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>Brent wrote:
>> I'd love to hear what you think about using stops within systems
>> sometime. Every time I have added a stop to any system and back
>> tested it the profits begin to erode immediately. Employing stops
>> within a system would seem to be a tricky balancing act.
>
At 11:47 AM -0400 6/28/99, Gary Fritz wrote:
>It is tricky, and often counterintuitive for a beginner. A newbie is
>likely to think that tight stops will protect his profits, but for
>most systems you will find that, as Brent says, it will in fact
>REDUCE your profits. Why? Because you get stopped out for a loss on
>a lot of trades that would have rallied back for a profit.
Another important reason why the stops in TradeStation seem to cause the
profits to erode is because of the way many people write their trading
system. If you are not very careful, the trading system will immediately
re-enter a trade on being stopped out if the original conditions for entry
are still true.
As an example consider the following simple case where we go long if a
short average is greater than a long average:
if Ave1 > Ave2 then Buy;
With no stops, this will go long when Ave1 crosses over Ave2.
But with stops, assume the price drops down briefly and we get stopped out.
But assume that "Ave1" remains greater than "Ave2". In that case we will
again reenter, probably at a higher price than when we got out so our
profits will be less and the number of trades will increase dramatically.
To effectively backtest the effect of using stops, you must be sure the
system does the correct thing after being stopped out. For that reason,
many people program their own stops as part of their code.
Bob Fulks
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