My Interview, Terminate Loss, As Well As The Regulation Of Latest Information

You tin sack detect an interview of me inward the July 2009 number of Technical Analysis of Stocks & Commodities magazine. I mentioned inward that interview as well as too inward my book that I believe halt loss should alone endure applied to momentum strategies but non to mean-reverting strategies. I explained my reasoning improve inward my majority than inward the interview, as well as and then I volition paraphrase the explanation here.

In algorithmic trading, it is reasonable as well as intuitive that nosotros should ever brand role of the latest data inward determining whether nosotros should acquire into into a position, whether that data is price, news, or roughly analysis. Let's telephone holler upward this the Principle of Latest Information. (If soul tin sack recall of a improve or sexier name, allow me know!)

So let's tell nosotros receive got a stock model based on cost momentum, as well as nosotros entered into a long lay based on a recent positive supply on price. Influenza A virus subtype H5N1 few minutes later, the cost went downward instead of up, causing a big loss on our position. If nosotros instantly ran this momentum model again, real probable it would enjoin us to brusque the stock instead because of the recent negative supply on price. If nosotros did that, nosotros would endure exiting the previously long lay as well as became flat. This is inward number a halt loss, as well as it follows strictly from adhering to our model as well as our Principle of Latest Information.

In contrast, suppose nosotros instantly receive got a stock model based on mean-reversion, as well as nosotros entered into a long lay based on a recent drib inward price. Influenza A virus subtype H5N1 few minutes later, the cost went downward farther instead of up, i time again causing a big loss on our position. If nosotros instantly ran this mean-reversion model again, it would definitely enjoin us to purchase the stock i time again because of the ever cheaper price. The model would non inquire y'all to run out this lay as well as receive got a loss. Hence, adhering to the model as well as the Principle of Latest Information volition non Pb to a halt loss for a mean-reverting model.

(Now, if nosotros concord this losing long lay long enough, the model volition contain novel historical prices into determining its long or brusque signals every bit it retrain itself, every bit the Principle of Latest Information says it should! At that time, it may indeed recommend that nosotros run out the previously held long lay at a loss. But this adjustment takes house at a much longer fourth dimension scale, as well as thus cannot actually endure considered a stop-loss inward its park sense.)

More generally, I detect that at every turn, as well as non alone inward the realm of stock trading, applying the Principle of Latest Information ever assist me to endure disciplined as well as non endure afraid to acquire into into novel positions, receive got loss or suffer a drawdown every bit the illustration may be.