Optimal stopping criteria for trading strategies?

mdlm · January 9th, 2006, 1:14 pm

What is known about how to determine whether a trading strategy should continue to be used or not?Over short periods of time a profitable strategy can look just like an unprofitable strategy so there is some tradeoff between prematurely stopping a profitable strategy and being too slow to stop a losing strategy. The goal is to maximize end wealth (or something like that.)Is there a name for the academic field that studies this? What are the most important papers?

jschnaz · January 9th, 2006, 2:47 pm

In academia there is no such thing as a "profitable trading strategy" ...In real life - this depends on the risk profile of the individual running the strategy. You should be able to work out (roughly) the expected return & variance of your strategy, and then from this work out the probability that a losing strip of a certain size and duration occurs. Then it's up to you and how confident you are ... Maybe your bank account will be empty by then. On trading desks there's usually someone to force you cutting losses at some point.