The subject of Stop Losses provokes heated discussion here on Stockopedia. Opinions are divided on how, why, when, where and if you should set a pre-defined exit price on a trade. Some investors won’t use stop losses, but others can’t live without them.
One of the biggest questions about stop losses is why they should even be used in the first place. Those in favour point to the benefits of lower volatility in a portfolio and protection from sudden single-stock disasters. For that reason, they’re often promoted by traders like Robbie Burns and Mark Minervini.
But the counter argument is that a regular buy-and-hold strategy (without stops) will even itself out over time. Without a stop, you won’t be at risk of being shaken out of a position. You won’t be left wondering what to do if you’re stopped out. You won’t be hit by extra trading costs. And you won’t be at risk of missing a recovery.
The arguments on both sides are persuasive. So in the coming weeks, we’re going to be looking a little closer at stop losses and exploring some of the science and behaviour behind them.
To start, I’m going to look at research into whether stop loss strategies…
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