Stops can hurt...

One of the questions that comes up about the MultiStage Trading System is whether I use stop-loss orders to limit losses. Most people believe that traders aren't traders unless they employ stops. I disagree. This may work for day traders, but stops do nothing to help you against overnight losses except lock in huge losses. All of that, however is just an idea, and I don't work well with ideas. So lets quantify the impact of a trading tactic a bit.

Here is the simple reason I don't use stops: They reduce my overall return and do very little to reduce drawdowns. I back-tested the system using the 500 stocks of the SP500 over a 10 year period. I reran the tests at several stop levels and below are the results.

In my mind, this paints a very clear picture. It's easy to see why I don't use stops. In some ways we might live with lower win rates and lower CAGR if the overall risk was reduced. But as you can see, drawdowns barely move. For some people trading without stops is simply unacceptable, but for me it's the only acceptable way to trade.

Good Trading...