One favorite "gotta have" of many traders is a breakeven stop. By not letting a winning trade become a loser, the psychological lure of breakeven stops is strong. This is especially true for discretionary traders, where the winning percentage can play an important mental not necessarily financial role. The answer for automated traders may be different, though. If breakeven stops hurt performance in the long run, then what use are they?
And if they help, are there any key aspects of these stops that improve trading? This article will provide a framework for evaluation breakeven stops, along with a few examples.
Remember though, to evaluate any conclusions with your own research on your own systems. Obviously, if this stop is immediately deployed after entry, the trade will almost certainly be quickly exited.
How to take Partial Profits and Move you Stoploss to Breakeven
So, a "ceiling" amount is frequently employed with this type of stop. The breakeven stop is not activated until the profit level breaks through the ceiling note that some platforms may consider this a "floor" amount, but nevertheless the point is still the same - the stop should only be activated once a certain profit threshold is exceeded.
One common variation of this is to include commissions in the breakeven, and even possibly a tick of profit. In that case and assuming no slippagethe final profit would be 1 tick minus commissions. Adding It Into Code Most platforms have a built in function for breakeven stops.
How to Figure Out The Right Time to Move Your Stop-Loss to Breakeven
As an alternative to using that, we will use the following code for Tradestation: Maxpositionprofit is a Tradestation reserved word that holds the maximum profit in the position. Entryprice is another Tradestation reserved word, and is simply the price the trade was entered at.
This code can easily be modified to move from a breakeven stop to a stop with a small profit. It could also be modified so that the threshold is based on recent volatility, instead of a fixed dollar amount for the whole test period.
Note that as written, this code will not be stop in trading and breakeven until the 2nd bar after the entry bar. More experienced stop in trading and breakeven can easily modify this code if that is not desired. As designed, it does NOT have a breakeven stop in it. But what if I included one?
Of course, this is an optimized result, so it is probably optimistic. But, again remember that I am comparing an optimized result to an unoptimized result.
The Break-Even Stop
It has, however, performed very well over time. Figure 4 below shows the equity curve for this strategy. While this seems like a good result, remember that it is the result of an optimization and stop in trading and breakeven walkforward strategy developed with a breakeven stop would have worse performance. It might, however, be worth investigating.
Conclusion So, do breakeven stops work, or not? In the two examples I show, the breakeven stop was not enough of a game changer to warrant its inclusion based on profit alone. In the second example, the decrease in maximum drawdown was significant enough to get our attention. But, since the breakeven results were optimized, it is impossible to say that the good results are meaningful although where the results are poor, we can conclude breakeven stops are not helpful since they were based on best case optimization.
Perhaps if I had the breakeven stop included from the start, it would have been more useful. Even with that a breakeven stop needs to really have an impact, otherwise it is just another rule that can aid in curve fitting without providing much help in real time.
In general, the key with developing a strategy, I have found, is to keep the number of rules and parameters as low as practical. Strategies with 4 rules tend to work better going forward than strategies with 40 or rules. I also recommend walkforward testingto provide as much out of sample data as possible.
Since that is generally true, the developer has to seriously question whether having a breakeven stop is worth the cost of having it. In the cases I show it is probably not.
Trading misconceptions (I): Moving stop loss to break even
But, for different systems, the results may be good enough to include a breakeven stop. Using the analysis framework I showed in this article, a strategy developer can easily determine for himself if having a breakeven stop is worth the expense. He has been trading for over 25 years. All Rights Reserved.
Better yet, it is never logical nor strategic to move your stop loss to breakeven.
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When to Move a Stop Loss to Break Even
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Moving Stop Loss To Breakeven +1? Consider This Before You Do.
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