Strategy backtest pt.7 - stop loss limit

In a former post I already investigated different stop loss systems. I found that the "reinforced" approach was most successful, so I used that throughout my following investigations with a constant stop loss limit of 2%. In this post I present results of an investigation of the limit itself.




Therefore I used the same strategy as presented in my last post:

• market trend: bullish when rate > 50-day-EMA, bearish when <50-day-EMA
• open buy-trade on rate increase in bullish market
• open sell-trade on rate decrease in bearish market
• close trades on reinforced stop loss (different values) and take profit (10%)
• delay factor 0.018%

I then applied this strategy to the Dax in the years 1992 to 2004 and varied the stop loss limit from 3% down to 0,0001%. Those are the results:



Interestingly there is a general trend: The tighter the stop loss limit, the better the overall performance of the strategy. With a limit lower than 0,01%, the performance is only improved minimally. This kind of proofs an old investment rule that recommends to cut the losses short (at least it proofs it for this strategy on the Dax). This general trend however is not valid for every year. For example the best out of the investigated stop loss limits in the years 1995, 1998, 1999 and 2003 was 2%. In 1999 a limit of 0,5% or 0,1% was lossy, while higher or lower limits were profitable. Furthermore the lower the stop limit, the more trades are opened. The next table shows more details about the profitability of the trades.



It is important to notice, that the number of profitable trades is at its top with a stop loss limit of 0,5%. Lower limits result in a lower number of profitable trades, while the number of lossy trades is increased. That seems to be contrary to the fact, that lower limits result in a better overall performance. But there is an explanation: When the stop loss is as tight as 0,1%, the trade (that is a buy position opened at the closing rate) can only be profitable, when the next days low is higher than the closing rate. That is obviously the case on approx. 340 days of the investigated time period. In this situation the trade can go all the way to the take profit limit. If this limit is not reached, the stop loss is "reinforced" thus repeating the procedure and protecting the gains. If the market is going into the wrong direction, the trade is closed with an average loss of only -0.3%. Of course many possibly profitable trades are closed by stop loss, because the rate hits the stop loss at one time of the day. But obviously the benefit of strictly cutting the losses is topping the drawback of loosing possible gains. In general these findings are only valid for this strategy and this asset. A different strategy or asset can result in completely contrary results.

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Related posts about backtesting:

• delay factor
• market trend
• short trades
• stop losses
• long trade indicators
• performance index DPI
• backtesting tool

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Important remark: The results presented above and throughout my blog are no recommendation for your trading! I only share my personal findings and opinions to give ideas and let my followers and copiers know what I am currently working on. I can not guarantee the correctness of my tool and my presented results. Furthermore past performance is not an indication for future results. Only trade with money you can accept to loose!