Why I Backtest Without Stops

First, look at these two charts each with a trade plotted on each:

Trade in EDR Endeavor Group Holdings stopped out but finishes strong
Trade in LAES SEALSQ Corp stopped out but finishes weak

Both of these trades were long and came from a system designed to hold all day and exit before the close.

Both hit the stop and therefore exited with a loss.

But, study each chart closely and notice what happened after the stop for the remainder of the day in each situation.

Now imagine you weren’t trading with a stop and you simply held each of these trades all day.

In the EDR trade, you’d end up with a strong profit.

In the LAES trade, you’d end up with a large loss.

Very different outcomes. Polar opposites!

Here’s the thing: when you backtest with a stop, you’re treating both of these situations as if they are equivalent.

But they’re not! Far from it.

This is one of many reasons I backtest without using a stop loss as part of my routine.

I want to make sure the rules I apply to a trading system are highly predictive and NOT dependent on any particular stop level.

Solely using a stop in your backtest hides these important details.

Here’s an exercise to try with your own backtest.

Run it with a stop as you normally have done.

But then run it once more without a stop, that is, with just a timed exit (e.g. exit at the end of the day, exit after X minutes, exit after X days, etc).

Save a list of trades from each backtest.

You should have the same number of trades in each file.

Now examine the trades that had the largest profit difference (either positive or negative) when using a stop versus not using a stop.

This will show you trades like the two examples shown earlier. (EDR would show a large positive difference while LAES would show a large negative difference)

If you’ve never tried this before, I almost guarantee you’ll learn something about your system that you can directly apply that will make it more profitable.

Give it a try and let me know what you uncover.

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