Big Bamboo: Refining Stop Strategies
BHH over at his blog IBDindex has published some graphs of what happens when various percentage and ATR stops are used with the Big Bamboo system.
The study demonstrates how percentage and Average True Range stops affect Net Profit, Win%, Average Trade, and Profit Factor.
B’s post is here: Big Bamboo Stop Study
The value of using a multiple of ATR for a stop is that the stop will constantly adjust itself for volatility, and win percentage will theoretically improve. The drawback to this method is that during periods of high volatility, position sizes will be smaller than with a fixed percentage stop, which will mean profits will be smaller on winning trades.
In many ways, the ATR stop vs. Percentage stop is as much about the trader as it is about the system. If one has a large appetite for risk, and does not need to be right more than 50-60% of the time, he would probably rather have the large profits associated with percentage stops. However, if one is more comfortable with the odds of winning 70% of the time, and can accept smaller average winning trades, an ATR stop may be more appropriate.
Finally, Damian from over at Skill Analytics reminded me that traders can get hit with larger than expected losses when using ATR stops. This would occur when volatility has died down, which would cause the ATR stop to get tighter and tighter. If a system is using a percent-risk formula for position-sizing, as the stop gets tigher, it is buying bigger and bigger positions. If volatility suddenly returns, the system may experience some large losses, until the ATR stop has time to catch up with the market volatility.
Sometime this week I will be running hindsight trades on the Big Bamboo to see what the current results would have been if it were using ATR stops.
The Fly asked me to remind you to not forget about the fractured fractals! Otherwise, carry on, good work.
November 9th, 2008 at 9:45 pmI haven’t Buylo…I’ve been one busy guy the past week. I’m writing the post “in my head” and will get it published soon.
November 9th, 2008 at 9:47 pmS&P500 futures up 1.75%
November 9th, 2008 at 11:40 pmthanks for the hard work WS…
Duane
November 10th, 2008 at 7:20 amWell done, Wood. I am making money on the system so far and am eagerly awaiting the next signal…
BTW, with S&P futures up 1.75% would you go long the QQQ today?
November 10th, 2008 at 8:05 amThanks Duane and Susan. Keep in mind that BHH has been absolutely instrumental in co-developing this system so don’t leave him out of the kudos.
I’m a little late answering your question Susan…I’m 100% in cash, but I’m still bullish. Buying the Qs here would be a discretionary trade for me, as I have no systems that are triggering a buy for it. My skill at discretionary trades is limited, so I hesitate to give any advice, unless you want to fade it!
November 10th, 2008 at 9:56 amWood - what’s up with SSO and SDS right now?
as of the close today:
SDS up 1.3%
SSO down 4.19%
in AH
SSO up from 28.36 to 29.00 while SDS is also up about .30
Seems off a lot more then normal.
November 10th, 2008 at 7:03 pmnice… I’ve never used ATR stops before, but I’m always looking to learn something new. Thanks BHH for the research
Wood, any new entries for tuesday?
November 11th, 2008 at 12:12 am[...] volatility targeting in tradings systems. This cause him to write this better sumary of my point in this post: Finally, Damian from over at Skill Analytics reminded me that traders can get hit with larger [...]
November 18th, 2008 at 2:48 pm