From a 2015 post at Quant Investing, a look at 3 research papers on the use of stop losses.
Study 1: When do stop loss rules stop losses?
What they also found was that the stop-out periods were relatively evenly spread over the 54 year period they tested. This shows you that the stop-loss was not just triggered by a small number of large market movements (crashes).
Study 2: Stop Losses, Trailing, and Buy & Hold compared
Trailing better than traditional
Only at the 5% and 10% loss levels did the traditional stop-loss perform better than the trailing stop-loss. At all other loss levels the trailing stop loss out performed, most notably at the 20% loss level where it performed 27.47% better over the 11 year period.
Study 3: Stop Losses in Momentum Investing
The stop-loss momentum strategy also completely avoided the crash risks of the original momentum strategy as the following table convincingly shows.
Click image to enlarge
Note that if you followed a stop loss strategy you would have made a small profit when the momentum only strategy lost nearly 50% and 40%.
The studies actually convinced the author to change is opinion on stop losses:
This has been a rather long article to come to a very clear and simple conclusion: Stop-loss strategies work
As you have seen:
- When applied to a 54 year period a simple stop-loss strategy provided higher returns while at the same time lowering losses substantially
- A trailing stop loss is better than a traditional (loss from purchase price) stop-loss strategy
- The best trailing stop-loss percentage to use is either 15% or 20%
- If you use a pure momentum strategy a stop loss strategy can help you to completely avoid market crashes, and even earn you a small profit while the market loses 50%
- Stop-loss strategies lowers wild down movements in the value of your portfolio, substantially increasing your risk adjusted returns
via Truths about stop-losses that nobody wants to believe at Quant Investing for Value, Momentum, Quality and Growth stocks