I came across this article and thought it had many parallels to this "Miller Cross" strategy. Some very interesting tidbits -- any emphasis, mine.
Read the whole (short, non-scholarly) article for the full gist.
It is from the blog of Dr Ernest Chan, author of Quantitative Trading
See link for full context and description of his point. But he ends with:You can find an interview of me in the July 2009 issue of Technical Analysis of Stocks & Commodities magazine. I mentioned in that interview and also in my book that I believe stop loss should only be applied to momentum strategies but not to mean-reverting strategies. I explained my reasoning better in my book than in the interview, and so I will paraphrase the explanation here.
In algorithmic trading, it is reasonable and intuitive that we should always make use of the latest information in determining whether we should enter into a position, whether that information is price, news, or some analysis. Let's call this the Principle of Latest Information. (If someone can think of a better or sexier name, let me know!) ...
http://epchan.blogspot.com/2009/06/my-i ... le-of.html(Now, if we hold this losing long position long enough, the model will incorporate new historical prices into determining its long or short signals as it retrain itself, as the Principle of Latest Information says it should! At that time, it may indeed recommend that we exit the previously held long position at a loss. But this adjustment takes place at a much longer time scale, and therefore cannot really be considered a stop-loss in its usual sense.)
More generally, I find that at every turn, and not only in the realm of stock trading, applying the Principle of Latest Information always help me to be disciplined and not be afraid to enter into new positions, take loss or endure a drawdown as the case may be.
Cheers,
Rick
[end /whining]
