Many investors utilize the strategies linked to a Trailing Stop Loss and some don’t. Everyone has their own opinions, advice, and ideas. A plan that works for one person is not necessarily going to work for everyone else. Each person is an individual and, therefore, so, too, are his/her needs, wants, desires, and ideas of financial risks and stability. Much research has been conducted on the theory of Stop Loss Orders and Trailing Stop Loss Orders. Let’s take a look at a couple of them.
Research Study Number 1(Kathryn M. Kaminski and Andrew W. Lo, 2008)
looked at a strategy that used a 10% stop loss price point. This particular
study covered a 54-year period. When the value of the loss on the stock
exceeded 10%, investments were sold and the money from that sale was
placed in an extremely low-risk investment; for example, U.S. government
bonds. When the stock recovered that 10%, the money was then moved
back into that stock. The stock market provided a 70% return while the money was invested, and during the times when the money was moved out into bonds, the stock market return was only 30%.
Research Study Number 2 (BergsveinnSnorrason and GaribYusupov, 2009) compared a normal stop loss strategy with a buy-and-hold strategy for an 11-year period. They set up the standards for the test using investments made on the first day of a quarter and then, at the end of that quarter, they reinvested the amount of money made. They utilized a stop loss limit and when that price point was reached, the stock was sold and the monies earned were reinvested at the beginning of the next quarter.
The results were that the highest average quarterly return was brought to fruition using a trailing stop-loss limit of 20 percent. The highest cumulative return was brought about using a 15 percent trailing stop-loss limit. The worst results came when a 5% stop-loss limit was used.
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