In my opinion, a major point to mechanical trading is trading with the probabilities particularly when emotions around you are running high (and it is not atypical for this to be the case when headline risk is elevated) and when you are also likely to be at least somewhat emotionally driven (as is currently the case). Incidentally, this is also often the time that mechanical trading provides one the greatest benefit and the largest gains (in my experience, anyway).
I don't know all of the ins and outs of the model, but I think the Robot adjusts stops based on volatility. That is, if the price rises while volatility rises, the stop might rise less than the price. If the price falls while volatility falls more, the stop might actually rise.
But the Robot (if I understand correctly) NEVER lowers the stop.
Under normal situations that's entirely correct, I'm sure.
Of course, that begs the question of defining "normal." It's like what the judge said about porn "I can't define it, but I know it when I see it."
Billy -- I'm sure you've tested allowing stops to lower as volatility rises. Maybe if you shared the edge the current non-lowering approach has, that might address (on a statistical level) what would happen if you tried to adjust for "headline risk" (which would be reflected in such an approach).
That might answer everyone's questions with specific numbers.
On an anecdotal level, I'd like to compare this with poker. Do you increase the bet when you get worse cards? Or do you fold quickly for a small loss and wait for a better hand? Winning players take the small loss and are grateful for the small loss.
Last edited by Timothy Clontz; 07-29-2011 at 11:00 AM. Reason: typo
Billy "the actual stop must be adjusted for the actual execution price".
Do you mean by this that for a new IWM buy today the stop at 78.52 is 2.07% lower than the entry price of 80.18. If you bought at open today at 78.72 maintaining the relationship the adjusted stop would be 77.09. Similarly for TNA the numbers are buy 74.03, stop 69.45-a 6.18% difference, so a buy at open of 70.04 would give you a stop of 65.71.
Is this correct?
Thank you.
Robert
Robert,Originally Posted by brrim
Yes this correct.
Billy
Tim, you couldn’t provide a better analogy. The robot always fold quickly for a small loss and waits for a better hand.
Risk management is all about the position’s risk, not external headline and event risks.
The stop management will start with a tight stop at the beginning of a trade.
Then the initial stop will be fixed (not trailing) until a certain backtested profit threshold has accumulated in the trade on a daily close basis. From there, the stop will be trailed with a larger allowance for volatility than for the initial stop. That’s why a trailing stop is never lowered: it already takes into account a wide enough volatility tolerance after it becomes profitable and can allow for more wiggle room.
The robot excels in trend-following, but we haven’t had a sustained intermediate trend to follow for 7 months now. When trend-following will be back –and it will!- the volatility will contract on an ATR basis and the trailing stop will consequently become tighter and tighter to secure maximum accumulated profits.
In choppy ranging markets like now, the stop will often remain very tight because the profit threshold for trailing wider stops will seldom be reached.
The objective is not to get stopped out easily from trending positions and to take only minor losses in choppy markets.
Billy
Posting Permissions
Reply With Quote