A flexible stops function, StopsFlexible. has been previously described. This was developed to allow a single function to calculate a wide variety of stop values. The same function was also used to create a StopsFlexible indicator.

In this post, the function has been used to create a corresponding StopsFlexible strategy.

The benefits of doing so are worth enumerated again.

Advantages of Using: StopsFlexible (Function, Indicator and Strategy)

1. Coding duplication is markedly reduced, lessening the possibility of errors and making code maintenance more efficient.
2. When used in a chart, the type of stop can be varied by simply changing an input parameter. This is more convenient than manually locating and inserting a new indicator from a large collection of stop indicators.
3. Indicators using function StopsFlexible can display the differences in behavior of several different types of stops simultaneously, giving the user a graphical representation of each on the chart and visually revealing their unique behaviors. Such a graphical comparison assists in the selection of the most appropriate stop without the need for formal backtesting.
4. When used in a strategy, optimization can exercise many types of stops using StopsFlexible. not just a single type of stop. In this manner, the best type of stop can be determined for the trading system being tested rather than only varying the distance of a single type of stop from the price reference.
5. Blended Stops can can easily be created. For example, one blended stop could be: the sum of 1% of price plus 1.5 ATR units. Optimization can test blended stops efficiently to determine if the unique characteristics of blended stops can extract more profit from a trading system than traditional stops.

Which Stop is Best?

The StopsFlexible Strategy now provides a tool to answer that question. Not only can the magnitude of the stop be varied by the strategy optimizer. but the type of stop can now be varied. Complex blended stops can also be tested to determine if they have merit in trading systems.

Can A Trailing Stop Be the Basis of a Trading System?

The following screen shows a simple trading system based on an 1.5 Average True Range ratchet stop:

Figure 1. 1.5 ATR Trailing Ratchet Stop on Gold Futures

The strategy performance report for a 10 year period follows:

Figure 2. Equity Curve — 1.5 ATR Trailing Stop Reversal System — Gold Futures — 10 years

The performance summary is shown below:

Figure 3. Strategy Performance Summary -1.5 ATR Trailing Stop Reversal System — Gold Futures — 10 years

Are Stop Reversal Trading Systems of Value?

The equity curve for gold above was a bit ragged but nevertheless showed some promise as a potential trading system. Optimizing the same system for S&P futures, however, failed to produce acceptable results:

Figure 4. Equity Curve — 1.7 ATR Trailing Stop Reversal System — S&P500 Futures — 10 Years

Further testing and optimizing the system in several other markets similarly failed to yield any consistent results. Most equity curves exhibited long periods of sideways movement or erratic behavior. I suspect that the behavior with Gold was an aberrancy and therefore would not recommend trading such a system.

Trailing stop reversal systems would be expected to perform reasonably well in strong trending markets and be penalized with whipsaws in sideways markets. If a good function were available to discriminate trends from sideways movement to filter the trades, a trailing stop reversal trading system might be more useful.

In fact, discriminating trend from non-trending markets, and doing so quickly without much lag, is an important component of almost all trading systems since the desired direction of the trade in a trending markets (with the trend) is the exact opposite of the appropriate direction in sideways market (counter trend).

I have always been curious to see if a trailing stop existed that would make a good reversal trading system. Now that a tool is available to test this further, I would encourage others to continue this exploration.

StopsFlexible as an Exit Strategy Only

The StopsFlexible Strategy was not originally intended to be a trading system in itself. That capability was only an afterthought facilitated by adding two additional input parameters to the strategy: