Using Stops as Entry Filters

Stops can begin controlling risk before a trade is entered as well as during a trade. The following two examples compare using stops only as exit strategies and then again as both entry and exit strategies.

In the gold trading system below, the first example uses stops only as part of the system's exit strategy. In this example, stops only control risk after a trade is entered.

In this example from the same system, stops are used to control risk before the trade is entered. If the potential stop loss for the trade is greater than a pre-designated risk amount, the trade isn't taken - essentially, the stop fires before the trade is even put on!

The second system with the risk-controlling entry stops - the system that took only the lower risk trades - actually made more money! As a matter-of-fact, it did better in almost every statistical category between the two systems. (The system was tested from 1/1/2002 - 3/11/2009).

The above examples show that stops can be used to control and filter risk before a trade is even entered in addition to their more traditional role controlling risk once a trade is entered.

Henry Carstens
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