rectangleThe world's leading A.I. powered trading network
PlatformPremiumCompanyContact Us

Stop Loss Heresy

Leave a comment
I remember when good friend Prof Tom Gastaldi told me, “Michael stop losses are the biggest impediment to profitable trading” I thought he was smoking his socks. When colleague’s Vladimir and Andrii shared the same views a few weeks ago I wasn’t too surprised, but I also realise that one needs to understand these statements in context. I will leave out for now the ways and means of applying this understanding to trading so that it doesn’t blow up your account. Once you receive an invitation to join our Slack trading room (coming soon) you can challenge our thesis vigorously, if you wish. Lets get to the results.

First, we have looked at the change in performance when we apply stop-losses to some very good trading accounts (using the PsyQuation Score). For those accounts that are marked Top in our research database we have backtested an effect of applying the stops using personalized stop loss levels set to their 15% historical quantiles. Afterwards, for every account in this sample we have created a time-series of hypothetical equity curve and hypothetical returns. Finally, we have compared the medians for the actual and backtested accounts. The results are presented in the table below:

It is clear for accounts with a persistent edge using a stop loss is in general negative for performance. What is also interesting and somewhat surprising is this same statement applies to accounts that are not that good. 
For this study we have separated all the trading accounts into four groups: positive using stop losses, positive not using stops, negative using stops and negative not using stops and looked at the median out-of-sample performance for these accounts. 
Bieber and Bitcoin Allocations Galore