Trend-Following Tradeoffs Between Dynamic Stops, Volatility Control, and Skew
Summary
The post compares a stateless trend-following approach with trade management that changes as a position develops. It describes a test system using a moving average signal, volatility-scaled positions, and stop losses. Dynamic volatility control resizes positions as volatility changes and adjusts stop distance in tandem; dynamic stops widen as a trade accumulates profit, according to profit measured in volatility units. The author also suggests measuring trend strength as a way to vary stops without relying on a trade’s past profit and loss.
The reported results show a tradeoff: volatility control improves Sharpe ratio while reducing positive skew, whereas dynamic stops increase skew but can substantially reduce Sharpe ratio. The skew effect is much stronger in trade-level profit and loss than in weekly or monthly returns. These findings come from the author’s particular system and parameter choices, and the post acknowledges that other trend followers may use milder settings. It presents the methods as choices shaped by risk preferences, not a universally optimal design.
Key ideas
- Volatility targeting changes position size as volatility changes and should be paired with corresponding stop-distance adjustments.
- Profit-sensitive dynamic stops can widen after gains, potentially improving trade-level skew while lowering Sharpe ratio.
- The measured impact of stop design on skew depends on whether results are evaluated per trade or over calendar returns.
- Volatility control and dynamic stops express different tradeoffs between Sharpe ratio and skew.
- The results depend on the tested system and parameters, so they do not establish a universal trend-following rule.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.