Quote from candletrader:
Have you backtested for any opportunity cost of this zero tolerance approach to stops i.e. is there a net overall loss in profit relative to if you had used larger stops?
I have done a fair amount of review, both backward and forward, before implementing the stops that I use for my present method. It does not always yield the best results, but then, nothing always does.
I would not characterize my testing as extensive. Rather, it was enough to give me a reasonable comfort level. You see, regardless of the historically best relative stop size (which may or may not carry over into the future), I am simply not comfortable with loose stops, particularly for less-than-ideal setups. I would rather have fewer, and
hopefully better timed, trades as well as some opportunity cost rather than not missing any important moves but potentially suffering a string of larger losses along the way. That would take the starch out of me, regardless of the "expected" and
eventual bottom line. Also, by using generally tighter stops and being a bit more selective in the setups I take, I can up the leverage for a given dollar level of risk (at least on the better setups). These tighter stops are not really arbitrary in that I have tested them in the context of my method and I keep them fairly consistent relative to the preceding volatility.
I'm sure that none of this comes as a surprise. But let me repeat something I wrote in my earlier post. My approach to stops is in the context of my own method, which may be quite different from your trading method or that of other respondents. Therefore, discussing the relative value of stop size may not be very meaningful when we are each probably referring to entirely different timing methods. Your
own testing should give you an idea of what is best for your
own method. But I'm sure you know all of this.
