Posted By: Hersh   Date: Sun Jun 8, 2008

Title: Stop Loss Still Recommended?

Message:
  Problem with this particular call was "how to handle the drawdown." I too am pleased the model eventually "bent" back into shape. But I thought you were recommending trading the signals with a stop-loss. If so, how could one have taken advantage of this particular short signal that went against you for nearly 8%? Would also be helpful to address the following: When you switch to or release new versions, please report on the data page what the "worst drawdown" was. Also perhaps a table with probabilities. For example,
  Drawdown Probability
  1% 60%
  2% 52%
  3% 40%
  4% 31%
  5% 22%
  6% 13%
  7% 8%
  8% 5%
 
 
  The above is just a fantasy example. You show show what what the ACTUAL backtest data shows. Thanks
  Hersh

Response:
  First, let me say that it is very important to set stops. The market will do unexpected things and the forecast model will make mistakes. Your concern when making any investment should be to protect your capital against unexpected losses.

  I did at one time publish a trailing stop value. The problem with this is that not everyone has the same tolerance for risk. Financial conditions vary among investors. For me, I have gone to a 8 percent trailing stop. More conservative investors might only consider half of that. The recent drawdown was just over 6 percent. That's a lot for most people, including me.

  I do keep previous model data. Send me an email and I will be glad to send you the results of any previous versions. I will start including drawdown data on the next web page update.