Here’s a post on stop loss orders from the Abnormal Returns archives. Tadas looked at what a number of others have written about using stop loss orders, including Justin Wilcox:
He goes on to note a better way traders should frame their thoughts about stop loss orders:
One thing that has helped me immensely is to not think about stops from the view point of the exit of a trade gone bad, but to view it as simply the exit from a trade. The execution of the plan you have for the trading day should effect where your stops go more than anything else.
And Eddy Elfenbein:
The lesson for investors is that your thesis can be right but it may take a long time to see it pay off. I remember Peter Lynch saying that his stocks did best in the second or third year that he owned them.
He concludes with what Churchill may have said about stop loss orders:
No one pretends that
democracy[stop loss orders are] is perfect or all-wise. Indeed, it has been said that democracy[stop loss orders are] is the worst form of government[risk management] except all those other forms that have been tried from time to time.
via Winston Churchill on stop loss orders at abnormalreturns.com