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The table below shows the results of the use of a trailing stop-loss strategy.Īs you can see the highest average quarterly return (Mean = 1.71%) was obtained with a 20% trailing stop-loss level limit. What is really helpful is they tested stop-loss levels from 5% to 55%. When a stop-loss limit was reached, the stocks were sold and cash was held until the next quarter when it was reinvested. Investments were made on the first trading day of every quarter (starting January 1998). This is a short test period but it included the bursting of the internet and the financial crisis. They compared the performance of following a trailing and normal stop-loss strategy to a buy and hold strategy on companies in the OMX Stockholm 30 Index over the 11 year period between January 1998 and April 2009. buy and hold strategy, published in 2009 by Bergsveinn Snorrason and Garib Yusupov. The second research paper was called Performance of stop-loss rules vs. Research study 2 – Performance of stop-loss rules vs.

To find investment ideas that fit your investment strategy - Click here For a better stop loss level look at the next research studies. This was most likely because the stop loss level was set too low. This was because it got back into the stock market too quickly after the technology bubble crash. If the researchers excluded the technology bubble (used data from Jan 1950 to Dec 1999) the model worked even better. This shows you that the stop-loss was not just triggered by a small number of large market movements (crashes). They also found that the stop-out periods were relatively evenly spread over the 54 year period they tested. Over the whole 54 year period the study found that this simple stop-loss strategy provided higher returns while at the same time limiting losses substantially. The researchers found that when the model was invested in the stock market it gave higher return than bonds 70% of the time, and during stopped-out periods (when the model was invested in bonds), the stock market provided a higher return than bonds only 30% of the time. When a 10% loss was exceeded the portfolio was sold and the cash invested in long term US government bonds.Ĭash would be moved back into the stock market once the 10% fall in the stock market was recovered (the 10% stop-loss was recovered). The strategy used a simple 10% stop loss rule. The paper looked at the application of a simple stop-loss strategy applied to an arbitrary portfolio strategy (for example buying the index) in the US markets over the 54 year period from January 1950 to December 2004. The first research paper When Do Stop-Loss Rules Stop Losses? and was published in May 2008 by Kathryn M. Research study 1 - When Do Stop-Loss Rules Stop Losses? I hated stop-losses! Mainly because some limited testing I did found that a stop-loss strategy lead to lower returns even though it did reduce large losses.īut you know here at Quant Investing we look at investment research all the time and I found three interesting papers that tested stop-loss strategies with results that changed my view completely.īut before we get to how and what stop loss you can use to increase your returns first the research studies.