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Does anyone know some bibliography about the problems or limitations of using Stop-Loss strategies in a portfolio?

Let me explain better: for example you can have a portfolio of 30 stocks from different securities and you can put a Stop-Loss Strategy over them, but what would happen if suddenly there is a crisis like the one of 2008? Does this strategy really help you to minimize your losses?

Thank you in advance your the help!

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  • $\begingroup$ If you Google "stop loss SSRN" you will find a number of papers on this, but I don't know which are worth reading. It is a messy problem that has not been clarified AFAIK, a lot depends on the assumptions people make. $\endgroup$
    – Alex C
    Nov 20, 2019 at 2:44

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There are lots of articles on the web about stop loss orders which explain the advantages and disadvantages.

Stop loss orders would clearly have helped "you to minimize your losses" in 2008 because for the most part, the decline was organized and took 15 months or so for the market to drop 50% and reach the bottom.

Where stop losses fail is when there are large gaps. An extreme example would be 1987 when the DJIA lost 22% in one day, bid/ask spreads were as much as several dollars wide and market makers walked away from their responsibilities.

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    $\begingroup$ For another example where stop losses proved counterproductive consider the one day flash crash of 2010: en.wikipedia.org/wiki/2010_flash_crash The dow jones started the day at 10,800. Suppose you had a stop loss at 10,000. You would have sold stocks at that price or more likely below (liquidity was terrible). By the end of the day the market was back to almost 10550, you owned no stocks and you had to decide whether to buy them back at a higher price than you sold. When stop losses fail is when there are large drops quickly made up. $\endgroup$
    – nbbo2
    Aug 16, 2020 at 15:14
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    $\begingroup$ Yes, stop losses can be counterproductive but the thing is, you only know that in hindsight. Take the DJIA at 25,864 in March. The next day it's down 2,000+ points on the way to 18,591 two weeks later. It's good when it works and not so much when it doesn't. The gap is the wild card. The only stop that doesn't fail is an option hedge. $\endgroup$
    – Bob Baerker
    Aug 21, 2020 at 17:03
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This paper may be helpful. Generally, this is not a simple problem.

Leung, Tim and Zhang, Hongzhong, Optimal Trading with a Trailing Stop (February 18, 2019). Applied Mathematics and Optimization, to appear, 2019, Available at SSRN: https://ssrn.com/abstract=2895437 or http://dx.doi.org/10.2139/ssrn.2895437

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