TheÂ most prolificÂ discussions generated by the tracking of the Big Bamboo Trading SystemÂ have concerned the use of stops. We have discussed using larger percentage stops, Average True Range stops, and no stops at all. (Regarding the use of no stops at all: That is like not wearing underwear. ItÂ works well, until you get caught with your pants down.)
The recent work by BHH which compared varying percentage and ATR stop levels was very instructive. The relationship between stop levels and profits cannot be ignored. As the 1.25ATR stop looked as if it performed well in B’s tests, I decided to go back and run all of Bamboo’s real-time trades as if they had been positioned using a 1.25ATR stop rather than the 4% stop.
I think the results are very interesting.
Below is the Big Bamboo tracking spreadsheet with the standard 4% stop.
The next spreadsheet is the Big Bamboo using a 1.25ATR stop.
Highlights of the differences between the 4% and 1.25ATR stops
- Total profit on 4% stop is almost double that of the 1.25ATR stop: $8,817 vs. $4,817
- 4% Return is 17.64% vs. 1.25ATR Return of 9.63%
- Avg. Trade is $735 vs. $401
- Positions are much smaller for the ATR stops,Â getting even smaller as volatility ramps up in October
- ATR stops have 91% win rate vs. 50% for the 4% stops
- Some of the stops are greater than 20% from the entry, giving the positions freedom to gyrate
BHH’s tests contained much more data than is represented in these 12 trades. Remember that ATR stops will allow for bigger position sizes than what isÂ calculated with these trades, as soon asÂ volatility tails off. This example then is really showing the extremeÂ results of using ATR stops, as the volatility in October was extremely high.
Perhaps the best result of using ATR stops was that during anÂ extremely difficult month, the system had only 1 losing trade.Â This shows the ability of the system to generate profits, with smaller positions, during very difficult market conditions.