Changes In MIDD for 20-day CHBOC on Coffee

-20000 -22000

S

-24000 -26000 -28000 -30000 -32000 -34000 -36000

 

Initial stop ($)

Figure 3.4 As we loosen the initial stop, MIDD first increases and then stops de­clining.

56 Foundations of System Design

close at a profit as the stop widens. Eventually the stops are so large that they have little effect, and so MIDD stabilizes.

The initial stop cuts off fewer trades as we loosen it (see Figure 3.5), and hence the total number of trades produced by CHBOC de­creases. Once the stop is "too loose" (more than $3,000 or so), it has lit­tle effect, and the number of trades stops declining.

Only 5 percent of the trades are profitable with a $0 stop. The per­centage of winners increases quickly as we loosen the initial stop until the stop has little effect (see Figure 3.6). As we loosen the stop, more of the winning trades can survive the vagaries of market action.

As you may expect, the worst losing trade increases as we loosen the stop (see Figure 3.7, page 58). This occurs because the worst case with a $0 stop reflects slippage due to a weak opening. However, as we loosen the stop, the losing trade from a false signal can survive longer.

The highest average 10-day trading range in the coffee market over the last 20 years was approximately $5,025. The average value was $1,015 and the standard deviation was $641. The cumulative distribu-