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Bob,
> Most fixed point-values of stops, etc., can be adapted by relating
> them to the price or the volatility with measures such as
> AverageTrueRange. The AverageTrueRange of daily bars of the Nasdaq
> composite index has varied from about 20 to about 300 over the past 3
> years. To expect any system with fixed limits to work well over such
> a range of volatility is unrealistic.
Ummmm. Seems to me this is going down the wrong path entirely. If ATR
expands, you don't want your stops to expand along with it unless they are
still within your acceptable risk limits. If they aren't, you stop trading
until ATR comes back within your risk limits. While I agree with you that
fixed limits won't work over the kind of ATR range that you describe, I
don't think the solution is to make them adaptive.
Season's best,
Mike
>
> But systems that scale the limits with volatility might work fine
> over such a range. If the weekly adjustments the person was making
> were really just manually adjusting for the underlying change in
> volatility, the re-optimization makes sense - but more adaptive
> methods would probably work better.
>
>
> >All good questions.....and this approach certainly flys against the
> >"simple-is-better" philosophy espoused many times on this list.
>
> A "simple-is-better" basic idea for a trading system is great. I like
> the analogy of an autopilot flying an airplane. The "simple idea" is
> to stay at a fixed altitude and fly directly to the desired airport.
> That works about 80% of the time. If you are happy almost crashing
> the other 20% of the time that is all you need... Such a trading
> system can have 5 to 20 lines of code. We see them on these lists and
> in magazine articles all the time.
>
> But if that is not good enough, you can do one of two things:
>
> > Have a pilot in the cockpit who can judge when the autopilot
> is having trouble and take manual control.
>
> > Start adding more software to handle more and more of the
> other 20% of the cases.
>
> A "fully developed" autopilot includes code to handle hundreds of
> special cases that occur only rarely. A fully developed trading
> system that can adequately handle 99% of the cases with adaptation to
> changing market characteristics, intelligent bet-sizing, risk
> management, crisis stops, etc., might be several pages of code.
>
> Traders never go broke when the market is in the 80% "normal"
> condition. Trading then is pretty easy. It is the other 20% that gets
> them. "The devil is in the details..."
>
> Bob Fulks
>
>
>
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