Risk Reduction Using Trailing Stop-Loss Rules

Abstract

We consider the effectiveness of trailing stop-loss rules which, unlike traditional stop-loss rules, involve the sell trigger price being moved higher to protect profits as prices rise. Our results indicate that while these rules have inferior mean returns to a simple buy-and-hold strategy, they do a good job of stopping losses. They generate superior risk-adjusted returns for investors with normal levels of risk aversion and perform particularly well at reducing downside risk. These results hold in all U.S. stocks and are particular strong for stocks that end up being delisted.

Keywords: Stop-Loss Rule, Risk Reduction

JEL Classification: G11, G12