{"id":2027411,"date":"2015-06-28T18:08:48","date_gmt":"2015-06-28T12:38:48","guid":{"rendered":"http:\/\/stockviz.biz\/index.php\/?p=2027411"},"modified":"2015-06-28T18:08:48","modified_gmt":"2015-06-28T12:38:48","slug":"stop-loss-and-re-entry","status":"publish","type":"post","link":"https:\/\/stockviz.biz\/index.php\/2015\/06\/28\/stop-loss-and-re-entry\/","title":{"rendered":"Stop-loss and Re-entry"},"content":{"rendered":"

Introduction<\/h3>\n

A trailing stop<\/a> is a percentage below the most recent high at which you exit a trade. It allows you to lock-in gains while avoiding catastrophic loss. There are lot of opinions about where these should be set. And more importantly, when to re-enter. What follows is a discussion on how different stops and re-entry rules affect trading frequency and returns. <\/p>\n

We will consider time-series from 2010 through now on the NIFTY, BANK NIFTY and CNX MIDCAP indices. During this time, the cumulative buy-and-hold returns were 61.47%<\/strong>, 104.81%<\/strong> and 75.61%<\/strong> respectively.\t\t<\/p>\n

A simple 5-3 Rule<\/h3>\n
\n“A good plan violently executed now is better than a perfect plan executed next week.”
\n– George S. Patton\n<\/div>\n

To get us started, we propose a trailing-stop loss at 5% and a re-entry rule that triggers when the index covers 3% from the lowest level since exiting the trade. This rule significantly increases returns and reduces draw-downs across all indices.<\/p>\n

\"nifty.stop-loss.2010.5.3\"<\/p>\n

\"bank-nifty.stop-loss.2010.5.3\"<\/p>\n

\"mid-cap.stop-loss.2010.5.3\"<\/p>\n

\n
\n\n\n\n\n\n\n\n
Index<\/th>\n#trades<\/th>\ncum. returns<\/th>\n<\/tr>\n<\/thead>\n
Nifty<\/td>\n139<\/td>\n366%<\/td>\n<\/tr>\n
Bank Nifty<\/td>\n209<\/td>\n2291%<\/td>\n<\/tr>\n
Midcap<\/td>\n159<\/td>\n382%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n
\nThe boost in returns come at additional trading costs. And even though the average number of trades work out to less than one a week, there maybe periods where it might trigger every day.\n<\/div>\n<\/div>\n

The 5-3 Trading frequency<\/h3>\n

Let’s plot the days on which this rule triggers (both buys and sells.)<\/p>\n

\"nifty.stop-loss.trades\"<\/p>\n

\"bank-nifty.stop-loss.trades\"<\/p>\n

\"mid-cap.stop-loss.trades\"<\/p>\n

By the looks of it, the stop-loss and re-entry bands are too narrow.<\/p>\n

The 10-5 Rule<\/h3>\n

Suppose we set the trailing-stop loss at 10% and re-enter when the index covers 5%, we end up with a strategy with lower number of trades and yet, better returns and buy-and-hold.<\/p>\n

\n
\n\n\n\n\n\n\n\n
Index<\/th>\n#trades<\/th>\ncum. returns<\/th>\n<\/tr>\n<\/thead>\n
Nifty<\/td>\n50<\/td>\n100%<\/td>\n<\/tr>\n
Bank Nifty<\/td>\n103<\/td>\n536%<\/td>\n<\/tr>\n
Midcap<\/td>\n66<\/td>\n162%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n
\nLower trading but lower returns as well.\n<\/div>\n<\/div>\n

Returns:<\/strong>
\n\"nifty.stop-loss.2010.10.5\"<\/p>\n

\"bank-nifty.stop-loss.2010.10.5\"<\/p>\n

\"mid-cap.stop-loss.2010.10.5\"<\/p>\n

Trading Events:<\/strong><\/p>\n

\"nifty.stop-loss.trades.10-5\"<\/p>\n

\"bank-nifty.stop-loss.trades.10-5\"<\/p>\n

\"cnx-midcap.stop-loss.trades.10-5\"<\/p>\n

Trailing stop-loss and re-entry scenarios<\/h3>\n

The master list of different strategies, their trading frequencies and cumulative returns.<\/p>\n

\"trailing<\/p>\n

Conclusion<\/h3>\n

Having a trailing stop-loss and re-entry strategy enhances returns but at the price of increased trading frequency. No combination of strategies can escape the doldrums – where the index is basically flat and you are getting whipsawed. <\/p>\n

With a 15% tax on short-term gains, over the 5-year period, you should handicap strategy returns by 75% to do an apples-to-apples comparison on the tax-free buy-and-hold returns. If you use the 10-5 rule, it means you will only come-out ahead trading the Bank Nifty. So you are better off with the 5-3 rule given where trading costs stand.<\/p>\n","protected":false},"excerpt":{"rendered":"

Introduction A trailing stop is a percentage below the most recent high at which you exit a trade. It allows you to lock-in gains while avoiding catastrophic loss. There are lot of opinions about where these should be set. And more importantly, when to re-enter. What follows is a discussion on how different stops and … <\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3471,9],"tags":[2761],"class_list":["post-2027411","post","type-post","status-publish","format-standard","hentry","category-investing-insight","category-your-money","tag-quant","entry"],"_links":{"self":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts\/2027411","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/comments?post=2027411"}],"version-history":[{"count":0,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts\/2027411\/revisions"}],"wp:attachment":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/media?parent=2027411"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/categories?post=2027411"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/tags?post=2027411"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}