Net Profit Results of Fixed Stops and Targets

Jun 4, 2008: 8:18 AM CST

Earlier, I’ve been revealing results of my recent studies into the relationship of fixed stop-losses and fixed profit targets, and how the affected win rate.  Now it’s time to see what the effects were on Net Profitability!

Revisit the previous posts for full study details:

Revisiting Stop-Loss and Profit Target Affect on Win Rate

Does a 95% Win Rate Result in Net Profitability?

Quick Recap:

DIA daily from 1998 to present, testing three long-only entry strategies:

Momentum
MACD
20 period SMA Cross

Each trade was 100 shares and assumed $4.00 in commissions and slippage.

The following are the relationships of Net Profitability of the Relationship – Stop-Loss fixed values (in $1.00 increments, or 100 Dow Points) are on the bottom with Fixed Profit Targets also in $1.00 (100 Dow Points).

Keep in mind that a “Buy and Hold” strategy would have returned around $5,500 in overall profit (trades = 1)

Let’s look at the Momentum Surface Relationship Chart:

The Momentum strategy was the most profitable of the three (which helps confirm the axiom “Momentum Precedes Price”), and there were a few peaks (in light green) that almost beat the Buy and Hold Strategy estimates.

Most of these values were in the $6 Profit Target with a $8 stop-loss.  That was the general area of the relationship where the highest concentration of Net Profitability was found (likely because of the higher number of trades generated).  I’ll discuss absolute profit values in a future post.

Next, let’s look at the classic MACD Crossover Study:

We see that we get into more trouble here with the MACD study, because a larger than normal portion of the chart results in a negative outcome (the bright red).  In fact, where the Momentum study was profitable, the MACD study directly was not (was weakest).

In fact, the largest net profit (the highest value of which was $7,135 with a target of $15 and a stop at $1) was concentrated in the lower stop-loss levels with a corresponding target of $15.  Any target near the $15 area did well with a correspondingly lower stop, which would be what we expect.

Finally, let’s view the 20 period simple moving average cross-over study:

Again, we see a large concentration of ‘red,’ meaning negative net profitability at the lower range of the chart with small stops and small profit targets.  Notice the band of green that occurs when the target is $2.00 and the stop is anywhere between $8.00 and $20.00.

Once again, the highest value occurred near the $15 target with stop from $3 to $6, which was similar to the MACD Cross strategy, which makes sense because the MACD strategy is similar to the MA Cross (only the strategy technically uses a dual-crossover).

Nevertheless, the highest net profit of $4,860 occurred with a target of $17 and a stop-loss of $19, which is absolutely not a feasible strategy at all (it only generated 5 trades in a 10 year period and had an 80% profitability rate).  Even then, it didn’t beat the buy and hold estimations.

Now that you can view the broader relationship based on the relationship between a fixed dollar stop-loss and profit target, we will begin to explore these matters deeper in upcoming posts.

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