Sunday, May 28, 2006, 5:26:47 AM, you wrote:
i> Yuki,
i> With regard to stops, my take on it is as follows:
i> Some systems produce large winners and large losers. Some systems
i> produce small losers and small winners.
i> Stops work well for the former, because it cuts large losses
early, while letting large winners run.
Okay, that's kind of a "Turtle" approach, and it might be true:
basically taking a very high percentage of fairly small losers, and
lurking around for the pyramided home run. Okay, you'd better use
stops in that kind of situation. Most people don't trade that way,
however, because the psychological cost can be very high, and it
requires serious capital to begin with -- you may pile up a *lot* of
losses (death by a thousand cuts) before finding that breakout and
follow through that rights the ship. (I posit that most entrants into
this business are woefully undercapitalized when they start.) So, I
will concede that stops are indeed appropriate for systems that
produce a *high* percentage of *losers* and a very *small* percentage
of tape-measure home runs. (The reverse is impossible to design,
IMHO.) ^_-
But really, few trade this way. And I don't ever remember anyone on
this board ever claiming that stops did anything but degrade
performance. Most use stops as a kind of protection against ruin.
But other than the case we discussed above, other tools such as
trading a portfolio (some diversification) and controlling position
size are more appropriate ruination insurance.
Yuki
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