Arbitrarily testing stop strategies...

[Corey]

That exactly the type of test I would like to run -- except that your entries are based on a system -- and therefore your mileage with stops may not be independent of the entries you take.

Hence, if I can create a random entry/exit system, with enough trials, I can smooth out the expected value.

I will be sure to post my results (if I ever get it done...)

 

[black diamond]

Quote from Corey:

Just a simple test in the expected value of a given strategy versus the expected value of that strategy when employing stop losses. I have read a few theoretical papers about the ineffective nature of stop losses...

With a system that creates a few thousand random entry and exit systems, and for each system runs a few thousand times -- each time keeping track of the return without stops, with stops, and with a few different types of trailing stops -- it would be possible to determine with relative certainty whether stop losses hinder the expected value of a trading strategy or not -- and if not, in which cases are they effective.

I think you would want to run this test on entries from your specific strategy instead of random entries. The reason you take trades from a system is that you believe the market is different after your entry signal than at other times - you think the expected return is higher than normal when your strategy says to go long for example. If the expected return is different than normal, then there is a good chance that some of the other return distribution characteristics that affect the stop performance (volatility, skew, autocorrelation, etc) will be different too.

 

[MGJ]

Quote from MGJ:

Here's a little experiment to try: Use randomization techniques to estimate the probability that a 13-card bridge hand drawn from a randomly-shuffled standard 52-card deck, contains eight or more red cards. Make ten or twenty plots of "Probability so far" versus "number of hands so far" and observe how the plots converge.

Here are twenty five such plots, at progressively greater magnification. Convergence is slow: a million hands gets you two, but not three, digits of accuracy.