I have just glanced at the proof and not studied it long enough to refute it. However, it seems everyone is talking about something different. So I will point out what I was talking about.
I was referring to the fact that the max draw down INCREASED when applying a stop. SO this means that if you take the biggest peak to valley on the PL chart its bigger than had you not used the stops. Yes it may be true that for each trade it lowers the max drawdown, but when applied to a system of trades it can increase the drawdown.
The reason for this is pretty simple. Typical price action may have the trade going into the red -$500 before going positive $500... well if you had a stop smaller than -$500 you get stopped out. Well you can argue that this reduced your max draw down. Which is true for the trade, because perhaps the trade would have continued down to -$2000 or something, but instead was stopped at -$500. So for a specific trade this is valid. Now what happens in a system of trades?
Well it has to do with the probability of an event happening. What if very often the trade goes -$500 before going positive.. or the trade doesn't even have to go positive after, it just improves to say -$200....
So assuming with a high probability a trade goes negative 500, then everytime it happens your getting stopped out.. so over a series of trades what if you got stopped out and realized the full $500 loss. So imagine a lot of trades getting stopped out that would have gone for a profit or improved from that point had you let it run its designed course. This only becomes the correct course of action if its RARE for the strategy to reach this stop value, and if its RARE for it to rebound after reaching this area. Sure this stop may protect you from a few -$1000 plus type days.... but is saving that extra 500 a VERY small percentage of the time worth possibly realizing that 500 loss very often?
Anyway, this is just late night ramblings and I probably did not properly illustrate what I am trying to say. Maybe someone else can chime in and build on what i'm saying....
In the end proof or no proof I know from lots of testing that normally stops produce smaller profits and bigger draw downs than without.
I was referring to the fact that the max draw down INCREASED when applying a stop. SO this means that if you take the biggest peak to valley on the PL chart its bigger than had you not used the stops. Yes it may be true that for each trade it lowers the max drawdown, but when applied to a system of trades it can increase the drawdown.
The reason for this is pretty simple. Typical price action may have the trade going into the red -$500 before going positive $500... well if you had a stop smaller than -$500 you get stopped out. Well you can argue that this reduced your max draw down. Which is true for the trade, because perhaps the trade would have continued down to -$2000 or something, but instead was stopped at -$500. So for a specific trade this is valid. Now what happens in a system of trades?
Well it has to do with the probability of an event happening. What if very often the trade goes -$500 before going positive.. or the trade doesn't even have to go positive after, it just improves to say -$200....
So assuming with a high probability a trade goes negative 500, then everytime it happens your getting stopped out.. so over a series of trades what if you got stopped out and realized the full $500 loss. So imagine a lot of trades getting stopped out that would have gone for a profit or improved from that point had you let it run its designed course. This only becomes the correct course of action if its RARE for the strategy to reach this stop value, and if its RARE for it to rebound after reaching this area. Sure this stop may protect you from a few -$1000 plus type days.... but is saving that extra 500 a VERY small percentage of the time worth possibly realizing that 500 loss very often?
Anyway, this is just late night ramblings and I probably did not properly illustrate what I am trying to say. Maybe someone else can chime in and build on what i'm saying....
In the end proof or no proof I know from lots of testing that normally stops produce smaller profits and bigger draw downs than without.
