Don't Use A Stop-Loss, Do This Instead
Why Traders Who Rely on Stop Losses Often Earn Less
We don’t use a stop-loss; we do this instead: trade smaller sizes and diversify over many strategies.
Everyone says you should “always use a stop-loss.” It’s the golden rule of trading blogs, courses, and forums. But what if that advice is actually holding your portfolio back? Backtesting and historical data suggest that the best stop-loss strategy may be… to have none at all.
Stop-losses are often a trade-off between survival and profit—and in many cases, they reduce the latter.
The Evidence: Stop-Losses Often Hurt Performance
Seasoned traders and research back up what many beginners don’t realize: stop-losses aren’t always helpful.
Larry Connors: After testing hundreds of strategies, Connors found that there’s no “optimal” stop-loss. Using stops almost always lowered system performance, especially for mean-reversion strategies.
Curtis Faith: One of the original Turtle Traders, Faith discovered that trend-following systems performed better in terms of CAGR, Sharpe ratio, and drawdowns when stops were removed.
Mean-Reverting Markets: In markets where prices often rebound, exiting with a stop-loss means selling just when expected returns are rising.
Why Stop-Losses Fail More Often Than You Think
Stop-losses might seem safe, but they can actually destroy returns. Here’s why:
Overnight Gaps: A “5% stop” can turn into a 10% loss if the market gaps against you overnight.
Market Noise: Tight stops trigger small, repeated losses from normal volatility—a slow bleed to zero.
Arbitrary Levels: Random percentage stops ignore volatility, trend, and market context, often executing trades at the worst moment.
Better Ways to Manage Risk Without Stops
Instead of depending on a single price level, consider portfolio-level risk management:
Diversify Strategies: Combine trend-following and mean-reversion strategies to offset losses in one with gains in another.
Trade Different Asset Classes: Stocks, bonds, and gold often move independently, reducing overall risk.
Mix Market Directions: Include both long and short strategies for balanced exposure.
Use Multiple Time Frames: Combine day trades with swing trades; they rarely correlate.
Control Position Size: Smaller trades reduce the impact of a single loss and prevent emotional mistakes.
Time-Based Exits: Many trading edges decay over time. Exiting after a set period or bar count can outperform rigid price stops.
The Takeaway
Stop-losses are tools for survival, not profit maximization. If your goal is a healthier, higher-return portfolio, focus on uncorrelated strategies, varied time frames, multiple market directions, diverse asset classes, smart position sizing, and time-based exits. Relying on a single price trigger may keep you “safe” in the short term, but it could also be quietly capping your gains.