Trading Without A Backstop, Part 2 by Anthony Trongone, PhD, CTA, CFP
Placing protective stops affects your trading performance
in good and bad ways. Should you or shouldn’t you use
them? Here in part 2 of this series, we take a look.
Despite the consensus of trading literature advocating the
use of a protective stop-loss order, so far, this analysis
does not appear to support this statement. In part 1 of my
study published last month in the August 2013 issue of
Stocks & Commodities, I examined the results of taking a
long position from 9:30–10:30 am (that is, in the opening hour
of trading) and the effect of using certain percentage stops.
Here in part 2, I’ll expand on the earlier analysis.
In the previous study, I took a long position in the spiders
(SPDR S&P 500 ETF Trust) at 9:30 am, along with a stop-sell
order at various percentages below this opening (9:30 am)
price. If the stop order did not fill, I promptly offset the long
position at 10:30 am ET.
The findings in the study I will present here expand the earlier
analysis from 743 to 764 trading days (June 1, 2010–June
12, 2013) to once again obtain the performance results. Since
most active traders do not enter into trading decisions blindly,
I began experimenting using a stop order with various trading
systems. Last month in part 1, I ran an analysis using early
morning volume (7:30–8:30 volume greater than two million
shares) to assess the effect on trading the spiders (SPY) in the opening hour. Despite the $3.32 loss in
165 trading days, when using a 0.25% stop
(below the 9:30 price), there were just 98
stop fills but a profit of $2.27. When this
same condition was present, a 0.50% stop
(below the 9:30 price) resulted in 64 stop
fills, but it produced a loss of -$5.39.
The benefit of applying a stop order to a
long position is already questionable; however,
it gets even more complicated because
the question of what percentage to use when entering a protective
backstop can make the difference in your bottom line.