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For purposes of this quiz only, assume that the stock has been rising every
day. In other words, each bar is higher than the previous one. [This
simplifies things, otherwise the low of "x" days - where x could be 4, 7,
10, or whatever - could potentially be the lowest low of last 20 days and I
wanted to avoid that variable.]
What happens on the next trading day is not relevant - whether the stock
goes up again or has a huge fall is not relevant. The question is which
trader is setting his sell stop correctly. The simple sell rule is "sell
when the stock makes a 20-day low" - a common condition that many traders
follow or something similar to it [Remember the Turtles? One of their buy
(short) criteria was a stock making a 20-day High (low)]. If you follow
something similar in your own trading, or came across a system that had this
as its sell rule, you may make the same the same mistake that 2 of these 3
traders are making - and this of course will violate the rules of the system
or your own trading! And the quiz is merely to illustrate this point - how
even simple things may be misinterpreted.
In the quiz, there are 3 hypothetical traders that interpreted this simple
rule 3 different ways but there can only be *one* correct answer.
There is a catch in the quiz which experienced traders will (hopefully) see
through. Believe me, the answer is *not* difficult and it *is* one of those
3 traders. Question is - which one? Answer in a couple of days.
Shashi
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Date: Sun, 21 Oct 2001 22:48:30 +0200
From: Frans Derksen <fjderksen@xxxxxxxxx>
Subject: Re: A tale of 3 traders...
Yes i think so too. And this low could be day 4 or 5 or 10 or whatever in
this example.
Why should day 20 be the lowest low in 20 days ?
Frans
At 12:12 PM 10/20/2001 -0400, you wrote:
>Shashi,
>
>Tell me if I am wrong but to me a 20 day low is the lowest price in the
>last 20 days.
>
>Holland
>
>Shashi Aggarwal wrote:
>>
>> Here is a little quiz. Its mainly for the benefit of less experienced
>> traders on this list. Since I devised this quiz myself, its not too
>> difficult ;-) By the way, this is how many people trade and make simple
>> mistakes.
>>
>> For purposes of this quiz, we will assume that the last bar (today)
>> displayed in a chart is bar 1, the one before that (yesterday's) is bar
2,
>> the one before that is bar 3, and so on.
>>
>> There are 3 traders - A, B and C. They all have day jobs and when they
come
>> back home from work, they download the latest data and then look at the
>> daily charts of their stock holdings on their computers (in Metastock!)
>> Based on this, they then go to their brokers' websites and place
appropriate
>> orders. e.g. based on the chart, they update their sell-stop price daily.
>>
>> Lets say all 3 have a long position in a particular stock which has been
>> climbing steadily. They have only one sell condition - namely, sell when
the
>> stock makes a 20-day low. This is what they do:
>>
>> Trader A - he chooses the low price of bar 20 (latest bar is bar 1, one
>> before is bar 2...see above) and selects that as his sell-stop
>> Trader B - he chooses the low price of bar 19 for his sell-stop
>> Trader C - he chooses the low price of bar 18 for his sell-stop
>>
>> Which trader is right? Remember, the sell condition is "sell when the
stock
>> makes a 20-day low". Answer tomorrow.
>>
>> Shashi
>
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