Saturday, March 12, 2016

Do Stop Loss Orders Make Sense For Traders?

This article is from my days at Tradingmarkets---- Does it still make sense in today's climbing volatility?

Drop the stops?? You are out of your mind!! I can hear most of you saying this after reading the title.  This article might just surprise you.

Stops are an integral part of most stock trader’s arsenal.  Many consider it foolhardy and na├»ve to trade without a fixed stop in place prior to entering a position.  As with most of the conventional market wisdom, these feelings do not hold up to vigorous testing.  

We have run 100’s of tests have that have proven that fixed stops actually hurt the performance of any trading system.  

One example took all shares trading above their 200 day Simple Moving Average closing at its 10 day low.  

The trade would be exited on a close above its 10 day Simple Moving Average or when a stop is hit at a variety of percentage points below the entry.  Out of nearly 400,000 tested trades, stops hurt the performance of the system.  In fact, the tighter the stop, the worse the performance. 

 Even stops as wide as 50% away from the entry dampened the systems returns.  Of course there are psychological benefits to using fixed stops but at the expense of profit.    Dropping the fixed stops is a sure way to improve the results of your trading system.

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