Statistical approach to trailing stops
Posted: Tue Aug 17, 2004 2:54 am
Guys,
I've been a long time lurker who has learned a ton from this site. I have programmed my own testing harness and have the following approach to trailing stops.
Stops are moved based on how many ATRs of profit we have. The stop locks in a percentage of the profit. For example, one profitable version has the following schedule:
Profit in ATRs | Stop (percent of profit locked in)
1 | 0%
2 | 0%
3 | 0%
4 | 15%
5 | 40%
6 | 50%
7 | 60%
8 | 70%
9 | 75%
10 | 75%
A separate schedule determines how stops are moved before breakeven. If the profitable stop schedule above shows 0%, then the following schedule shows how much of the initial stop is left exposed:
Profit in ATRs | Stop (percent of initial stop left exposed)
1 | 100%
2 | 80%
3 | 50%
4 | 0%
5 | 0%
6 | 0%
7 | 0%
8 | 0%
9 | 0%
10 | 0%
In my model each of these numbers can be changed so that you have a lot of room to play around with trailing stop movement. I have tried linear movements where the stop goes up by a set amount (say 10%) for each ATR. This doesnt work too well b/c early in the trend you must give the trade more room to breath than linear moves allow. I find that exponential moves where the percent lockin moves slowly at first and then starts to move higher much quicker at around 4 or 5 ATRs works much better.
I would be curious to see what people think about my version of stop movement for exiting compared to the usual simpler versions (e.g. turtle stops where you exit on a 10 day low for example).
I have found some counterintuitive results however, when testing my model. For example using the schedules above I have systems that generate CAGRs of 15-20% and Max drawdowns of 50% over the past 10 years (I plan on testing over 20 years once i upgrade my CSI subscription).
However, when I try modifiying the schedule such that I set the stop at 100% at 2 ATRs or 100% at 3 ATRs, my CAGR jumps to over 50% with Max drawdowns below 25%. The funny thing is that these results seem somewhat robust as well. Am I missing something here? Or is the long-term trend following model I painstakingly coded telling me that short-term profit taking is the key to a smooth equity curve and better profitability. It doesn't feel right to me. c.f./fellow board members, any thoughts on this?
I've been a long time lurker who has learned a ton from this site. I have programmed my own testing harness and have the following approach to trailing stops.
Stops are moved based on how many ATRs of profit we have. The stop locks in a percentage of the profit. For example, one profitable version has the following schedule:
Profit in ATRs | Stop (percent of profit locked in)
1 | 0%
2 | 0%
3 | 0%
4 | 15%
5 | 40%
6 | 50%
7 | 60%
8 | 70%
9 | 75%
10 | 75%
A separate schedule determines how stops are moved before breakeven. If the profitable stop schedule above shows 0%, then the following schedule shows how much of the initial stop is left exposed:
Profit in ATRs | Stop (percent of initial stop left exposed)
1 | 100%
2 | 80%
3 | 50%
4 | 0%
5 | 0%
6 | 0%
7 | 0%
8 | 0%
9 | 0%
10 | 0%
In my model each of these numbers can be changed so that you have a lot of room to play around with trailing stop movement. I have tried linear movements where the stop goes up by a set amount (say 10%) for each ATR. This doesnt work too well b/c early in the trend you must give the trade more room to breath than linear moves allow. I find that exponential moves where the percent lockin moves slowly at first and then starts to move higher much quicker at around 4 or 5 ATRs works much better.
I would be curious to see what people think about my version of stop movement for exiting compared to the usual simpler versions (e.g. turtle stops where you exit on a 10 day low for example).
I have found some counterintuitive results however, when testing my model. For example using the schedules above I have systems that generate CAGRs of 15-20% and Max drawdowns of 50% over the past 10 years (I plan on testing over 20 years once i upgrade my CSI subscription).
However, when I try modifiying the schedule such that I set the stop at 100% at 2 ATRs or 100% at 3 ATRs, my CAGR jumps to over 50% with Max drawdowns below 25%. The funny thing is that these results seem somewhat robust as well. Am I missing something here? Or is the long-term trend following model I painstakingly coded telling me that short-term profit taking is the key to a smooth equity curve and better profitability. It doesn't feel right to me. c.f./fellow board members, any thoughts on this?