Stopped. Then What?

July 03, 2013

One problem many investors have with stop losses is what to do after they have sold their position.  ie when do they get back in?

Below is an academic paper on the topic that examines various ways of getting out, and back in again.

The abstract before the download:

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Stop-loss strategies are used by many practitioners to limit excessive losses on existing investments. In practice, however, the value of stop-losses can only be assessed when re-entry rules are considered jointly with stop-loss rules. In this paper we analyze the benefits of joint stop-loss and re-entry rules from the perspective of both risk reduction and return enhancement for six different global equity markets as well as for listed real estate investments, a commodity index and gold. We find that stop-loss rules significantly reduce volatility and excessive losses. The evidence on return enhancement, however, is mixed, with stop-losses increasing absolute and risk-adjusted returns for most equity markets and listed real estate but not for commodity indices or gold. We also find significant differences between secular bull and bear markets, with stop-loss and re-entry rules providing higher risk-adjusted returns during secular bear markets but not during bull markets.

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