Saturday, September 1, 2012

Skipping trade after a loss - a valid tactic?

My curiosity was piqued during my last entry, so once I woke up this morning, I fired up my backtest results on my daily range < ATR(14) * 0.5 low volatlity breakout system. I decided to see how my results would change if I skipped every trade after a loss.
There was little change with overall expectancy or win%. However, the frequency of my trades dimished quite a bit, so this tactic would still be harmful.
Some thoughts. My low volatility breakout system isn't very vulnerable to ranging conditions. You're most likely to get an entry signal just after a large movement when the market pauses to breathe. If price starts to range, ATR(14) will adjust and cease to provide entry signals.
I think skipping a trade after a loss may be useful if you're using a system that frequently triggers and fails during ranging conditions. Ranging markets can exist for prolonged periods of time, so you may avoid up to 50% of your losses with this "tactic". I'm not sure what other market conditions would suit this.

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