Fitting an Optimum Stop Loss

TheBramble

Legendary member
8,394 1,170
Before I start expending hundreds of hours chasing wild geese down a blind alley (actually, that would be quite a good strategy wouldn't it!) - has anyone spent any time attempting to optimise their stop loss for any given instrument?

It is possible to determine what stop loss would have made the optimum profit for LONG positions and similarly for SHORT positions - over any selected period of time.

Optimum in that is didn't stop you out too early on good trades, but balanced that with getting you out soon enough on bad trades.

Although it's possible to do this on an instrument-by-instrument, period-by-period basis, I was wondering if any of the more mathematical types out there had a more general formula for deriving this info.
 

FetteredChinos

Veteren member
3,897 40
volatility stops are generally the best bet..

ie those based upon previous ranges.. (Average True Range)

ie if we have an erratic (erotic?) instrument (fnar fnar) then the stop needs to be wider or else we would get stopped out all too often.. on an end of day basis i like to use something in the region of 2*ATR , and preferably somewhere that coincides with major support (remember, were aren't allowed to go short anymore. LoadaDosh told us so, so resistance doesnt feature :rolleyes: )

as for intraday, then its a whole different kettle of fish, as market sentiment/noise can cause such choppy action that its a right pain. maybe in this case a fixed point (and therefore risk) stop is better, moving it to breakeven plus a bit when in profit, and then when the position goes further in your favour, pyramid in and use a trailing stop....

at least that is what i used to do before they firewalled me here at work. I wonder if they noticed :rolleyes:


i bet that doesnt help at all does it?


FC
 

TheBramble

Legendary member
8,394 1,170
No, it does help.

Factoring in volatility and using ATR sounds like a useful approach. I was just wondering if there was a rough formula that anyone had found fitted more than one instrument.
 

JonnyT

Senior member
2,560 22
It depends very much on the system.

The only way is to test test test and then hope the forward testing corresponds to the backtesting.

JonnyT
 

barjon

Legendary member
10,705 1,809
following up on FC and just to prove I can read posh books
(Kaufman) I pass on the following. Don't ask me about it - I don't
think I even understand it :) :)

As a sound statistical measurement of risk the standard
deviation can be used to determine stop loss levels. The
Dev-Stop method devised by Cynthia Kase can be used both long
and short.

1. Calculate the true range (TR) of the past 2 trading days using
the highest high and lowest low of the 2 day period.

2. Calculate the moving average ATR of the TR using 30 periods
for intraday charts and 20 periods for daily charts.

3. Calculate the standard deviation of the true ranges in step 1
using the same period as in step 2.

4. The stop loss values are DDEV = ATR + (f*SDEV) where f = 1,
2.06 to 2.25, and 3.2 to 3.5, and where the larger values of the
pairs correct for skew and the larger numbers allow for larger
risk.

5. The Dev-Stop for long positions = trade high - DDEV; the Dev-
Stop for short positions = trade low + DDEV
 

FetteredChinos

Veteren member
3,897 40
thanks Barjon!!! lol

always good to have a simple system in a market moving quickly against you :LOL:

still, what it postulates makes pretty good sense, but again we are assuming that price conforms to standard distribution patterns ie 66%, 90%, 95% or whatever it is as we go through each SD

i seem to recall back in the dawns of time back on the Contemplating Trading Strategies board on the Fool, Martin/Hokusai298 did some research about price distribution and found that it didnt conform to normal patterns.

this probably explains why Bollinger Bands don't work as well as they should in theory.

one more thing, Barjon, thanks for making me think this morning. it is helping the hangover clear in no time. (was out late last night celebrating my exam results - pass one, fail one. Still, any excuse for a piss-up)

FC
 

FetteredChinos

Veteren member
3,897 40
ooo i didnt realise that we had swear-filters on this board??

in that case

lets have a test


**** **** ******** todmorden :LOL:
 

TheBramble

Legendary member
8,394 1,170
Barjon, looking very much along the lines I was hoping for. A useful calculation.

I'm going to check it out and see how well it does on a few of my favourites.
 

TheBramble

Legendary member
8,394 1,170
Yes, absolutley. A combination of the two would give a much higher probability of success.

Unless the entry was so well defined and executed that a stop loss was never needed...
 

TheBramble

Legendary member
8,394 1,170
barjon said:
5. The Dev-Stop for long positions = trade high - DDEV; the Dev-
Stop for short positions = trade low + DDEV

Just attempting to put this into Metastock formula and realised I don't understand what 'trade high' and 'trade low' refer to.

The lowest low and highest high of the last 2 days, previous day, today?
 

FetteredChinos

Veteren member
3,897 40
erm isnt trade high, the highest price when in the long, and therefore trade low the lowest price in a SHORT..

this is a trailing stop n'est-ce pas?



FC
 

barjon

Legendary member
10,705 1,809
I said not to ask questions :eek:

I think it must be be the high/low of the previous 2 days.

The source is: Cynthia Kase. "Redefining Volatility and Position
Risk" Technical Analysis of Stocks & Commodoties (Oct 1993) if
that helps in any way.
 
 
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