I just read a post on the usage of stops when trading Russell 1000 stocks. It seemed to be a fair enough analysis. It concluded that when trading a basket of stocks, stop-loss usage hurt performance.

Has anyone noticed that the "left unsaid" part of the analysis is often the most important? For example. His simulation entry is to buy using a limit order at some volatility measure below the prior close. It seems reasonable and reasonably mirrors some of the things that I like to do in stocks.

The problem is if you use this simple, tested method with any size at all in a great many Russell 1000 stocks, you will not get filled in any shape or form that approaches the simulation results. That trade where in simulation u made a killing? In real life, u got 47 shares. Including a "go beyond" factor on the limit order fill does not help, because your order alters the sequence of prices. If u have a big, dumb limit order, they won't let you in at the best prices (You get the full boat though, when your level will have your buried in no time).

Next is the analysis of stops. The system testing does not factor in that when the "stop" hits the market, a hole emerges - your order is sucked into a pit to be filled much lower than you thought possible. Or if the instruction is to "stop out" on the open the next day, opening price is monstrous and you get filled at some obscene level that ends up being the low of the day, far more than should be expected.

So while some of the principles identified might be reasonable (buying weakness in stocks), the "nuts and bolts" implied from the back-test are going to be mostly dead wrong, and consequently going to ruin a great many trader's starting out with their crafted plan based on simulation results.

It reminds me of 15+ years ago when I believed I had a system to make 7 figures a year trading coffee futures. I did have that system. It worked wonderfully on historical data. in real life I tried 3 trades, all generating significant and unexpected losses, and quit. I actually like trading coffee with small size now, but the initial naivete of having a "sound system for shadow boxing the market" was disastrous. The nuance of the trade makes all the difference. It might be less of an issue in the big markets, but it still comes up.





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