About Beyond The Charts

Welcome back to the Trade Risk’s educational series, Beyond the Charts. It is designed to give you insights into our research process, which for nearly a decade has helped fine-tune our expertise and products, such as the market-beating Merlin and Lamorak trading systems.

We hope the technical tools and code we’ll share with you throughout this series will help you become a more informed investor and, please note, the conclusions we draw throughout this series should be seen only as a starting point to additional independent research.

 

Today’s experiment

In this episode, we’re diving into stop losses, specifically, we will be comparing two stop loss approaches: intraday (real-time) and end of day stop losses. The question we are setting out to answer is: which is better for traders to use: intraday or end of day stop losses?
 

What are intraday and end of day stop losses?

Let’s begin by first defining what a stop loss is. A stop loss refers to the point at which a trader is going to exit a trade when the trade does not move in their favor. Most traders will enter their stop loss with their broker using stop limit or stop market orders.

An intraday stop loss is what most of us think of when we think of stops. When a stock violates your stop loss intraday (real-time) the order is executed and you will exit the trade immediately.

The end of day stop loss is a bit different. It means, we need to see the market close the day beyond the stop loss level before taking action. If the stock closes beyond the stop loss, you will exit the position at the next market open.

Today, we are going to run backtests to determine which approach, intraday or end of day stop losses, is better to use.
 

Tools & resources used in this experiment

• NinjaTrader 8: This is the backtesting platform we’ll be using to generate our signals and test our strategy.
• Microsoft Excel: After we run our strategy in NinjaTrader, we’ll export the reports to Excel and analyze results.
• Norgate: This is where our data comes from for this experiment and it’s our recommended source for building and testing strategies (affiliate/referral link).
• Github: All of the strategy code can be found and downloaded here.

The in-depth tutorial

The following video lesson is where we go into all of the detail explaining the experiment, showing the code, and using our various tools and programs. If you want the in-depth walkthrough, we recommend continuing from this point on with the video. We also have timestamps in the description of the video in case you want to jump around.

How we set up the strategy backtests

We ran 3 backtests for this experiment, piggybacking on the strategy code we set up in episode 2, Is Buying Stocks Trading at 52-Week Highs a Profitable Trading Strategy? We used the same 52-week high trading strategy with various trailing stop loss distances to compare intraday and end of day stop loss profitability.

1% trailing stop loss backtest

In out first backtest, we used a 1% trailing stop loss.

Here are the results for intraday and end of day stop losses. The first image (left) is end of day results and the second image (right) is an intraday stop loss.

Not sure how to interpret some of these measurements? Head on over to our trading system performance glossary.

Using cumulative R to measure total return, we see that both versions produce negative results, however, on a relative basis, the end of day stop loss is much more profitable (i.e., lost a lot less).
 

5% trailing stop loss backtest

In the second backtest, we used a 5% trailing stop loss. Here are the results. The first image (left) is end of day results and the second image (right) is an intraday stop loss.

Using cumulative R to measure total return, results for these strategies are profitable, and once again, we see that end of day stop losses resulted in more profits.
 

40% trailing stop loss backtest

In our final backtest, we increased the trailing stop loss to 40%.

Here are the results. The first image (left) is end of day results and the second image (right) is an intraday stop loss.

Using cumulative R to measure total return, we see that 40% intraday stops losses were the winner, producing more profits on a relative basis. One important note, because the stops were so wide, this strategy continued to hold a full basket of positions until the last day of our backtest, which makes the way we measure results a bit more difficult to assess.
 

Which is better intraday or end of day stop losses? 

In 2 out of the 3 backtests, we found end of day stop losses to be more profitable. However, it’s worth noting again, our tests were not rigorous across thousands of different strategies and timeframes, so what we have is just a small sample of evidence. Here are some of the big takeaways:

End of day stop losses act as a noise filter. Throughout the day, stocks can be extremely volatile, but by the end of the day, the dust settles, and the chart shows a much clearer picture.

It’s because of this, end of day stop losses help prevent a trader from getting stopped out during the intraday volatility and retain a bit more of their trading profits. The downside is that you will be much slower to react if things go south since a big drop intraday will have you waiting until the the next market open until you can finally get out.

On the intraday stop loss side, the biggest benefit is that you will get out when and where you want to get out. You can even set up good to cancel (GTC) orders if you don’t have the time to watch the stock market throughout the day. The biggest downside to intraday trading is that it is prone to whipsaws. You could easily be exiting the trade too early only to see the stock rebound aggressively without you.

While conducting this experiment, we also had a couple of additional takeaways on how to decide which method might be right for you. This is something we discuss more in the video, but here’s a quick takeaway slide:

I hope you enjoyed this month’s experiment.

Were these results surprising to you? Do you use intraday or end of day stop losses? I’d love to hear your feedback and thoughts in the comments below.