Friday, October 24, 2014

Controlling Risk with Stops....10.24.14

Most traders (and investors) hate to give back recent market gains and at the same time want some sort of hedge against the drawdowns accompanying the recent market mini-crash.  Option spreads is one approach to this end but in the M3 model we use both an Auto-Stop, which filters out trades with a low probability of follow through, and discretionary stop-loss stops which seek to retain gains and mitigate significant losses.  We could also add a trailing stop but that feature is really most appropriate for day traders.  The discretionary stops that we use are simply to establish a risk benchmark and, since we are not investment advisors, are shown simply as one example of a risk containment strategy.  In live market conditions traders can apply the posted discretionary stops, modify or ignore them completely. Actual trading returns will vary accordingly.  The Auto-Stop feature is turned on by default and its filter will always be factored into the posted model returns.
Here are the 3 month returns for various M3 risk models>>>>>>>
Also see previous post on this subject.

Returns with both Auto-Stop and discretionary stops exercised.

Returns with only Auto-Stop on.

Returns with no Auto-Stop and no discretionary stops,