Risk

Stops that are set and kept

A stop placed at the start and not moved further away is the simplest form of commitment.

What it is

Moving a stop closer as a trade works is a management choice. Moving it further from price after entry raises the risk after the fact.

What it suggests

In a laboratory experiment, binding stop-loss and take-gain orders reduced the tendency to hold losers and sell winners, while a simple reminder did not. It was a laboratory experiment, not live trading.

How to check it

Enter the stop with the order, not as a mental note.

Common mistakes

• Widening a stop to avoid a loss.
• Trading without a stop because the broker will not hunt it.

Sources

• Fischbacher, Hoffmann and Schudy (2017), The causal effect of stop-loss and take-gain orders on the disposition effect, Review of Financial Studies 30(6) (laboratory experiment) (citation and headline finding only)
• Odean (1998), Are investors reluctant to realize their losses? Journal of Finance 53(5) (citation and headline finding only)

Related lessons

• Selling winners early and holding losers
• Taking partial profits and moving the stop to entry

Written in our own words. Education only, not financial advice.