Someone ask recently why the 10% stop was chosen for Power Dip.
It wasn’t really chosen but arrived at quantitatively through research and hundreds of thousands of simulated trades. This is intuitive to an experienced trader and fine and dandy as an abstract concept but real-world examples are what people tend to respond best to so today (so far), you have it.
Today is a PERFECT – real world example of why too tight a stop can be devastating to a system. A tighter stop would have stopped out a very large percentage of our trades yesterday, probably near the lows of the day. With the looser stop, most are recovering today and if the market holds up, we will get exit signals today on many for gains or small losses where the tighter stop would have taken us out for max losses yesterday.
These market ebbs and flows are normal and a good system is designed to quantitatively exploit these market characteristics (and the traders that are naive to them).
(Brandon posting for Woodshedder)
Right you are, Brandon. I have developed a trading system that appears very similar to the Power Dip. As I read this blog I often see stocks that I have just bought after my own system triggers them show up on the Power Dip “buy list”. I use a volatility based stop as opposed to a flat 10% stop and have found that you need to use either a very tight stop (with a greater position size) or a very loose stop (with a lower position size). My research shows that anything stop utilized in between saddles you with a negative expectancy. Thanks for the updates.
We had mixed results with volatility stops for Power Dip but they are a great fit for certain systems. As you know, they are a bit more difficult to implement so we decided to keep this one easier to trade. I completely agree that a very tight stop will ultimately generate higher profits due to larger position sizes but this comes at the expense of dramatic increases in system equity volatility which make them far more difficult to trade psychologically. Tight stops also tend to work better on breakout systems where on is entering in the direction of short term momo. In a system like this, where you are entering in anticipation of a short-term reversal, we have found you need a little more breathing room as timing the entry perfectly is impossible with an end-of-day system. With a good intraday entry, one can get away with a much tighter stop also.
bhh/woody,
how does your system performs on qld and double long indexes.
Bill, it will be very volatile, as you would expect with levered vehicles. The system does not discriminate between equities and equity ETFs and will trade the double longs if they meet the system criteria.
From a backtesting perspective, it is hard to test the double levered products as there is really only 2 years worth of data.
technically, they will trade the inverse etfs as well if they match the entry criteria, effectively allowing this system to short the market as well.