(note: I originally posted this as a response to a thread in r/stocks but thought I'd post here to get people's thoughts)
I have been thinking about trailing stops a lot lately with everyone predicting another crash and so I decided to do some research. I came across this blog post that reviewed three studies of different stop-loss strategies.
The tl;dr is that trailing stop losses work really well between the 15 and 20% range (compared to shorter strategies like 5% on the one hand and buy-and-hold on the other). One study in particular found that:
- "The only stop-loss level that did worse than the buy-and-hold (B-H) portfolio, with a negative average return of 0.12% and cumulative return of -8.14%, was from a trailing stop-loss strategy with 5% loss limit."
The 15% trailing stop loss level gave the highest cumulative return and the 20% trailing stop loss gave the highest quarterly return. This makes sense if you think about it--a 15-20% gives you a lot of room for regular fluctuations but protects from either stock-specific or market-wide crashes. It stops the bleeding without limiting your profits too much. Then, once the market has bottomed out (or close to it) you have cash to reinvest and can hopefully decrease your cost basis. There have been 29 declines of 10-20% in the S&P in the last 75 years--and among those the declines average 14%--and only nine 20-40% declines, which average a 28% decline (source). So unless you're day trading or swing trading, trailing stop losses seem to be best used to protect yourself from March-like situations.
Speaking of which, I don't have a good way to backtest more complex strategies like this, but if someone else does, I'd be interested to see how they would have fared in March.
Anyway, thought I'd share what I found. Personally, I went through and put 18% trailing stop losses on most of my positions after I did all this research! Seems like a good way to split the difference.
Submitted August 10, 2020 at 08:23PM by z74al https://ift.tt/3kzQbHq
