Day CHBOC with varying initial stop

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Initial stop ($)

Figure 3.3 Profit increases steadily and then levels off as the initial stop in­creases.

Initial Stop: Solution or Problem? 55

The system sells short on the close if today's close is lower than the low­est low of the past 20 days. We will test this system on the coffee market, which has seen much volatility as well as strong trends. We will vary the initial stop from $0 to $8,000 in $500 increments and allow $100 for slippage and commissions.

Consider for a moment what the $0 initial stop means. The system goes long or short on the close. Thus, the trade will remain open only if prices continue to move strongly beyond today's close. This is the toughest stop you can impose because the only trades that survive are the ones that are profitable immediately.

Observe that profits increase steadily as we loosen the initial stop (see Figure 3.3). There was a surprising profit of $158,103 with a $0 in­itial stop on just 20 (of 434) trades. This confirms a common piece of market wisdom that the best trades are profitable immediately. It also confirms that only 5 percent or so of the trades are the "big ones." So you should work hard not to miss them.

Figure 3.4 shows that a tight stop can produce a drawdown greater than using no stop at all. More and more trades recover their losses and