The Truth About Trailing Stops – And it Hurts!

Before i begin, i would like to define trailing stops so that we are all on the same page.

There are different usage patterns as to how one moves and manages their stop losses and therefore they tend to coin them differently.  Breakeven stops(moved to entry price when profitable), Trailing stops(continuously moves in the direction of the order when profitable and after having surpassed the initial trailing stop gap), Jumping stops(”jumps” by a certain level whenever a certain condition has been met) and Percentage stops(stops that are managed as a % level of the profits left on the table)

For the sake of this topic, i won’t go into the literature of what each stops are and how they can be best managed. As long as your trading plan includes  having a stop loss level which moves as the market progresses, this involves you and you need to read this.

Moving your stops – Does it help?

Yes it does. In fact, for many of our trend following systems, we do have a habit of moving our stops and letting the trends ride itself with absolutely zero or minimal risk.

We do this for 2 reasons;

1) To protect our profits/risks against a whipsawing market
2) To realize larger profits should the market give you one of those monster trends.

Now, so why does it hurt to have stops that move?

If those reasons above are the reasons why your trading plan incorporates such a mechanism and you trade using which always, i can assure you that you have gotten it at least partially correct.

The sad news is, you will be losing money, or not making as much profits in the long run. What???

Yes. This is true and accurate.

Almost a year ago, Max Ong(Biz partner and Director of Technology) and I, were thrashing out the concepts of trailing stops and systems with no such management. Ever so often, we get into the debate of  “myths of manual trading”. Just because someone said so or we read it in the books and “think” it works, we stick to it all the time. However, what if we can know, for sure, if certain stuffs work or not.

This is Max’s specialty. I mean, he is a whiz at programming. Give him some logic and he will sit on his computer and start “spraying”(i use spraying because he types at an unbelievable speed) the keys and bham, we are done. A new EA created in like what, 45 mins? Gosh, he is good.

Anyway, so he will put the logic at work and have conditional parameters which plague our doubt. Then, based on simulated market trading(backtesting), we are able to have 2 sets of data. One with our conditional parameter and the other, without.

Here are the results and i am sure a picture tells a thousand words;

The picture is conclusive and from what you can infer, yes, trailing stops do not overall give you more profits. However, they do control your downside(drawdowns) as you can notice the long valleys/spikes downwards are shorter with those which have had trailing stops and those that didn’t.

Of course, after this discovery, we got into our usual “healthy” arguments on how auto trading can be fallible and Max was saying that manual trading is fallible and so on. Eventually, we got beleaguered by our own findings and we had to seek more holistic answers.

The Search for the Truth

In doing so, we asked our other biz partner, Dr. Tham for guidance about this discovery. Dr. Tham, as most of you might know, is my business partner and Director of Psychology. He helps our trainees(and in this situation, even us ourselves) stay focused and have a winning mentality rather than to believe in myths and bogus claims.

He was delighted of our findings and it further cemented his belief and skeptical views that much of what is out there in the market is not what as they claim to be. The test is in the pudding and with numbers to back it  up, there is just no 2nd guessing anymore.  Much to my surprise of learning about the QWERTY Keyboard from him, on how intentionally it was meant to be an inferior keyboard layout, we began to further complement our believes that knowledge and theory from books and experts can be great, but not necessarily relevant to your style of trading.

So why are you telling us about all these now??

Most importantly, what made me write this article today is that what we had figured out and is sitting amongst truckloads of reference material, has been brought to light by another famous trader and his circulars.

In Dr. Van Tharp’s circular, of whom both Max and I are great fans of,(I am also a fan of his attractive cousin called Nanthini, which is another story altogether), we had a publication today making exactly the same claim;

“The bottom line is that breakeven stops are psychologically comforting.  Moving to breakeven allows us to mentally “play with the market’s money.”  However, under most scenarios, it seems that breakeven stops are not helpful in making trading profitable.” — D.R. Barton. Jr.

Conclusion

Note that i am not saying that having trailing stops are not at all counter productive. They do help reduce drawdown at best, so if you are a risk averse trader and protecting your capital is key, it does serve a very important purpose here.

So, should we or should we not use trailing stops?

Well, the devil is in the details. This brings us back to the balance of having enough “risk” to catch more “rewards”. You see, when you trail your stops with too tight a gap, chances are you might get stopped out and if you trail your stops with too wide a gap, you might lose much of the floating profits you could have realized.

There is a proven method as to how much of a a “gap” between the current price and your stop loss will give you an optimal buffer to move within, so that your stop losses will not be taken out prematurely, yet there is an opportunity to harness more profits should the market march on in your direction.

More importantly, for my team and I, it proves that we are in the right course of direction and how the combination of methods, technical backtesting and overall market psychology, each one area contributed by each one in our team, has combined to the greater whole. Again, this shows that we are ahead in our quest for profitable trading systems. That sure helped the ego trip.

Happy Trading,
Seeni

Forex Weekly Outlook – Mar 29th – Apr 2nd

We head into the first week of April this midweek and it will be a NFP week, with an exception. A very unique strange lineup of events will prove to be a special NFP day this time around. More of that to come at the end of this post.

Good Monday morning folks, i hope you have had another good trading month for Mar. We had an excellent week in trades last week. Bagging almost 380 pips on the Euro pairs and close to 300 pips on Gbp pairs, it was a textbook week in trading. We had our bearish outlook in alignment with what the market had given us for the whole week, except for the closure of the week. God bless, it has been a very profitable week and i end my trading month very much in the black. Having an almost BE month just about 2 weeks ago.

Now, another trade that has worked out very well is our call to buy Cad/Jpy. I have been speaking of this since the year begun and when the alignment of all signals was just right, we went in for the trade and this has turned out to be the best performer of the month.  Cad/Jpy has since soared about 350 pips and since this is a long term position, i have been adding to it constantly while taking out profits and closing my risks. I did speak of this again almost a month ago on this post . I did also write many times throughout the week for my readers to make call on the pairs that could have growth propelled by oil and risk appetite and Cad/Jpy by far, has achieved the best results so far.

Ok, so let us get back to this week and see what the markets could have in store for us. Once again, we review what has happened last week with all the currencies shaping up against the USD;

1) Eur – -ve 0.8%

Outlook : Bearish – Cautious
Our longer term outlook of Euro declining is still in perspective. However, in the short term, especially for this week, please be cautious of playing all your cards short.

Here are my reasons;  Greece might get bailed out eventually with funding from IMF and cooperation with the European union. Market open saw a big gap up already and this signals intent of the immediate pressure relieved off Euro. Having said that, only the “G” is out of the “PIIGS” and this is an ambiguous, indefinite statement. There isn’t much clarity as to where this money is being raised from and how is it going to be repaid back. Greece meanwhile has attempted to get more money by selling $5 bonds which goes to show the desperate state that they are in. Therefore, in my opinion, there could be a short term rally/correction due to the sense of “relief” of this immediate Greece saga, but the problems overall are too much and we are confident of more euro decline.

If you are looking to sell the euro, get cautious for the 1.32 area holds lots of confluence of levels. With a cautious setup, you should honour all stops not beyond 1.3500 level.

2) Gbp – -ve 0.62%

We are still bearish on the Gbp. There are no signs of recovery or of positive impact for the moment and we have no reason to change the outlook as yet.

3) Jpy - -ve 2.2%

Due to seasonal cycles and recent suggestions of BOJ intervention, the Yen has suffered one of its worst declines against the USD since Nov last year. We believe this will continue given the outlook of a strong dollar and the seasonal pattern of yen from now till June.

We have upside limited till 94 level set by November’s high but it is possible to achieve that by May-June.

4) Chf – -ve 0.4%

Notice the correlation with Eur for the Chf changing rather dramatically over the last few weeks.

5) Cad – -ve 0.99%

6) Aud – -ve 1.07%

Though the Aussie dollar is the biggest com-dollar loser for the last week, our outlook on Aussie dollar is still very bullish. “Interest rates may need to be increased further to contain inflation” Reserve Bank of Australia Governor Glenn Stevens.

7) Nzd – -ve 0.35%

8 ) Gold – +ve 0.33%

Gold has been ranging for the 3rd week running now, stuck within a range of about 280 pips from 1086 and 1114.

Interestingly, as you can see, the USD has done very well, unanimously, across the board. This is not a state of risk aversion as JPY lost heavily to the USD. This is pure USD strength by itself and it is obvious that the USD is probably one of the most preferred currencies on most portfolios.

So, it is no surprise as the USD Index gained in strength.

USD Bulls are getting stronger

I always have an anti-thesis to what the market does but i don’t trade it, as yet. My anti-thesis now is that the USD is really strong. Almost every Tom Dick and Harry is propping up dollar strength. With the way things are going, i have no reason to believe otherwise. There are even talks about the Fed increasing interest rates? I mean, we had almost everyone writing off the US dollar just about 4-5 months ago and now they are all expecting US dollar strength to outpace every other currency.

Well, as i have always said and believed, no expert truly can predict what will happen and they simply go with the herd. The market has extreme short term memory and it just forgets what happened prior and simply focuses on its current myopic view.

When everyone is flocking to the USD, you know that spells trouble. I am not asking you to short it, but just don’t buy it. Not at this late stage. Base your bias on other faltering currencies such as the Eur and the Gbp, going down against the US dollar. Don’t simply buy majors based on USD strength throughout. That can be suicidal.

Ok, big news this week:

This week is NFP Week. We have other key indicators coming from UK, Aus, and Japan but all eyes and trading speculation will be on NFP release this friday.

The best part is, it is a holiday! Yes, strange as it seems, almost every major country is having its holiday on Friday, except the US, and that is when NFP data is released.

2 things are going to happen and you want to keep your eyes peeled for this;

Regardless of the data being released;

1) Market will be extremely volatile. Not to mention volatility beyond normal trading days is expected during NFP trading days. However, volatility beyond these levels can be expected as there is very thin liquidity and almost all of the other trades(except the US) will not be taking part in this event.

2) There will be lots of profit taking and volume movement on Thursday. Since most markets will be closed for the week and to protect their positions against NFP release, most traders will close/hedge their positions on Thursday itself. Depending on the outcome of trends this week, we can use the simple trade setup trick to benefit from reversals on Thursday.

Happy Trading,
Seeni

Best Performing Funds of 2009 – Devil is in the details

What is the story ??

I refer to today’s article in the Sunday Times paper, page 27 of the investment section.

In this article, the author states that “There has been lots of interest in the emerging markets as they have been credited with leading the global economic recovery last year”.

Further she quotes “By contrast, the developed economies saw paltry or negative growth” – Mr. Albert Lam, IPP Financials Investment director.

Therefore, in summary, we can infer from these statements that what we have in this image is probably some of the best, if not the best, performing funds for the last 2 years.

Now that we have this statement in unison, let us scrutinize the performance data in finer detail.

Best Performers (?)

In a quick scan, you can notice some very reputable names such as Aberdeen and ING. Npw, they have achieved an impressive 60-80% ROI in 2009 alone! Very nice performance within such a year indeed. However, if one is myopic with such a short term performance benchmark, they can be very “happy” customers and prove an easy time for fund managers and investment experts.

Just looking a year before, 2008-2009, one can witness the horrendous drawdowns these funds have suffered, as much as 40%-60%. I respect and appreciate the papers and FundSupermart for publishing these transparently.

Therefore, overall, on a 2 years window(which is near myopic standards too) we do see the funds performing positively, but it ranges anywhere between a paltry -2.3% to a near decent 5.2%.

Well, not too bad you might say, considering many traditional stock investors who have gone long with equities and indexes have yet to see black since 2008. However, if we are to consider a 2 year holding period, opportunity costs and management/switching fees into the equation, these performances don’t look the least profitable to me. Throw in the spanner of having to manage the emotional stomach churning experience of handling a 60% drawdown during those crazy times, i will say i demand to be paid more than 5% for my investment on the line.

So, this is considered a good portfolio with low risk and high returns?

Well, anyway, that is my opinion.

However, for one to say that forex investments/trading schemes are high risk, which have achieved consistent 20% p.a. min while suffering a 10% drawdown(even during the crazy market times) is high risk, i wonder what vocabulary best describes these “best performing funds” ?

Times are changing, but our mindset isn’t. If you belong to the crowd that agrees with the abovementioned article, i humbly request you to think again. Do what is right for your money, not for your mind, or so you are told to believe.

UK Retail Sales – 5:30 PM SGT – 25th Mar 2010

Dear Folks,

There are 2 news events today worth watching but i have more to contribute to the UK Retail Sales news event at 5:30 pm SGT than the 8:30 Pm US Unemployment Claims event.

UK and Eur as you already know are in a bit of hot soup lately. Last week alone, they have dropped close to 3% of their original value combined and further losses this week can only compound these figures.

As such, the market is in an heavily oversold state and after UK’s annual budget release yesterday, Chancellor Darling didn’t do much to hype up the cable(Gbp/Usd has already lost 80 pips since the announcement) and we can expect the sterling to be in doldrums and perhaps see even more downsside in the upcoming months. There are rumours even that the UK and the US would favour their currencies to be much weaker than they already are to keep inflation low and increase exports and production. Makes sense to me

Ok, back to the news event, as we are already in a very saggy oversold state, we will only be looking for a negative news to further short the sterling.

We will not be looking for a buy in this market condition.

Therefore, if the news trigger comes -1.4% and worse, i will suggest you to sell the Gbp/Usd and perhaps even the Gbp/Chf. Do not sell Gbp/Jpy as Jpy is really weak at this point in time.

If we get the number anything more than -1.4%, i.e. -1.3% and better, we will not be taking any trades.

Happy trading from Rainy Singapore,
Seeni

Live Trade Video – 23rd March 2010

I did a video as i traded the market live and gave my opinion and perspectives about all that i see on the charts.

If you like candlestick patterns, identifying a good trade setup and managing your positions, you definitely want to watch these videos.

Part 1

Part 2

Part 3

Drop me comments on what you think;