survive the typical amount of noise in a market. Because you have no idea how
much leeway each specific trade will need, the best you can do is estimate an aver-
age leeway that seems to work best within each trade for a large group of trades.
For example, a trade with a profit target at 5 percent and stop loss at 1 per-
cent (no trailing stop) has an average wiggle room of 6 percent, no matter how
long it lasts. If you use the same wiggle room for all trades, the average wiggle
room for all trades will also be 6 percent. If you replace the stop loss with a trail-
ing stop, then the wiggle room within an individual trade that shows a profit will
become smaller with time. Therefore, to keep the average wiggle room constant,
within both an individual winning trade and all trades (both winners and losers),
the wiggle room must be slightly larger at the beginning of a trade with a trailing
stop than it must be for a trade with only a stop loss.
This creates a twofold problem: Not only will the largest single-trade loss for
a trailing stop be a little larger than that for a fixed stop (because the trailing stop’s
initially greater leeway means larger potential losses), but the best-case scenario—
the profit target—will also not be reached as often as before. This is because some
profitable trades that would have remained open if a fixed stop were used (and
therefore might have ultimately reached the profit target) will instead be stopped
out by the trailing stop. Another way to look at it is to understand that, for a prof-
itable trade, the trailing stop will move in the direction of the trade to decrease the
chance for a profitable trade to go bad. Because it’s closer to the price than where
the fixed stop would have been had we used one, it will also be hit more often,
which leaves fewer trades to reach the profit target.
Thus, the profit target must be lowered for two reasons. Reason one is to
keep the average wiggle room constant, given that the trailing stop will createCHAPTER 15 Expert Exits 179
Original system, both sides, random entries PercProf: 86.92
Trades PercWin NetProfit AvgProfit ProfitStD RiskRatio
Average: 165.06 32.77 52,947.82 375.55 Market
St. Dev: 49.54 7.02 57,816.14 409.49 3,469.47 0.09
High: 214.60 39.79 110,763.96 785.04 3,845.01 Portfolio
Low: 115.51 25.75 (4,868.31) (33.94) (3,093.92) 0.92
ProfitFactor RiskFactor MaxDD PercDD PercTime AvgLength
Average: 1.31 0.19 34,605.77 26.90 17.52 4.36
St. Dev: 0.34 0.21 22,807.03 22.76 6.70 1.34
High: 1.65 0.40 57,412.80 49.66 24.22 5.70
Low: 0.97 (0.02) 11,798.74 4.15 10.82 3.02TABLE 15.4
Trading Both Sides Using RNG