Has anybody found trailing stops help trend following strategies?

[horace]

Hi!

I've been developing and trading fully automated trend following strategies now for some time (since 2004).

Several times I have encountered clients that tell me a trailing stop would be usefull. Mostly they react that way after a trade that has given back a significant part of the profits gained since the openning.

I have researched, studied, programmed and backtested all sorts of trailing stops almost as many times as these people come back to me with the idea but never found a way to make them make my strategies better.

I'm about to conclude that (quite simply) trailing stops never help trend following strategies.

Anyone has a better view?

Any help will be appreciated,

Horace

 

[Joey25]

Hi Horace,

I have tried many strategies in MATLAB and R, and unambiguosly contingent orders of any kind perform worse than entering and exiting based on signals.

Lightening or adding to an existing position is an entirely different matter...


Edit: I'm assuming here that a "limit" order exit is really a "market-if-touched" exit.

 

[horace]

Hi Horace,

I have tried many strategies in MATLAB and R, and unambiguosly contingent orders of any kind perform worse than entering and exiting based on signals.

Lightening or adding to an existing position is an entirely different matter...


Edit: I'm assuming here that a "limit" order exit is really a "market-if-touched" exit.

Hi Joey,

What's an unambiguosly contingent order for you?

I'm not talking about limit/market orders or even position sizing, it's a matter of trailing stops or not.

Thanks for reading.

Horace

 

[SanMiguel]

Mostly they react that way after a trade that has given back a significant part of the profits gained since the openning.

That is just something you will have to get used to.
IMO it is better to trail a stop manually and put it well below support or the expected volatility/ATR. In general, too close a trailing stop is just going to get wiped out.
You are very often going to see your target hit/stop loss hit, or close a trade only to have price carry on in your favour - that's trading and has to be accepted. You can always say, "oh I should have put on a trailing stop of x pips, look at what it would have got me" but the next time it won't work in exactly the same way.

 

[the hare]

From what little reseach I've done I would also agree that a single trailing stop is not a very good idea.

The few people who I know who seam to make this work tend to use multiple exits, e.g a couple of different trailing stops based on ATR multiples, coupled with more sensitive volatility stops which gives them a chance of catching exhaustion or capitulation type moves.

Personally I'm not in favour of that particular approach either, on the basis that the parameters used tend to be curve fitted.

 

[Joey25]

Hi Joey,

What's an unambiguosly contingent order for you?

I'm not talking about limit/market orders or even position sizing, it's a matter of trailing stops or not.

Thanks for reading.

Horace

Sorry! It is meant to be read along the lines of:

"Without fail, resting orders such as stops and target limit orders reduce profitability."

However, if the exit limit order is a genuine limit order that earns the spread (as opposed to being a market-if-touched order incorrectly labelled as a limit order) then this changes things.

 

[SanMiguel]

"Without fail, resting orders such as stops and target limit orders reduce profitability."

Profitability is relative to the system/methods/trades.
The above is not strictly true as you could have seen a trade hit a level where you would normally have put a limit but not exited as you were doing it manually only to see it retrace and then exit for less than you would have got had you had a limit order.

 

[Rhody Trader]

I've been developing and trading fully automated trend following strategies now for some time (since 2004).

I have researched, studied, programmed and backtested all sorts of trailing stops almost as many times as these people come back to me with the idea but never found a way to make them make my strategies better.

I'm about to conclude that (quite simply) trailing stops never help trend following strategies.

I started testing trend following systems even further back (late 80s?, early 90s?) and have come to basically the same conclusion. The only stops I found that actually didn't negatively impact performance were very wide ones meant to catch the absolute worst of contrary moves.

My suggestion to reduce the drawdowns is the reduce the leverage. Obviously, that's going to impact profitability. If the customers are more worried about the givebacks, though, they might be OK with it.

 

[horace]

That is just something you will have to get used to.

Hi SanMiguel,

I am, it's only I always wonder if there it a way to make my systems better.

As you can imagine, after some time trading you end up learning each and every natural response.

 

[horace]

From what little reseach I've done I would also agree that a single trailing stop is not a very good idea.

The few people who I know who seam to make this work tend to use multiple exits, e.g a couple of different trailing stops based on ATR multiples, coupled with more sensitive volatility stops which gives them a chance of catching exhaustion or capitulation type moves.

Personally I'm not in favour of that particular approach either, on the basis that the parameters used tend to be curve fitted.

Thanx the hare,

I personally think complication is the easiest way of making non-robust systems. So IMHO, I don't think those exits really work on the long term.

 

[horace]

I started testing trend following systems even further back (late 80s?, early 90s?) and have come to basically the same conclusion. The only stops I found that actually didn't negatively impact performance were very wide ones meant to catch the absolute worst of contrary moves.

My suggestion to reduce the drawdowns is the reduce the leverage. Obviously, that's going to impact profitability. If the customers are more worried about the givebacks, though, they might be OK with it.

Hi Rhody,

Nice to hear that. I'm fully convinced there is no other way to survive in the long term than using stop loss. But a trailing stop is different. It IS possible to make a system more profitable using stop losses (in the long run of course). At least that is my experience. But in the case of tren following, I'm pretty sure the same does not hold true for trailing stops.

 

[caoy2003]

hi horace:

You asked a very good question. I can answer it, because I did quite some intensive studies since later 2009 on trailing stops. I don't think there are anyones who know it better than me.

My findings is: to use the percentage trailing stop can help you greatly improving your trend following strategy. Remember, it is percentage % trailing stop, not ATR or other trailing stop.

The underlying principle is this: If the trend is strong ,the pull back should be a small percentage. If the pull back from the highest close is too big, for example, SP500 index ETF, 2% is the threshold for 2010-2011, most of time it signals trend reversal.

You can only see this by coding it and plotting the trailing stop line on the stock charts. Otherwise you will never find it useful, as most ppl do, i.e. just code it and throw it to the computer. Because you need to see why sometimes simple rules failed, and how to use filters to accomodate it. For example, the price close below trailing stop for 2-3 consecutive days, etc.

I have published many studies in my blog, written in Chinese, http://blog.sina.com.cn/caoy1980. I am not sure if you can read it. But you can get some hints by looking at the graphs in my articles.

I am new here, hope to come to this forum often.

 

[Black Swan]

I experimented with trailing stops, both dynamic and fixed, for a while, IMHO they are death to a swing fx trader, however, can really see the benefit if you're a day trader, for example, perhaps shooting for 20 pips per trade on a pull trigger 1:1 set up. For swing I tend to use the psar to move the stop..

 

[tomorton]

Trailing stops for me are letting the tail wag the dog - i.e. managing a position based not on TA or even fundamentals or newsflow, but on how greedy you are. They look great when used as a sales aid to convince the public to take up trading - they seem to eliminate opportunity risk when they will actually cap profits.

Surely the better policy in trend-following is to get out with profits at each successive TA level, re-entering with the trend at an equally good or better price. In/out costs these days should not be a major burden on an account.

 

[Jason101]

Hi!

I've been developing and trading fully automated trend following strategies now for some time (since 2004).

Several times I have encountered clients that tell me a trailing stop would be usefull. Mostly they react that way after a trade that has given back a significant part of the profits gained since the openning.

I have researched, studied, programmed and backtested all sorts of trailing stops almost as many times as these people come back to me with the idea but never found a way to make them make my strategies better.

I'm about to conclude that (quite simply) trailing stops never help trend following strategies.

Anyone has a better view?

Any help will be appreciated,

Horace

I do not mean to be rude. I am just wondering if I am being dumb here or not.

You said you are a trend follower, so you follow a trend. You have defined your trend in order to follow it. So when your definition of a trend is no longer valid then you should not be following it anymore and should exit, so isn’t that where your stop should be trailed.

 

[Joey25]

I experimented with trailing stops, both dynamic and fixed, for a while, IMHO they are death to a swing fx trader, however, can really see the benefit if you're a day trader, for example, perhaps shooting for 20 pips per trade on a pull trigger 1:1 set up. For swing I tend to use the psar to move the stop..

psar? I'll take it back, you're obviously the 'real deal'

 

[Black Swan]

psar? I'll take it back, you're obviously the 'real deal'

Oh look, a new stalker, strange how you're a multi millionaire and all.

 

[Pazienza]

Oh look, a new stalker, strange how you're a multi millionaire and all.

Everyone that disagrees with you is a "stalker", "fooktard", "multinic damaged c11nt" etc etc etc.

 

[Black Swan]

Everyone that disagrees with you is a "stalker", "fooktard", "multinic damaged c11nt" etc etc etc.

Nope, anyone who follows me around after each post I make is damaged..it's hardly fookin normal is it, even for an anonymous bedlam such as this place?

 

[Pazienza]

Nope, anyone who follows me around after each post I make is damaged..it's hardly fookin normal is it, even for an anonymous bedlam such as this place?

You should be flattered to have such ardent and committed admirers.