babyturtle wrote:is it wiser to exit a losing position or ride out the loss?
One way to interpret your question, is to suppose that you are asking "For all possible trading systems, applied to all possible portfolios of instruments, for all possible choices of backtest start and stop dates, is it wiser to exit a losing position or ride out the loss?" But that is difficult to answer because it requires an infinite number of tests to be run and an infinite number of results to be summarized.
Therefore I have decided to interpret your question in a way that makes it rather simple to answer: "For a single portfolio, and a single trading system, and a single choice of backtest start date and end date, what are the effects of exiting a losing position using a stoploss order?"
One of my futures trading systems, that's being traded live, right now, with real money, is shown in the figure below. Its rules include the use of a stoploss order, so that when a trade's loss is bigger than (a certain number of ATRs), the system exits the losing position.
Using Blox it is extremely easy to vary the distance to the stop, from extremely "tight" (small number of ATRs) to extremely "loose" (large number of ATRs). Notice that when the stop is extremely "loose", it is never hit. Instead, the trade is exited by the normal (non-stoploss) exit rules. Eureka! When the distance to the stop is very large, this is equivalent to having no stop at all.
I've removed the axis labels from the plot, because what matters here is the shape
of the curves, rather than their particular numerical values. What we see, is what we expected to see: some choices of stoploss (point a) are worse than having no stop at all (points c and d), but other choices of stoploss (point b) are better than having no stop at all (c and d). No great surprise really.
The bigger question, what would these plots look like for ALL possible systems and ALL possible portfolios of tradeable instruments, I will leave to others. It might be fun, in a perverse sort of way, to search for a system that has a plot with the exact opposite shape: a dip
on the left side of the plot (rather than a rise), then a flat area on the right side.