Using Trailing Stop Losses to Reduce Risk
August 11, 2008 - Technical Trading
Do stop-loss orders (automated position exits based on a cumulative loss threshold) enhance returns and reduce risk? In their 2008 paper entitled “The Value of Stop Loss Strategies” Adam Lei and Huihua Li investigate whether traders using stop-loss strategies to exit losing positions in individual stocks outperform a comparable buy-and-hold strategy. They test the following strategy alternatives: holding periods of three months, six months or one year; stop-loss thresholds of 5, 10 or 20 daily return standard deviations; reinvestment of stopped out positions in either the S&P 500 index or the one-month Treasury bill; and, a fixed stop price or a trailing stop price that follows stock price upward (but not downward). Using historical and simulated daily return data for a broad sample of NYSE/AMEX-listed stocks and random buy dates over the period 1970-2005, they conclude that: Keep Reading