For subscribers and followers of the MultiStage Trading System (currently version 9 on CalculatedReturns.com), you will remember that one of our three exit types is a profit stop at 5%. It’s worth noting that 5% is no magic number. Take a look at the following short study:
As you can see, there are trade offs to moving this exit, and “better” is a function of what you are trying to accomplish. If getting the highest percentage of winners is important a 3% stop has historically worked out “better”. If Sharpe ratios are important to you, then higher exits work out better.
I personally look closely at the Ulcer Performance Index. This is a number which rewards bigger returns and penalizes drawdowns. For this number a higher exit, like 6% or 7%, is better. And for those of you bent on absolute optimization runs, the very best was 7% for short positions, and 6% for long positions. I suspect that’s a little curve-fit, however, as there really is no “magic number”.
Good Trading…
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