more wiggle room at the beginning of the trade, but less at the later stages of a
winning trade. Reason two is to increase the number of trades that reach the tar-
get, to maximize the profit potential when the trailing stop will make it easier for
a trade to exit with a less than maximum profit. However, sometimes the profit tar-
get will be increased instead of decreased. Still, however, more often than not,
despite the increased profit target, the initial risk–reward relationship going into
the trade will not be as favorable as with the same system using a stop loss. Most
often, the average profit per trade also will be lower when shifting from a stop loss
to a trailing stop.
Therefore, to be effective, a trailing stop must increase the number of win-
ning trades so that the resulting system’s slightly smaller winning trade size makes
up for its slightly greater largest single-trade losses. A system with a trailing stop
can also increase profits further because, more often than not, it will shorten the
trade length, which results in more trading opportunities with a higher likelihood
of success.
Table 15.5 shows the result of a trailing-stop version of the system, with the
trailing stop at 1.6 percent away from the most recent highest high (lowest low in
a short trade) —which also is the initial worst-case scenario—and the profit target
at 4 percent. If you compare Table 15.5 with Table 15.1, you will find that all the
anticipated differences between the two versions also held true in the testing. For
one thing, the average profit is slightly smaller for the trailing-stop version, but
because the percentage winners and the number of trades are slightly higher, and
the trade length is a little shorter, the average net profits are almost the same. A
marginally higher risk–reward ratio for the trailing-stop version also indicates that180 PART 2 Trading System Development
Trailing-stop version, both sides PercProf: 87.69
Trades PercWin NetProfit AvgProfit ProfitStD RiskRatio
Average: 316.60 41.24 90,239.93 329.24 Market
St. Dev: 92.40 5.68 87,191.48 308.19 3,007.20 0.10
High: 409.00 46.91 177,431.41 637.43 3,336.44 Portfolio
Low: 224.20 35.56 3,048.46 21.05 (2,677.96) 1.07
ProfitFactor RiskFactor MaxDD PercDD PercTime AvgLength
Average: 1.36 0.20 43,673.54 31.76 26.44 3.46
St. Dev: 0.37 0.20 40,969.57 41.42 8.99 1.15
High: 1.74 0.39 84,643.11 73.18 35.43 4.61
Low: 0.99 (0.00) 2,703.96 (9.66) 17.45 2.31TABLE 15.5
Using Trailing Stops