Trading Basics: Evolution of a Trader

TESTING SIX STOP TYPES

To test the various types of stops, I used 570 stocks from March 20, 2000, to July 9, 2007, yielding sample counts (trades) that ranged from 16,150 to 24,625. Not all stocks covered the entire period. The S&P 500 over that period made a long V-shaped bottom, beginning and ending near the same price. If you were to buy and hold throughout the period, you would have nothing to show for the risk. The stocks used are those that I follow on a daily basis and they range from small to large cap, low to high price.

I used a simple moving average crossover scheme as the method to test stops. Here are the rules.

• Buy when the closing price crosses from below to above the 50-day simple moving average of daily high prices. Buy at the opening price the day after the signal.
• Sell when the closing price crosses from above to below the 50-day simple moving average of daily low prices. Sell at the opening price the day after the signal.
• Exclude trades with closing prices below $1 at purchase time.
• Buy $10,000 worth of shares for each trade.
• If a stop is used, trail the stop upward, never lowering the stop price. If price hits the stop, the trade exits at the lower of the stop price or the day's opening price. For example, if the stock gaps open below the stop price, the sell order fills at the opening price and not the stop price.
• Commissions, slippage, and other fees were not included.

The use of daily high and low prices helps prevent whipsaws, that of a trade ending a ...