Part 1. The importance of OThe result of all trades depends on the way out. If the input has been good, and the output is bad, then trade is likely to bring loss. At the same time, even if unsuccessful entrance, but well-staged by the foot can make a profit. That's outputs, not inputs, determine the impact of trade. This conclusion is easily proved. Take any strategy for the inputs and outputs to experiment with. You will quickly discover that the results can vary considerably even for very small changes in the parameters of output. In fact, often difficult to tell whether the input is good - because of the fact that the results depend heavily on the outputs. Due to poor yields good entry may seem unfortunate, and, conversely, a good yield can give us a bad input as good.
When testing the effectiveness of methods of entry are well out of the first trades just after a certain number of bars. If you do something more complicated, very soon you will find that actually testing their outputs rather than inputs. If you change the terms of the outputs when you try to work out the strategy for entry, then the results will vary so much that it will be impossible to draw any reliable conclusions about the effectiveness of entry strategies. In combination with the right exit strategy for almost any input would look great. In combination with poor yield, the same entry strategy will look awful.
The purpose of entry is the initiation of the trade in the right direction. To test the effectiveness of inputs can be simply measured in what percentage of cases initiated trades in the right direction. For example, input "A", which has 60% of profitable trades after 5 days is better than the input "B", with only 45% of profitable trades after 5 days.
Do not make conclusions about the risk or profitability in choosing the best entry. What if input "A" causes damage, and the input "B" - profit? Remains whether the input "A" is better? The answer - "Yes" because the purpose of entry is not profitable, and the initiation of the trade in the right direction. After that, everything else depends on the way out. Input "B" was just lucky to make more money for a specific release date, we have chosen. We can easily change our way out and find that the input "A" will provide higher returns than "B", as he initiates a trade in the right direction more often. In order to maximize profits is necessary to combine the correct input with the correct output.
Part 2. The yield based on Money Management
Probably the simplest and at the same time the most important is the output based on Money Management, the classic "stop-loss". This is a way out. Which protects the commercial capital, and prevents destruction.
Trading without stop loss - this is a sure road to bankruptcy. A well-known trader and author Victor Niederhoffer (Victor Niederhoffer) has lost tens of millions of dollars of money yet, when brought by his foundation to zero (and even owes something about $ 20 million on top). This is not surprising. The inevitability of this outcome was a foregone conclusion years ago, when Niederhoffer wrote:
"I never use the foot. The combination of the various outputs provides a significant advantage to me ..." Victor Niederhoffer, "The Education of a Speculator",
Collapse Niderhofera no surprise to professionals. Discussed only how much time it will take its road to ruin. In its favor include the fact that he stayed lolshe than most anticipated. Paranoia Niderhofera about stop-loss is not uncommon among beginners, but very rare among adult professionals. The main priority is to protect the trade of merchant capital from ruin - everything else in relation to this is secondary.
Check carefully as we have postulated that goal. We did not say that our goal is to eliminate or reduce the risk of loss. Reasonable losses are part of the sales process. Good traders make losses as a fee for participation in the business. In fact, I have noticed that good traders are probably more losing trades than bad ones. The critical factor is the size of acceptable losses. Catastrophic losses must be eliminated at all costs and damages are easily eliminated by the steady performance of a simple stop-loss.
Niederhoffer mistakenly thought he was so good trader, which can reject the basic rule of commerce and not to use stop-loss. The truth is that a good trader is in fact more in need of stop loss, than a bad trader. Bad trader collapses quickly, regardless of whether it uses stop-loss or not, while a good trader survives and thrives. The longer and better is your trade, the greater the chance of potentially catastrophic turn of events.
Stop-loss brings a trader to a predetermined point loss that the trader is ready to accept and exit losing trades without too much grief. A trader uses stop-loss, knows of his starting units that he can trade only a limited space to move against his position, and after that it limits its damages from the release of the trade in accordance with its plan. It gives him great psychological advantage. The presence of a pre-determined fixed point of exit from the trade, which brings a loss, largely eliminates the stress associated with finding in an unprofitable trade. The trader has placed your stop-loss, he knows exactly where he will be forced to withdraw and thereby eliminates the unpleasant emotions associated with the observation of increasing losses from day to day.
This is the psychological advantage of stop-loss also helps the trader in front of the trade. Suppose the system offers us enter into a certain market tomorrow and we have an unknown and unlimited potential for loss. No sensible trader would not want to enter into such a transaction. However, if we have a pre-determined stop loss and know exactly what will happen in the worst case, psychologically much residence to receive the signal system to act and enter into a deal. We know in advance and prepared for the worst case scenario and determine how much risk is acceptable to us. This knowledge gives us confidence when entering the trade and psychologically prepares to accept the losses if they occur. Of course, the stop-loss orders do not always accurately determine the amount of losses in the worst scenario, since the market opened with a break at times against the position and causes great losses than expected. However, in most cases, the stop-loss reasonably determines the maximum amount of damages.
The easiest stop-loss - it's feet, as measured by changes in fixed prices compared with the moment of entering a trade. This option is easy to use foot and it is in most trading programs, allowing it to include in the system. At the same time, possibly as a proper and improper use of its systems.
Improper use is that first you intellectually figure out how much capital you can lose on one trade and then place a stop loss in accordance with the given number. Unfortunately, the market is not commensurate the size of their movement against your position with the amount of money you are willing to lose.
The correct way of placing stop-loss is the use of market characteristics and statistics of testing the system to determine its placement. For example, a fixed stop-loss should not be placed too close to the market, since the random market fluctuations can cause a premature exit from the trade. At the same time stop should not be placed too far from the market because in this case, the amount of damages may be more than chtem necessary. Our experience shows that the fixed stop loss should be placed on the study of market volatility. For example, if the average daily trading range market is $ 1,000, the fixed stop-loss orders should be placed at least $ 1,000, if not more. This size of the foot should keep an open position of the random price fluctuations at the same time carry out the function of capital savings. We emphasize again that an appropriate system testing and analysis of the results of such testing should be preceded by placement of a fixed stop-loss to ensure maximum system performance.
It is important to understand the characteristics of market volatility, which you trade and do not blindly use a fixed stop loss if the market is changing characteristics of volatility. In this case, more properly develop adaptive stop-loss, depending on the current market volatility.
Part 3. Adaptive stop-lossIn order to develop a stop-loss adaptive to the conditions of the current market volatility, you need to get away from the fixed stop-loss and explore other ways of placing a protective stop, depending on the characteristics of market volatility.
One approach is to study price movements to determine the location of the stop-loss. For example, the minimum or maximum value for the price of the last days of X can be used as a stop-loss. We call this version of "stop-loss channel" (Channel Stop). Stop-loss channel is very adaptive to current market conditions, because it varies with the trend and volatility. Channel stop-loss is removed from the prices in periods of high volatility and strong trend and close to prices in periods of low volatility and reduce the strength of a trend. The basis for this stop is an obvious logic - we know that important breakthrough highs and lows are often a signal of trend reversal. Therefore, the stop loss placed at highs or lows is justified in terms of technical analysis.
At the same time, this foot has its drawbacks. During a strong trend, it can be placed too far from a reasonable exit point. On the other hand, consolidating the market with low volatility such stop can, conversely, be too tight. In addition, the potential magnitude of losses all the time varies and depends on how far prices have gone from the entry point, which complicates the calculation of the magnitude of risk to the deal.
Another adaptive strategy is the use of significant support and resistance levels to determine the position of the stop-loss. You can use the important market patterns, such as points of reference minima or maxima to determine the placement of stop-loss. The advantage of using price and technical points to determine the position of the stop-loss is that the stop is in accordance with the logic in a place where further movement against the position will be a logical justification for closing the position.
Another way to design a stop-loss is to study the current market volatility. We can use the average trading range (Average True Range) over a period of time, or standard deviation of prices (Standard Deviation) for a period of time and multiply that value by some constant to determine how far away can be placed on our entry. One of our favorite stop-loss is simply to take the Average True Range for a certain period, multiply it by a factor at this place and away from the entrance stop-loss. To prevent accidental movement of prices recommended disposes stop at a distance of more than one value Average TrueRange from the entry point. The advantage of using a stop loss based on the Average True Range is that it is highly adaptive to current market conditions. The distance from the point of input to output will increase in periods of high market volatility and decline in priody low market volatility. In actual practice, you may find that a problem with this stop start to arise when short-term market volatility is unusually small and narrow feet can be broken at random movement. To eliminate these false positives we expect to stop as short-term market volatility (3-4 days) and long (15-20 days) and set the foot by using the values of volatility, which is currently turned out great. This allows the feet to move quickly enough to prevent false alarms and stops after several unusually quiet day.
Another option is adaptive stop-loss is associated with a standard deviation (Standard Deviation) past prices as the value associated with the volatility. For example, you can expect the standard deviation for a given period, multiply the value obtained at a certain constant and put a stop to the entry point to the value obtained. The rationale for this stop is the same as that of the ATR stop loss. The aim is to ignore the random fluctuations in prices, but reduce losses when prices start to really serious movement against the position.
Adaptive stop-loss orders, based on the volatility play an important role in the management of capital. The likely amount of loss can be quickly counted up to the opening position, and we can be sure that the potential size of losses corresponds to current market conditions. For example, suppose that our system offers to place stop-loss at a distance of half a 20-day ATR from the entry point. If we take as an input market S & P 500 beginning of the 90s, the Average True Range is equal to the then $ 1,250, so the stop-loss orders should be placed at a distance of $ 1.875 from the entry point. Now suppose that the amount of capital is $ 100,000 and we want to take risks at one time 10% of the capital. Based on the volatility of the early 1990s, we'll sell five contracts, risking, thus, $ 9.375 of our capital. Now suppose that we are trading the same system in 1999. Average True Range is now the market is $ 5,600. In accordance with this stop-loss is $ 8.400 at the distance from the entry point. If we still sell the same $ 100,000 of capital with acceptable risk of 10%, then we have to buy only one contract. As you can see, the adaptive stop-loss - this is an excellent way to manage risk in a changing market volatility.
Part 4. Outputs. Are your stop-loss is too narrow or too wide?It often happens that the stop-loss or are too close and cause frequent false alarms or, conversely, too broad and result in unnecessary loss of our capital. According to the results of our research, we concluded that for most systems more advantageous to have relatively wide stop-loss.
At first glance it seems that what is already a stop-loss orders, the lower the losses. However, it looks logical conclusion is not confirmed during testing. In almost all cases, the broad stop-loss orders allow a higher percentage of profitable trades and reduce losses. Small feet look psychologically attractive, but may actually reduce system performance, as susceptible to frequent alarms caused by random movements in prices. On the other hand, big feet, too, can be psychologically attractive because they work much less and the system with wide feet typically generate a greater number of profitable trades. However, the flip side of a wide stop is that the trader occasionally suffers from relatively large losses, although not very frequent, the size of which can be perceived very hard psychologically. Is there any solution to this problem kompromisnoe?
We believe that, yes. An interesting phenomenon that we observed in our study is that it is often possible to expand the size of the stop-loss for a short period after the opening position. We believe it is possible to give the market a few days after opening a position greater freedom wider stop-loss. However, after a certain number of days of stop-loss can often be significantly reduced. For example, if we have a stop loss at $ 5,000 at the entrance to the market S & P 500 and the size of this loss we disliked?, It is possible to have a stop loss of this magnitude only the first few days after the opening position, and then narrow it to $ 2,500 for all the remaining time for the open position. The probability to go on foot a $ 5,000, thus, decreases, although the possibility remains that a significant move against your position in the first few days will force you to go on foot maximum size. The exact amount and timing of the stop to change it must be determined using computer and statistical analysis of system performance. For some trend-following trading systems, we found that you can significantly increase the profitability of using big stops in the early days of the trade, and subsequently reducing them by 50 percent or more by increasing the duration of the open position.
When testing the effectiveness of methods of entry are well out of the first trades just after a certain number of bars. If you do something more complicated, very soon you will find that actually testing their outputs rather than inputs. If you change the terms of the outputs when you try to work out the strategy for entry, then the results will vary so much that it will be impossible to draw any reliable conclusions about the effectiveness of entry strategies. In combination with the right exit strategy for almost any input would look great. In combination with poor yield, the same entry strategy will look awful.
The purpose of entry is the initiation of the trade in the right direction. To test the effectiveness of inputs can be simply measured in what percentage of cases initiated trades in the right direction. For example, input "A", which has 60% of profitable trades after 5 days is better than the input "B", with only 45% of profitable trades after 5 days.
Do not make conclusions about the risk or profitability in choosing the best entry. What if input "A" causes damage, and the input "B" - profit? Remains whether the input "A" is better? The answer - "Yes" because the purpose of entry is not profitable, and the initiation of the trade in the right direction. After that, everything else depends on the way out. Input "B" was just lucky to make more money for a specific release date, we have chosen. We can easily change our way out and find that the input "A" will provide higher returns than "B", as he initiates a trade in the right direction more often. In order to maximize profits is necessary to combine the correct input with the correct output.
Part 2. The yield based on Money Management
Probably the simplest and at the same time the most important is the output based on Money Management, the classic "stop-loss". This is a way out. Which protects the commercial capital, and prevents destruction.
Trading without stop loss - this is a sure road to bankruptcy. A well-known trader and author Victor Niederhoffer (Victor Niederhoffer) has lost tens of millions of dollars of money yet, when brought by his foundation to zero (and even owes something about $ 20 million on top). This is not surprising. The inevitability of this outcome was a foregone conclusion years ago, when Niederhoffer wrote:
"I never use the foot. The combination of the various outputs provides a significant advantage to me ..." Victor Niederhoffer, "The Education of a Speculator",
Collapse Niderhofera no surprise to professionals. Discussed only how much time it will take its road to ruin. In its favor include the fact that he stayed lolshe than most anticipated. Paranoia Niderhofera about stop-loss is not uncommon among beginners, but very rare among adult professionals. The main priority is to protect the trade of merchant capital from ruin - everything else in relation to this is secondary.
Check carefully as we have postulated that goal. We did not say that our goal is to eliminate or reduce the risk of loss. Reasonable losses are part of the sales process. Good traders make losses as a fee for participation in the business. In fact, I have noticed that good traders are probably more losing trades than bad ones. The critical factor is the size of acceptable losses. Catastrophic losses must be eliminated at all costs and damages are easily eliminated by the steady performance of a simple stop-loss.
Niederhoffer mistakenly thought he was so good trader, which can reject the basic rule of commerce and not to use stop-loss. The truth is that a good trader is in fact more in need of stop loss, than a bad trader. Bad trader collapses quickly, regardless of whether it uses stop-loss or not, while a good trader survives and thrives. The longer and better is your trade, the greater the chance of potentially catastrophic turn of events.
Stop-loss brings a trader to a predetermined point loss that the trader is ready to accept and exit losing trades without too much grief. A trader uses stop-loss, knows of his starting units that he can trade only a limited space to move against his position, and after that it limits its damages from the release of the trade in accordance with its plan. It gives him great psychological advantage. The presence of a pre-determined fixed point of exit from the trade, which brings a loss, largely eliminates the stress associated with finding in an unprofitable trade. The trader has placed your stop-loss, he knows exactly where he will be forced to withdraw and thereby eliminates the unpleasant emotions associated with the observation of increasing losses from day to day.
This is the psychological advantage of stop-loss also helps the trader in front of the trade. Suppose the system offers us enter into a certain market tomorrow and we have an unknown and unlimited potential for loss. No sensible trader would not want to enter into such a transaction. However, if we have a pre-determined stop loss and know exactly what will happen in the worst case, psychologically much residence to receive the signal system to act and enter into a deal. We know in advance and prepared for the worst case scenario and determine how much risk is acceptable to us. This knowledge gives us confidence when entering the trade and psychologically prepares to accept the losses if they occur. Of course, the stop-loss orders do not always accurately determine the amount of losses in the worst scenario, since the market opened with a break at times against the position and causes great losses than expected. However, in most cases, the stop-loss reasonably determines the maximum amount of damages.
The easiest stop-loss - it's feet, as measured by changes in fixed prices compared with the moment of entering a trade. This option is easy to use foot and it is in most trading programs, allowing it to include in the system. At the same time, possibly as a proper and improper use of its systems.
Improper use is that first you intellectually figure out how much capital you can lose on one trade and then place a stop loss in accordance with the given number. Unfortunately, the market is not commensurate the size of their movement against your position with the amount of money you are willing to lose.
The correct way of placing stop-loss is the use of market characteristics and statistics of testing the system to determine its placement. For example, a fixed stop-loss should not be placed too close to the market, since the random market fluctuations can cause a premature exit from the trade. At the same time stop should not be placed too far from the market because in this case, the amount of damages may be more than chtem necessary. Our experience shows that the fixed stop loss should be placed on the study of market volatility. For example, if the average daily trading range market is $ 1,000, the fixed stop-loss orders should be placed at least $ 1,000, if not more. This size of the foot should keep an open position of the random price fluctuations at the same time carry out the function of capital savings. We emphasize again that an appropriate system testing and analysis of the results of such testing should be preceded by placement of a fixed stop-loss to ensure maximum system performance.
It is important to understand the characteristics of market volatility, which you trade and do not blindly use a fixed stop loss if the market is changing characteristics of volatility. In this case, more properly develop adaptive stop-loss, depending on the current market volatility.
Part 3. Adaptive stop-lossIn order to develop a stop-loss adaptive to the conditions of the current market volatility, you need to get away from the fixed stop-loss and explore other ways of placing a protective stop, depending on the characteristics of market volatility.
One approach is to study price movements to determine the location of the stop-loss. For example, the minimum or maximum value for the price of the last days of X can be used as a stop-loss. We call this version of "stop-loss channel" (Channel Stop). Stop-loss channel is very adaptive to current market conditions, because it varies with the trend and volatility. Channel stop-loss is removed from the prices in periods of high volatility and strong trend and close to prices in periods of low volatility and reduce the strength of a trend. The basis for this stop is an obvious logic - we know that important breakthrough highs and lows are often a signal of trend reversal. Therefore, the stop loss placed at highs or lows is justified in terms of technical analysis.
At the same time, this foot has its drawbacks. During a strong trend, it can be placed too far from a reasonable exit point. On the other hand, consolidating the market with low volatility such stop can, conversely, be too tight. In addition, the potential magnitude of losses all the time varies and depends on how far prices have gone from the entry point, which complicates the calculation of the magnitude of risk to the deal.
Another adaptive strategy is the use of significant support and resistance levels to determine the position of the stop-loss. You can use the important market patterns, such as points of reference minima or maxima to determine the placement of stop-loss. The advantage of using price and technical points to determine the position of the stop-loss is that the stop is in accordance with the logic in a place where further movement against the position will be a logical justification for closing the position.
Another way to design a stop-loss is to study the current market volatility. We can use the average trading range (Average True Range) over a period of time, or standard deviation of prices (Standard Deviation) for a period of time and multiply that value by some constant to determine how far away can be placed on our entry. One of our favorite stop-loss is simply to take the Average True Range for a certain period, multiply it by a factor at this place and away from the entrance stop-loss. To prevent accidental movement of prices recommended disposes stop at a distance of more than one value Average TrueRange from the entry point. The advantage of using a stop loss based on the Average True Range is that it is highly adaptive to current market conditions. The distance from the point of input to output will increase in periods of high market volatility and decline in priody low market volatility. In actual practice, you may find that a problem with this stop start to arise when short-term market volatility is unusually small and narrow feet can be broken at random movement. To eliminate these false positives we expect to stop as short-term market volatility (3-4 days) and long (15-20 days) and set the foot by using the values of volatility, which is currently turned out great. This allows the feet to move quickly enough to prevent false alarms and stops after several unusually quiet day.
Another option is adaptive stop-loss is associated with a standard deviation (Standard Deviation) past prices as the value associated with the volatility. For example, you can expect the standard deviation for a given period, multiply the value obtained at a certain constant and put a stop to the entry point to the value obtained. The rationale for this stop is the same as that of the ATR stop loss. The aim is to ignore the random fluctuations in prices, but reduce losses when prices start to really serious movement against the position.
Adaptive stop-loss orders, based on the volatility play an important role in the management of capital. The likely amount of loss can be quickly counted up to the opening position, and we can be sure that the potential size of losses corresponds to current market conditions. For example, suppose that our system offers to place stop-loss at a distance of half a 20-day ATR from the entry point. If we take as an input market S & P 500 beginning of the 90s, the Average True Range is equal to the then $ 1,250, so the stop-loss orders should be placed at a distance of $ 1.875 from the entry point. Now suppose that the amount of capital is $ 100,000 and we want to take risks at one time 10% of the capital. Based on the volatility of the early 1990s, we'll sell five contracts, risking, thus, $ 9.375 of our capital. Now suppose that we are trading the same system in 1999. Average True Range is now the market is $ 5,600. In accordance with this stop-loss is $ 8.400 at the distance from the entry point. If we still sell the same $ 100,000 of capital with acceptable risk of 10%, then we have to buy only one contract. As you can see, the adaptive stop-loss - this is an excellent way to manage risk in a changing market volatility.
Part 4. Outputs. Are your stop-loss is too narrow or too wide?It often happens that the stop-loss or are too close and cause frequent false alarms or, conversely, too broad and result in unnecessary loss of our capital. According to the results of our research, we concluded that for most systems more advantageous to have relatively wide stop-loss.
At first glance it seems that what is already a stop-loss orders, the lower the losses. However, it looks logical conclusion is not confirmed during testing. In almost all cases, the broad stop-loss orders allow a higher percentage of profitable trades and reduce losses. Small feet look psychologically attractive, but may actually reduce system performance, as susceptible to frequent alarms caused by random movements in prices. On the other hand, big feet, too, can be psychologically attractive because they work much less and the system with wide feet typically generate a greater number of profitable trades. However, the flip side of a wide stop is that the trader occasionally suffers from relatively large losses, although not very frequent, the size of which can be perceived very hard psychologically. Is there any solution to this problem kompromisnoe?
We believe that, yes. An interesting phenomenon that we observed in our study is that it is often possible to expand the size of the stop-loss for a short period after the opening position. We believe it is possible to give the market a few days after opening a position greater freedom wider stop-loss. However, after a certain number of days of stop-loss can often be significantly reduced. For example, if we have a stop loss at $ 5,000 at the entrance to the market S & P 500 and the size of this loss we disliked?, It is possible to have a stop loss of this magnitude only the first few days after the opening position, and then narrow it to $ 2,500 for all the remaining time for the open position. The probability to go on foot a $ 5,000, thus, decreases, although the possibility remains that a significant move against your position in the first few days will force you to go on foot maximum size. The exact amount and timing of the stop to change it must be determined using computer and statistical analysis of system performance. For some trend-following trading systems, we found that you can significantly increase the profitability of using big stops in the early days of the trade, and subsequently reducing them by 50 percent or more by increasing the duration of the open position.
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