Variation In biggest losing trade: 20-day CHBOC on Coffee

CM CM CO CO "tf T 1^ 10 <D tO f*- h-.

-1000

-2000

-7000

-8000

-9000

Initial stop ($)

Figure 3.7 The worst losing trade increases as we loosen the stop.

try to take the long-term view when you set your stops. If you use a con­stant stop based on system design, then use loose stops. If you set the stop differently for each trade, then you have probably mastered the fine art of placing stops.

The risk of being stopped out is highest near trade inception, as shown by the calculations in Table 3.11, page 60. This table shows the effect on the length of the average losing trade of using no stop, a $1,500 stop, and a variable stop. A simple 20-day CHBOC model, with no exits other than an initial money management stop, is used, allowing $100 for slippage and commissions. The tests were over a 6-year period commencing May 26, 1989, using continuous contracts.

The data in Table 3.11 show that inserting an initial money man­agement stop of $1,500 reduced the length of the average losing trade by approximately 40 percent to 17 days from 28 days. These calculations confirm that the risk of being stopped out is highest near trade incep­tion. The average winning trade was typically 2 to 3 times longer than the average losing trade.

Initial Stop: Solution or Problem? 59