Trailing Stops

September 11, 2020 |

Zubin Al Genubi writes: 

I would like some advice on trailing stops.  Lets say a guy took a trade, 3 down days, buy end of day, hold for expectation period of 1 day, sell half, set a trailing stop on balance.  Where?  low of day? break even? 20 period ema?  And how is best to move it up.  Low of day? Ema?  Fixed trailing?  I realize it is not efficient but selling at the expectation period would lose a run like last month from 3000 of 16%.   Things seem "trendy" now.  Appreciate any good ideas.  Can this kind of thing be tested?  I doubt it, because normal tests don't seem to catch trends as they tend to mean reversion.  Thanks.   

Sushil Rungta writes: 

I use a % trailing stop.  Usually, once I buy a stock, depending on the stock and the expected volatility, I place a trailing stop anywhere from 8% to 25%.  That way I do not lose any of the upside.  And the % trailing stop keeps moving higher if the stock keeps moving higher.

I am a novice and not meant to be advice.  Just shat=ring what I do

Ralph Vince writes: 

I think it depends on the particular market. For equities, I've found nothing worthwhile that constitutes a mechanical trend following methodology I would risk money on

I have a lot of experience looking for it though! Perhaps  a temporal solution is manifesting in the quities indexes right now, which will oly be evident at some future point in time?

Experience in the markets teaches us nothing, and I doubt it has any value whatsoever. If fact, there is a toxicity to it in that we begin to believe we know something that day one participants aren;t burdened with.

We are tasked with finding which of the 9 sections of the tic-tac-toe board a ball will (randomly) appear in. We choose the center. It comes up randomly in the NW corner. (It must like corners?). We choose the SW corner, it shows up in the NE corner. (see, it likes corners,) We select the SE corner. It comes up in the middle (Ah, two corners, then a middle…..) and on and on ad on. 


"I have a good sense for where that ball will come up as I;ve been doing this for years." Or, better still, "I have a good sense of where that ball will come up - it;s mathematical! It;s somewhat deterministic," (as said the man walking into the convenience store to pony up for his next magic powerball number combination).

In markets, If you find something that works, and is working, it's about to evaporate. This is why I've migrated to longer and longer-term views on things, as it results in a longer time until things evaporate. Everything we think is true in the markets, is a delusion of our own making. Even the notion of drift: in equities, vanishes - first, for  decades or so, then, with the next fall of an empire. The probability of a drawdown, of any given magnitude, approaches certainty as the length of time given for it to transpire increases.

Most things in markets (as in all of life) that are real, often tend to be dull and tedious, require work to get our arms around,  and reside nowhere near where we are looking.

Ralph Vince writes: 

The point is everything we are looking at in terms of timing mechanism is ephemeral. I like longer-term models because they might outlive me (e.g. be long S&P500 when 90 day bills /  S&P500 div yield >1.8, which has batted 9 of 9 since 1980, below) before collapsing. The flipside is a much shorter-term model that will work, until it doesn't, then won't, until it does again!

I have never encountered anything in terms of equitisinexes that works in terms of trend-following, save for the notion of long-term, upwards drift. But as I say, once you are comfortable that something will always work, it is likely near-finished. The buy all dips / drift works in our favor mentality is not immune, but has had the good fortune of being a lugubrious beast.


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