Figure 4.13 The profits (upper line) increase as the initial money management stop is loosened. Eventually, the stop is too wide and profits begin to level off. The lower line is the maximum intraday drawdown. Data are for the U.S. bond market.
same period as Table 4.1. Other calculations (not shown) show that the largest winning trade is affected only a little by the initial stop, since these trades usually are profitable from the very beginning. You may set a volatility-based stop or a hard-dollar stop with equivalent results. You may have to set a different dollar stop for each market, although you could use the same volatility stop across all markets. Note that with a volatility stop, the actual dollar amount changes over time, aad hence you must ensure that this stop is within your overall hard-dollar limits for risk control.
You should note some limits on how the initial money-management stop can be tested. In most cases, the amount of the stop must be larger than the daily trading range. The software cannot determine if your stop could have been hit intraday if the stop is smaller than the daily trading range. Unless you have intraday data, you cannot test the effect of, say, a $250 stop using daily data.
The 65sma-3cc Trend-Following System 93