Our 400,000 Trade Test Proves Using Stops Is Not Very Bright

[marketsurfer]

This is the results of 400,000 tested trades--- like it or not, it is the facts-- don't believe it? If you got the data, run the test yourself---so you either listen to quantitative facts or continue to go by "feelings" and old wives tales about the market.


Stops are an integral part of most stock trader’s arsenal. Many consider it foolhardy and naïve to trade without a fixed stop in place prior to entering a position.

As with most of the conventional market wisdom, these feelings do not hold up to vigorous testing. We have run 100’s of tests have that have proven fixed stops actually hurt the performance of any trading system.

One example took all shares trading above their 200 day Simple Moving Average closing at its 10 day low. The trade would be exited on a close above its 10 day Simple Moving Average or when a stop is hit at a variety of percentage points below the entry.

Out of nearly 400,000 tested trades, stops hurt the performance of the system. In fact, the tighter the stop, the worse the performance. Even stops as wide as 50% away from the entry dampened the systems returns. Of course there are psychological benefits to using fixed stops but at the expense of profit. Dropping the fixed stops is a sure way to improve the results of your trading system.

 

[destriero]

Wow, you backtested 400K trades with some off the shelf engine. Kudos Bro, you've entered the 20th century.

 

[Handle123]

When I do long term anything, once I get to breakeven plus little, stops stay there for years, you cheat yourself having trailing stops. I don't use stops at all when day trading but I don't recommend anyone should do as I do, you need to be profitable many years before using mental stops.

Yeah, psychologically is why people use them, they want to get every nickel when they losing thousands using the stops.

 

[lawrence-lugar]

I have never been a Stops guy -- or anything automated myself.
I tend to like to be in control, and see the greater picture of things.

... it's important you understand what's happening behind the scenes as a trader, and not just simply trade somewhat blindly based on charts only.

if you use Stops because you think your downside will be capped and your upside will be higher...then you may be in for a rude awakening.

 

[jo0477]

Hey surf, just curious. What was the max draw down % in the stops vs no stops systems?

 

[learner2007]

One example took all shares trading above their 200 day Simple Moving Average closing at its 10 day low. The trade would be exited on a close above its 10 day Simple Moving Average or when a stop is hit at a variety of percentage points below the entry.
Out of nearly 400,000 tested trades, stops hurt the performance of the system.

You may want to study and learn more realistic methods of placing stops. Using moving averages will show negative results in 40 tests let alone 400,000.

 

[Metamega]

I've read this a few times in other places. One thing I've strayed doing is trying to build systems and strategies with a defined sell signal or cover signal instead of a fixed stop level.

One author(can't remember) made a good suggestion in my mind. If we can take the time to create a entry signal, we should take the time to create a exit signal.

Been kind of fooling around with this idea and taking the trade list and trying to build a risk tolerance around the trade list of the backtest, really digging into the MAE stats.

 

[destriero]

Surf's stops are his account balance. He doesn't trade in a production account, so his lack of stops allow him to go "all in" on YM trades within a series.

 

[i960]

Even stops as wide as 50% away from the entry dampened the systems returns.

50% away? Dude if the trade is going that far out without stops then *thats a big problem anyway*. Just because it eventually recovers does not mean that's sane trading and "stops suck."

Hey surf, just curious. What was the max draw down % in the stops vs no stops systems?

*This*

 

[botpro]

Stops are cheap profit for some brokers...
Never use stop orders.
Fire a close order only if its time has come...