Part 1. The importance of outputs
the Result of any trade depends on output. If the entry was good, and the output is evil, then the trade is likely to bring a loss. At the same time, even when not logged on, but well supplied foot can make a profit. Exactly outputs, not inputs, determine the effectiveness of trade. This conclusion is easy to prove. Take any strategy inputs and try to experiment with outputs. You'll quickly find that your results may vary considerably, even in very small changes in the parameters of output. In fact, often even hard to say good entrance - due to the fact that the results depend very much on the outputs. Because of bad outputs a good input may seem unfortunate, and, on the contrary, a good output can give us a failed login as a success.
When testing the effectiveness of a technique login well at first out of a trade just after a certain number of bars. If you do something more complicated, very soon you will find that actually are testing your outputs, not inputs. If you change the terms of outputs when you try to work out a strategy for the entrance, the results will vary so much that it would be impossible to draw any reliable conclusions about the effectiveness of a strategy to enter. In combination with the correct access almost any strategy entry will look great. Combined with poor access the same strategy entry will look terrible.
the Purpose of the entrance is the initiation of a trade in the right direction. To test the effectiveness of the entrance you can easily measure in what percentage of cases trades were initiated in the right direction. For example, entrance A, having 60% of profitable trades after 5 days are better than entrance "B", with only 45% of profitable trades after 5 days.
do Not make conclusions about the risk or profitability select the best entry. What if entrance "A" makes a loss, and the entrance "B" - profit? Do entrance "A" better? The answer is "Yes", as the purpose of entry is not profit, and the initiation of a trade in the right direction. After that everything else depends on output. The "B" input just lucky to make more money because of a specific term of release, which we have chosen. We can easily change our output and find that the entrance "A" will give more profits than "B", because it initiates a trade in the right direction more often. To maximize your profits, you must combine the correct input a correct decision.
Part 2. Output based on the Money Managient
Probably the simplest and at the same time, the most important is the output based on the Money Managient, the classic "stop-loss". This output. Which protects the trading capital and prevents ruin.
Trade without stop loss is a sure way to ruin. Widely known trader and writer Viktor Нидерхоффер (Victor Niederhoffer) lost tens of millions of dollars of money customers when brought by his Foundation to zero (and even remained shall about 20 million dollars). This is not surprising. The inevitability of such an outcome was predetermined years ago, when Нидерхоффер wrote:
"I never use the foot. A combination of various output provides me a significant advantage..." Victor Niederhoffer, "The Education of a Speculator"
the Collapse of Нидерхофера caused no surprise to professionals. Discussed, but how much time will it take to the road to ruin. In his favor are that he lasted longer than mainly intended. Параноя Нидерхофера relatively stop-loss is not uncommon among beginners, but very rare among the Mature professionals. The main trade priority is the protection of trading capital from ruin everything else in relation to this is secondary.
Note carefully how we postulated that goal. We say our goal is to eliminate or reduce the risk of loss. Reasonable losses are an integral part of the trading process. Good traders accept the losses as a charge for participation in the business. Actually I noticed how good traders are probably more losers than bad. The critical factor is the size of acceptable losses. Catastrophe losses have to be eliminated at any cost and such losses are easily removed by the steady execution of a simple stop-loss.
Нидерхоффера wrongly decided that he would become a good trader that can swing the main rule of trading and not use a stop loss order. The truth is that a good trader in fact more often in need of StopLoss than a bad trader. Bad trader quickly collapses regardless of whether he uses stop-loss or not as good trader survives and thrives. The longer and better is your trade, the greater the chance of developing potentially catastrophic turn of events.
Stop loss brings the trader to a predetermined point of losses that trader is willing to take and get out of losing trades without unnecessary grief. Trader, using stop-loss, know from their launching pads that he can afford to trade only limited space for movement against your position and after that it limits their losses release of trade under its plan. This provides him with a great psychological advantage. The presence of a pre-determined fixed point of exit from the trade, the bringer loss, largely eliminates the stress associated with the finding in an unprofitable trade. Trader, placing your stop-loss order, knows exactly where he is forced to go out and thereby eliminates unpleasant emotions associated with monitoring the rise of losses from day to day.
This is the psychological advantage of a stop loss also helps the trader before entering the trade. Suppose a system invites us to enter a market tomorrow and we have an unknown and unlimited opportunity for losses. No reasonable trader does not want to enter into such transaction. However, if we have a pre-defined stop loss and know exactly what can be in the worst case, psychologically much easier to make the signal system to action, and enter the transaction. We know in advance and prepared for the worst-case scenario and determine what amount of risk is acceptable for us. This knowledge gives us confidence when you log in trade and psychologically ready to perception of losses, if they occur. Of course, the stop-loss is not always precisely defines the size of the losses in the worst scenario, because the market sometimes opens with a gap against the position and causes great losses than planned. However, in most cases, the stop loss is reasonably determines the maximum amount of losses.
The easiest stop-loss is a stop-defined fixed rates change compared with the moment of entry into the transaction. This option foot is easy to use and it is, in most commercial software, which allows it to include to the systems. At the same time as the proper and improper use of the systems.
Misuse is that first you speculative прикидываете, what amount of capital you can lose on a single trade, and then place the stop-loss in accordance with the received number. Unfortunately, the market does not balance the size of their movements against your position with how much money you are willing to lose.
the Correct way of placing the stop-loss is the use of market characteristics and statistics system testing to determine its location. For example, a fixed stop-loss orders should not be placed too close to the market because of the occasional market fluctuations may cause early withdrawal from a trade. At the same time stop must not be placed too far from the market, since in this case the amount of losses may be more than чтем necessary. Our experience shows that a fixed stop loss should be placed on the basis of studying of the market volatility. For example, if the average daily trading range market is $1,000 a fixed stop-loss is recommended to place at least $1,000, if not further. The size of the stop must hold an existing position from random fluctuations in prices, at the same time to fulfil the function of capital saving. We emphasize again that the corresponding system testing and analysis of results of such testing must precede the placement of fixed stop-loss for maximum system performance.
Важно понимать характеристики волатильности рынка, который вы торгуете и не использовать слепо фиксированный стоп-лосс если рынок имеет изменяющиеся характеристики волатильности. В таком случае более правильно разработать адаптивный стоп-лосс, зависящий от текущей волатильности рынка.
Part 3. Adaptive stop-loss
in order to develop a stop-loss adaptive to conditions of the current market volatility, it is necessary to abandon the fixed stop loss and explore other ways of placing the protective stop, depending on the characteristics of market volatility.
One approach is to study the movement of prices where to place the stop-loss. For example, the lowest or the highest price value during the last X days can be used as a stop loss. We call this version of the "stop-loss channel (Channel Stop). Stop-loss channel very adaptive to the current market conditions, since it varies with the change of the trend and volatility. Channel stop-loss is removed from the prices in periods of high volatility and a strong trend and is approaching the prices in periods of low volatility and reduce the strength of the trend. The basis of this stop is obvious - we know that a breakthrough is important highs and lows are often a signal of trend reversal. So the stop loss order placed on a level of maxima or minima is reasonable from the point of view of technical analysis.
at The same time this stop has its drawbacks. During strong trend can be placed too far away from a reasonable point of exit. On the other hand, the консолидирующемся market with low volatility this stop may be too tight. In addition, the potential value of losses all the time varies and depends on how far prices have gone from the entry point, which complicates the calculation of the amount of risk per trade.
Another adaptive strategy is the use of significant support and resistance levels to determine the position of stop-loss. You can use important market patterns, such as anchor points minima or maxima to determine the location of the stop-loss. The advantage of using rates and technical points to determine the position of the stop-loss is a stop is in accordance with the logic in the place where the further movement against the position will be a logical justification close that position.
Another way to design a stop-loss is a study of the current market volatility. We can use the average trading range (Average True Range) for a certain period of time or the standard deviation of prices (Standard Deviation) for some period, and multiply this value by a constant to determine how far can be located from our entrance. One of our favorite stop-loss is to just take the Average True Range for a certain period, multiply it by some factor and position at this distance from the entrance of stop-loss. To prevent accidental movements in prices is recommended to have a stop at a distance of more than one value Average TrueRange from the point of entry. 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 point of entry to point of exit will increase during periods of high market volatility and a decline in periods of low market volatility. In practice, you may find that the problem with this stop start to arise when the short-term market volatility becomes unusually small and narrow foot can be knocked out the random movement. To eliminate these false positives stops we expect a short-term market volatility (3-4 days), and long-term (15-20 days) and set foot using the values of volatility, which currently appeared to be longer. This allows the footsteps move fast enough and helps prevent false activation stops after a few unusually quiet days.
Another option adaptive stop-loss connected with the use of standard deviation (Standard Deviation) of past prices as a value associated with the volatility. For example, you can calculate the standard deviation for a certain period, to multiply the value obtained on a constant and place stop from the point of entry to the received value. The rationale for this stop is the same as the ATR stop-loss. The aim is to ignore the random fluctuations of prices, but to reduce losses in case when rates begin to really serious movement against an open position.
Adaptive stop-loss, based on a volatility play an important role in the management of capital. Probable value of the losses can be quickly calculated till the moment of opening position and we can be sure that the potential size of losses corresponds to the current market conditions. For example, suppose that our system offers to place a stop loss at a distance of one and a half units 20-daily ATR from the point of entry. If we take as the initial data of the S&P 500 beginning of the 90s, the Average True Range was equal at that time $1,250, therefore the stop loss should be placed at the distance of $1,875 from the point of entry. Now suppose that the amount of capital is $100,000 and we want to take the risk at one time 10% of that capital. Based on the volatility of the early 1990s we will trade 5 contracts, risk, so the $9,375 our capital. Now suppose that we have the same system in 1999. Now the Average True Range of the market is $5,600. In accordance with this stop-loss is located at a distance of $8,400 from the point of entry. If we continue to sell the same $100,000 of capital with acceptable risk 10%, we should buy only 1 contract. As you can see, adaptive stop-loss is a great way to manage risk in a changing market volatility.
Part 4. Outputs. Whether your stop losses too narrow or too broad?
it Often happens that the stop-loss or are too tight and causing frequent false positives or, conversely, too broad and lead to unnecessary loss of our capital. According to the results of our research, we concluded that for most systems advantageous to have a relatively large stop-loss.
At first glance, it seems that the already stop-loss, the smaller the losses. However, this looks logical conclusion is not confirmed by the tests. In almost all cases, the broad stop losses give a higher percentage of profitable transactions and reduce losses. Small foot look psychologically attractive, but may actually degrade the performance of the systems, since it is susceptible to frequent detections caused by random movements of prices. On the other hand, big feet, too, can be psychologically attractive as they work much less and systems with wide feet typically generate a greater number of profitable trades. However, the flip side of the wide stops is that the trader occasionally suffers from relatively large losses, though not very frequent, the size of which can psychologically perceived very hard. Is there a compromise solution to this problem?
We believe that, Yes. An interesting phenomenon that we have seen in our research is that it is often possible to expand the size of the stop-loss for a short period after opening the position. We believe it is possible to market in the first few days after opening a position of greater freedom wider stop loss. However, after a certain number of days, the stop loss can often be significantly reduced. For example, if we have a stop loss in the amount of $5,000 market entrance of S&P 500 and the size of this loss we unpleasant ?, it is quite possible to have a stop loss of this magnitude only the first few days after opening the position, and then narrow it down to $2,500 to all remaining for the open position. The probability to go on foot size is $5,000, thus declined, although it is possible that a significant movement against your position in the first few days will make you go on foot maximum size. The exact amount stop and terms of changes have to be determined with the help of computer and statistical analysis of the characteristics of the system. For some following the trend trading systems we have found that can significantly increase the return applying large foot in the first days of trade and subsequently reduce them by 50 percent or more with increasing duration of an open position.
This technique of narrowing stops after a few days has rationale: we know that the accuracy of the predictions of the entry signals decreases as the point of entry into the future. In most cases, indicators, determining entrance, better predict the movement of prices in the following two days, than in the next two weeks. Starting trade with a wide StopLoss we give prices sufficient freedom for movement in the right direction until it corresponds to the period of high reliability of input signal. In process of advancement of trade in the future reliability of the signal decreases, so we сужаем stop losses, reflecting the reduction of our confidence in the continuation of price movement in a certain direction.
There are other possible solutions to the problem of wide stop-loss. For example, the use later in pregnancy, trade breakeven stop protecting the number of shares or profit protection stop protecting profits). After activation of these stops the possibility of adopting the large stop-loss is significantly reduced or even eliminated.
The proper understanding and use of stop-loss is vital for the survival of the traders. Stop-loss effectively limit the amount of maximum losses that may be obtained from the trade that contributes to the most important task for the trade - saving trading capital. Trade without stop loss is a path to a significant increase in the probability of a catastrophic decrease your trading account.
the Importance of stop-loss exhaustively fully summarized Jack Schwager in his book "TheNew Market Wizards": "If you will not take a small loss, then sooner or later you will visit the mother of all casualties... "
Part 5. Trailing Stops (trailing stop)
Now, after we have taken the necessary precautions to prevent catastrophic losses through the use of stop-loss, you can focus on strategies that are created for the accumulation and retention of profits on the market. When properly applied, these strategies are designed to serve two important functions : they allow profits to accumulate, at the same time they must protect the already obtained after entering a trade profit.
Although their application is very broad, we do not believe that trailing stops should be applied to all trading situations. Most of the described us trailing stops are designed specifically to allow to accumulate profits. Therefore, they are best used with systems following the trends. For a number of countertrend ideas systems are better suited more aggressive outputs. Philosophy is “if you have a profit - take it” works better when you trade against the trend, when the amount of possible profit is limited. However, the rapid removal of profits when trading with the trend usually leads to one disorders - we exit the market with small profit, only to watch as a huge trend continues to move in our direction for days or even months after our early withdrawal. Therefore, we recommend the use of various exit strategies depending on market conditions. More aggressive options outputs will be discussed below, but for now we will concentrate on the feet, designed to accumulate over time a significant profit.
the Understanding of trailing stops critically important for traders of trends. This is because trade trends is usually connected to the small percentage of profitable trends, which makes it extremely important receiving the maximum possible returns in cases where this is not frequent, but a significant trend occurs. Typical traders trends, get most of their profits with the rare but significant trends, all the remaining time they seek efficient reduction of losses during more prolonged sideways movements.
Rational justification for the use trailing stops is based on the expectation of rare and unusually strong trends and opportunities to get considerable profit during these main trends. If the entrance is well-timed and the market continues to move in the direction of the entrance, trailing stops - excellent strategy outputs, which allows us to receive a significant part of the profit from this trend.
Trailing stops described here have similar characteristics, the knowledge of which is important for understanding how we use them in our trading systems. Effective trailing stops can significantly improve the profitability of trading systems based on following the trend, allowing us to maximize the use of trades with potentially high profit. The ratio of profit/loss typically increases significantly if the proper use trailing stops. However, there are some negative aspects of these stops. The number of profitable trades can sometimes decrease, because of all these stops can afford moderately profitable трейдам become unprofitable. Also, rare significant reversals after the opening of a profitable trade can make use of these stops psychologically difficult. No trader does not get pleasure watching as much of a profit is reduced to negligible or as profit trade becomes unprofitable.
The Channel Exit
The simplest way of following the trend is to install the foot, which constantly moves in the direction of the trend using the current maximum or minimum price. For example, following the rising trend of the stop can be set to the minimum value of the last few bars; if travelling trend-down - the maximum value of the last few bars. Number of bars, used to determine the maximum or minimum prices, depends on how much freedom can we afford to give trend. The more bars we use, the more freedom we give the trend and can lose the profit on rollback before you stop work. The use of a small number of bars leads to a narrowing of the stop and a speedy recovery from the trade.
This type of information is usually called “Exit Channel” (the stop on exit channel). The word “channel” is derived from a channel which is formed by using the X-day highs and lows for the outputs of a short or long positions, respectively.
For most of our examples we assume that we are working with fluorescent bars, but we can work with data of any temporal scale depending on the type of system that we create. Stop at the exit channel is extremely flexible and can work with weekly bars and пятиминутками. Also keep in mind that all of the examples on long positions can easily be applied and for short positions.
the Rationale stop on exit channel is very simple. Suppose that we decide to use the 20-day channel output for our long positions. Every day, we will determine the minimum price for the last 20 days and place our stop at this point. Many traders can host channel stop at several points closer to or further this point, depending on their preferences. As prices move in the direction of the trend, the minimum price of the last 20 days is gradually increasing, so "going after" the trend and just below it and allows to protect a certain amount of accumulated profit. It is important to note that the channel feet always only move in the direction of the foot and never in the opposite direction. When prices fall below the minimum price of the last 20 days, the trader closes its position using stop.
the First and most important question about the data link outlet - how to use bars to determine the exit point. Should we install stop at a minimum the last 5 days or 20, or maybe some other number? The answer depends on the properties of the system. Clearly defined set of characteristics of the system is always very useful to answer this important question. Do we want to make long-term system with late outputs or want to make the short-fast outputs? A large length of the channel is usually allows obtaining more profit for a long time, keep a long trend. Shorter channel allows to get more profit if the market is dominated by shorter trends. As a result of our research, we have come to the conclusion that the long-term systems should use trailing stops with the number of bars of 20 and more, medium-systems work best when the number of bars from 5 to 20, while short-term system to get the maximum profit at the time window to 5 days. We also found that a very short channels, with the length from 1 to 3 days work well with the "убегающем" market when developing very steep trend. We have observed that this type of trailing stop if there is a strong trend often allows you to stay in the trade almost up to the top.
it Seems that between the outputs of the channel footsteps of different lengths there is a logical contradiction. Longer channels will give more profits, but it is and will упускаемая part of the profit. Shorter channels will give less profit, however, capture the most of it. How to resolve this contradiction and create output that would have accumulated considerable profit and at the same time, reduced the share of miss them came? A very effective approach consists in the gradual narrowing of the channel stop with the development trend. First, you should use a channel output based on bolshej to width of a time window, later on, as the development trend or when there is a steep trend, the width of the channel should narrow to get a very narrow channel, effectively locking profit.
Here is an example of such an approach. After entering a long position and placing the stop-loss to prevent the dramatic decrease in trading capital, we will use a trailing stop, based on the minimum price for the last 20 days. This 20-day channel stop usually wide enough to prevent false positives and allows you to remain in position to receive some profit. On a certain, predetermined level of profitability, which can be based on the average trading range, multiplied by a factor or on fixed income in us dollars, the length of the channel can be reduced and the stop is placed at the point corresponding to minimal values of EN for the last 10 days. If we were lucky enough to reach the next level of profitability, such as profit in the amount of 5 trading ranges, we сужаем channel to 5 days and go out when the price reaches the minimum value of the last 5 days. At the maximum level of profitability, which are very rare, we may place a stop at a minimum прдыдущего day for the preservation of the large profits that have already been received. As you can see, this strategy gives prices enough freedom to the accumulation of profits at the beginning of the trades and then, the accumulation of profit foot narrowed. The more profit by foot. The more we have, the less we want to give.
there Is another way to improve the local stop, however, дискутабельный: dilate or expand the traditional channel using the channel width or multiplied by a ratio of average trading range. Suppose you are working with 20 day out. First you calculate the width of the channel as the difference between the 20 day maximum and 20-day minimum. Then you сужаете channel, increasing the minimum and reducing the maximum of a certain predefined amount. For example, on 5% bandwidth or 5% of the average trading range and use the resulting value to place your stop. This allows you to create a narrower channel.
Last point to discuss, is associated with an important disadvantage of the channel stop. The method is quite popular, so at the points X-daytime highs and lows are typically placed a sufficient number of orders. This may cause these points a significant slippage of the market when you try to use this method in your trading. The above method of narrowing of the channel width to a percentage of the width or of the average trading range is one of the ways to bring your stop from the area where they placed the majority of participants of the market and, thus, achieve their best performance.
The Chandelier Exit
If channel stop [for long positions] is calculated proceeding from the minimum values for the x-days, it is discussed in this section of the strategy to place stops moving is based on the account of the maximum values for the x-day.
Chandelier Exit (I would have translated the term as "hanging" stop. Moysha) calculates the trailing stop proceeding or to the maximum value of maximum prices or maximum value of the closing price for a specific period. The distance from the maximum point to the trailing the best bet in units of ATR (Average True Range). However, it is possible to measure in monetary terms or in currency of the contract value.
Below are three examples (as usual, are examples of long positions. For short positions it is necessary to reverse the logic.)
1. The stop is placed at an equal to the maximum price of the opening position minus three ATR.
2. The stop is placed at an equal to the maximum price of the opening position minus $1500.00.
3. The stop is placed at an equal to the maximum price of the opening position minus three to 150 points.
Advantage of this foot is the fact that he is moving up in the moment, when reaching a new high. Name Chandelier (chandelier) seems appropriate to stop and remind us of the logic of this very effective stop. Also as a chandelier hanging from the ceiling - the highest point of the room, and a Chandelier Exit hangs down from the highest price.
the Reason why we prefer to use for the calculation remove foot from the maximum price average trading range (Average True Range), is that the ATR is applicable to all markets and gives the system an adaptive character by accounting for changes in volatility. We can use the same formula for the grain trade, the yen, coffee or shares. If the trading range expands or contracts, our stop will change and move at a certain distance from the prices, remaining finely tuned to the current state of the market.
In the book " Trade Your Way to Financial Freedom " Dr. Van K. Tharp has shown that an effective exit strategy may give a profit even when randomly selected inputs. We were not surprised by the fact that in the proof of this provision with respect to diversified portfolio of futures markets was selected because "hanging" stop. Tharp used subtraction trebled ATR of maximum or minimum closing and used a 10-day exponential moving average for the calculation of the ATR.
Protection available profits.
When we discussed the channel output, we pointed out that some time after the initiation of trade rationally use wider stop, and then, the accumulation of profit, and to narrow stop by reducing the number of bars for calculation of the channel. A similar logic of profit may be used when using a "hung" stop. In early trade the distance to stop on most of the futures markets should be in the range from 2.5 to 4 ATR. The accumulation of profit can we stop moving closer reducing the number of units ATR from maximum to our stop.
Suppose we began to trade with "hanging" stop at a distance of three ATR of the maximum. After reaching the first level of profit, we can narrow down stop, change this value by 1.5 ATR. Further, the accumulation of profit, with a certain values of yield, you can narrow down the stop up one ATR. We had very good results for some very profitable deals with a trailing stop "suspended" from the maximum distance of only half of the ATR. We believe that to get the maximum return from following the trend systems it is necessary to narrow the trailing stop the accumulation of significant profits.
Note that, although the values highs used for "hanging" stops can only increase, changes in volatility may reduce or increase the width of the foot. If you want to see less of oscillations of the width of the foot - use a large length of the ATR. If you need to be more adaptive brake use shorter ATR. We usually use 12 bars for calculation of the ATR, if there are any special conditions that require change this value. When using a very short values ATR (3 or 4 bars) often creates problems in periods of very low volatility when stop is very close to move to the prices and the random motion rates may cause false positive stop. If we want to use a short and highly adaptive ATR without the risk of placing stop too close, we can calculate the short ATR and long ATR (such as 4 and 12 bars) and use that value which gives a wider stop. This technique allows our footsteps quickly shifted in periods of high volatility without the risk of false positives in short periods of very low volatility.
Combining channel and suspended stops.
We like to start our trade with the installation moving channel stop and only then, after prices rose and we got some profit - add suspended stop. Channel stop is kept at minimum, and not moving up as a profit. Only after a certain time, he gradually begins to move up. However, he does not react to reach new highs. That's why we need suspended stop to be sure that our stop is located not too far from the maximum. Combining the two techniques output, we can use the channel stop for a very gradual increase in the level of stop in the beginning of trade. However, if the trade is developing quickly in selected us side, there is a significant gap between the stop and prices. Once we have a profit, we need the best solution, which will protect our profit. At this point there is a sense to include hanging from the stop, to be increased at the same time, as is reached a new high. This property suspended stop making it one of the most intelligent when profitable transactions.
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