volatility. But because volatility works both ways, without the stop loss, some of the
large winners actually started out as large losers. Therefore, with the stop loss in
place, a few of the would-be large winners would have ended up as small losers.
The same reasoning also holds true if we were to add a profit target. In that
case, all trades above a certain profit would have ended up no larger than what the
profit target would have allowed. But there also would be a few trades that origi-
nally ended up with a profit below the profit target, after they’ve had an open prof-
it above it, which now will end up at the maximum allowed profit column. This is
depicted in Figure 17.5, whose distribution of trades shows an average profit of
1.95 units. This is slightly more than in Figure 17.4, which doesn’t always have to
be the case.
Note that the numbers here were generated at random and that the actual
numbers will, of course, vary with the system, but the general relationships
between the different stages of the research process always hold true, no matter
what. Also note that just because the average profit per trade decreased by more
than 30 percent from Figure 17.1 to Figure 17.4, it doesn’t mean that the system
behind the results in Figure 17.4 will be less profitable in the end. Quite the con-
trary. Because the stop loss also narrows down the possible outcomes for theCHAPTER 17 Distribution of Trades 197
FIGURE 17.5
Maximum allowed profit.