[Predictor]

The valuation comes from extrapolating the returns over the system some years into the future. The basic idea is that if I start to trade a system then I've already extrapolated the results into the future and therefore I can extrapolate the returns into the future. The real key to making this work though is that I take out my profits as the account increases in value at a defined rate. Based on the historical return rate and my cash flow plan then I can come up with a realistic valuation that doesn't require for me to risk "all future gains".

Originally Posted by SunTrader »

A valuation based approach, did I miss something somewhere such as ...... ummm valuation.

Where?

Stops / no stops is not a valuation approach if you ask me.

[Predictor]

This is a reasonable perspective. However, we are referring to a system in this case which had a historical drawdown and return. I may have should been clear that there are exit rules in a system like this. It takes losses: it just doesn't take stop losses. As I noted, its not about wanting to use a stop or not use a stop. In this case, the system returned more without using the stop.

I should probably add too and this maybe something new for those who haven't built system is that typically the tighter the stop one uses on a system then the GREATER the drawdown. Let me repeat, the tighter the stop then the systems will typically experience GREATER drawdown. Of course, there is value in decreasing the maximum risk per trade because with less max risk per trade it is possible to leverage the system higher.

My perspective in this article was that a person starts to trade a system that historically had DD of 40% or 50% because they know they will only have to risk x$ because the system uses a stop. However, they are really kidding themselves versus accepting the risk of taking that 40% or 50% loss.

Where I agree with you.. is that yes if a trader doesn't have a plan to take losses and doesn't have an edge then that's a disaster waiting to happen.

Originally Posted by joshdance »

I believe just the opposite to be true: a person who uses a stop loss has accepted the financial risk, and quantified it. Someone who does not use a stop loss has not accepted the possibility that he is wrong if the instrument trades to some point. Therefore, the person who has no stop loss has not really accepted any risk at all, because it's not really possible for him to lose.

[SIUYA]

Originally Posted by Predictor »

This is a reasonable perspective. However, we are referring to a system in this case which had a historical drawdown and return. I may have should been clear that there are exit rules in a system like this. It takes losses: it just doesn't take stop losses.

Sorry...but this is clearly just a matter of accounting perspective - a stop or an exit form a system is the same. it is the point at which the entry trade is exited....how are they different? maybe its just a matter of definition but it irks me a little when things are discussed this way. For me a loss is a loss is a loss - no matter why, how or when.

Originally Posted by Predictor »

I should probably add too and this maybe something new for those who haven't built system is that typically the tighter the stop one uses on a system then the GREATER the drawdown. Let me repeat, the tighter the stop then the systems will typically experience GREATER drawdown.

This I would say is completely system dependent (aka Zdo) - change the take profits to no take profits and test over different periods and you will get vastly different results. Plus when you talk about the greater the drawdown, you may have more stops per wins, but the drawdown may or may not change. I think you are being too general here. Often depending on the system your aim might be to build as many units as possible and run them, and stopping out at break even for example may lessen the number of trades on when you have a winner. You might then expect a big open profits drawdown far in excess of your closed PL drawdown.....for many this is a crucial element of the system, if it can be traded, if they can trade it.

Originally Posted by Predictor »

My perspective in this article was that a person starts to trade a system that historically had DD of 40% or 50% because they know they will only have to risk x$ because the system uses a stop. However, they are really kidding themselves versus accepting the risk of taking that 40% or 50% loss.
.

yes...because records are meant to be broken the back tested drawdown is virtually guaranteed to be beaten at some stage, and the reality is they might stop the system at down 20%

(I dont mean to do anything more than post discusssions to the thread as I think too many go down the path of thinking a backtest is more than what it actually is and that often the same system can be radically different based on very small variations in that.....and this is I hope as you mention a thread for discussing the value of backtesting.)

[tommaso]

[QUOTE=Predictor;136189]....typically the tighter the stop one uses on a system then the GREATER the drawdown. Let me repeat, the tighter the stop then the systems will typically experience GREATER drawdown. Of course, there is value in decreasing the maximum risk per trade because with less max risk per trade it is possible to leverage the system higher.

My perspective in this article was that a person starts to trade a system that historically had DD of 40% or 50% because they know they will only have to risk x$ because the system uses a stop. However, they are really kidding themselves versus accepting the risk of taking that 40% or 50% loss.

....QUOTE]

That is very true: a lot of people are deceived in thinking that stops limit losses, while instead may just be the opposite (depending on the general organization of the strat).

The only notable effect of stops in automated trading is generally to let your PNL possibly oscillate around 0 for a good amount of time before seeing larger losses ("slot machine effect").

[ Also consider (selling and buying appropriately) options, which may be a great way of hedging and margin bounding. ]

Tom