system but with relatively
>large drawdown, add stops to it, drawdown does often decrease but so does
>profit over the long term.  Conversely, I find that mediocre or
>underperforming systems can became decent systems by adding stops.  But with
>limited captial, why would I choose a system whose underlying ideas perform
>only mediocre?

I very common source of this is that the system will reenter after
being stopped out. For example:

   if Avg1 > Avg2 then Buy next bar at market;
   if Avg1 < Avg2 then ExitLong next bar at market;

If you use simple money management stops you might get stopped out
but since the entry conditions can still be true, then you would
reenter immediately, get stopped out, reenter, etc. If the number of
trades increase rapidly as your stops get tighter, this is probably a
problem.

The fix is to make sure this doesn't happen. In this simple example,
you can simply replace the operator and the number of trades will
stay about the same for different stop values:

   if Avg1 crosses over  Avg2 then Buy next bar at market;
   if Avg1 crosses under Avg2 then ExitLong next bar at market;

Bob Fulks