Hi Guys, hi from Andrea Unger.
I know we have already discussed about it, but this is the Automatic Trading Magazine which is so far only in Italian but we are thinking about the English version, and in this I was reading the article of Andrea Nebiolo, this guy here, and he was talking about the correct employment of trailing stop in trading systems.
I like these articles because they are all analysis based on numbers, being an algo trader I obviously base all my decisions on numbers, and in this article Andrea, who has the same name as me, the same business as me, the same trading approach, so obviously I agree with what he writes, the same experience, because it is what makes us think what is good or bad, he’s explaining the pros and cons of trailing stop and all the dangers in the built-in software rules of functions.
So who has seen the other video, where I talk about the trailing stops knows that I’m not a fan of trailing stops, but just to tell you another thing in our video, I was saying that I don’t trade systematically cryptocurrencies, I just put live two systems on Bitcoin future.
I developed these systems a while ago, I kept them in incubation, live incubation with no real money, and I saw that they are performing well so I decided to put them live, but looking at the performance, I noticed that these systems were able to capture some of the major trends that the market showed, you know there had been interesting trends, but in their retracements phases, or the opposite direction trends, they were suffering deep drawdowns, giving back a lot of money that they accumulated.
Psychologically I prefer not to make money rather than giving it back.
So if, for example, I have a trade that goes up to 100 and then goes down to 80 and I exit, that 20 given back from the virtual open position gain to the final gain, makes me suffer more than if I had a take profit at 80 and after exiting, seeing the market going up to 100.
I mean this is my personal mindset, but I believe it’s common with most of you, let me know it will be interesting to discuss.
That said in any case, let’s go back, this system had these nasty slowdowns in the phases where my trades were giving back some money.
So I was wondering about using a trailing stop and I tested it, it’s more than two systems, it’s one system with two different sets of inputs, so it’s very similar.
In both, I inserted a trailing stop and I found out with my moderate astonishment and satisfaction, that employment of a trailing stop in this system helped very much.
First of all in reducing, really cutting down the drawdown and also, this is what gave me more reasons to be astonished, in increasing a little bit the net profit.
So I was not giving back part of the net profit, getting a better drawdown, but I got a better drawdown and I even saved my net profit which was obviously a very nice surprise.
So thinking about this, I was thinking back of when the first systematic trading approach came out, in the ’80s maybe or so and the fact that they were coming along with a trailing stop concept idea, which was one of the exit rules.
So if we think back at those markets in the ’80s and we compared them to a Bitcoin today, they were similar, I mean obviously, the bubble of Bitcoin was pretty much more explosive, but the general behavior of these long trends, long and strong trends and deep retracements and then up again, it’s very similar and so it was obvious that in those markets there was the suggestion of a necessity to use a trailing stop to protect the open profits while today the same markets which were moving that way in the past have a very choppier behavior.
So it’s much more difficult to get the same benefit of using a trailing stop because you’re using it on narrower timeframes, narrower time horizons, so everything changed and the goodness of the trailing stop of those days is mostly gone.
If we look at today’s standard markets, Dax future, miniS&P, crude oil, hardly you find a good way to use the trailing stop and you find always that standard exits such as time exit, stop loss and take profit, are still those who make the system work and additional trailing stop most often doesn’t give any benefit, not even psychologically reducing drawdowns, you don’t get what you are looking for what you were getting in the past and what you can get if you trade this modern, fast and furious markets, such as Bitcoin or cryptocurrencies.
I trade this system of Bitcoin because I can trade the futures of Bitcoin so I developed on the futures.
So this is it actually and that explained why I’m not a fan of trailing store today, because narrowing down the timeframe of employment leads to much lower or to no benefit and also it has the danger of having the mistakes in the software the bugs in the software to properly calculate the impact of a trailing stop, this is something that I probably discussed a long ago in my previous video about trailing stop, you can find it here on the channel anyway, and the reason why I use a trailing stop on Bitcoin is because it helped in, let’s say, getting my system, protecting profits in such a volatile market.
So I’m still not a fan of trailing stop, but I accept to use the trailing stop when I see a benefit.
I’m not stubborn, I test numbers, put that together, if I like the numbers I use what I found, if I don’t like them or if I think that there is something false, due to a bug, I just put it away.
Test, always test!
That’s it, I hope it helped and let me know about your experience with trailing stop.
Now don’t come and show me this marvelous system with a 45° degree equity line, because I don’t believe it.
Tell me your real experience, with real money and using or not using trailing stop and if you put your money at work with systems, I believe you have the same conclusion I had that trailing stop is not the ultimate help for systematic trading.
Ciao from Andrea Unger see you next time, ciao!