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Trading Securities Using Trailing Stops

Author

Listed:
  • Peter W. Glynn

    (Stanford University, Department of Operations Research, Terman Engineering Center, Stanford, California 94305-4022)

  • Donald L. Iglehart

    (Stanford University, Department of Operations Research, Terman Engineering Center, Stanford, California 94305-4022)

Abstract

In financial markets traders often protect their position from a significant decline by using a trailing stop. Assume the trader is long the market (owns the security). A trailing stop is an order to sell the security at the market, if the price of the security drops to the stop price. The stop price is always less than the market price when the stop is entered. As the price fluctuates, the stop is raised to remain a fixed distance from the maximum price at which the security trades. In this paper we consider two models for the price process: a discrete time random walk and continuous time Brownian motion, both with positive drift. For these price processes we compute the distribution, mean, and variance of the gain to the trader as well as the duration of the trade when a trailing stop strategy is used. Also discussed is the question of optimizing the distance from the current price to the stop.

Suggested Citation

  • Peter W. Glynn & Donald L. Iglehart, 1995. "Trading Securities Using Trailing Stops," Management Science, INFORMS, vol. 41(6), pages 1096-1106, June.
    • Handle: RePEc:inm:ormnsc:v:41:y:1995:i:6:p:1096-1106
    DOI: 10.1287/mnsc.41.6.1096
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    Citations

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    Cited by:

    1. Neofytos Rodosthenous & Hongzhong Zhang, 2020. "When to sell an asset amid anxiety about drawdowns," Mathematical Finance, Wiley Blackwell, vol. 30(4), pages 1422-1460, October.
    2. Hongzhong Zhang, 2018. "Stochastic Drawdowns," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 10078, August.
    3. Bochuan Dai & Ben R. Marshall & Nhut H. Nguyen & Nuttawat Visaltanachoti, 2021. "Risk reduction using trailing stop‐loss rules," International Review of Finance, International Review of Finance Ltd., vol. 21(4), pages 1334-1352, December.
    4. V. Abramov & M. K. Khan & R. A. Khan, 2008. "A probabilistic analysis of the trading the line strategy," Quantitative Finance, Taylor & Francis Journals, vol. 8(5), pages 499-512.
    5. G. Yin & Q. Zhang & C. Zhuang, 2010. "Recursive Algorithms for Trailing Stop: Stochastic Approximation Approach," Journal of Optimization Theory and Applications, Springer, vol. 146(1), pages 209-231, July.
    6. Tim Leung & Hongzhong Zhang, 2017. "Optimal Trading with a Trailing Stop," Papers 1701.03960, arXiv.org, revised Mar 2019.
    7. Neofytos Rodosthenous & Hongzhong Zhang, 2020. "When to sell an asset amid anxiety about drawdowns," Papers 2006.00282, arXiv.org.

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