Trading to Stops
Change log
Authors
Imkeller, Nora
Rogers, LCG
Abstract
The use of trading stops is a common practice in financial markets for a variety of reasons: it reduces the frequency of trading and thereby transaction costs; it provides a simple way to control losses on a given trade, while also ensuring that profit-taking is not deferred indefinitely; and it allows opportunities to consider reallocating resources to other investments. In this paper, we try to explain why the use of stops may be desirable, by proposing a simple objective to be optimized. We investigate a number of commonly used rules for the placing and use of stops, either fixed or moving, with fixed costs, showing how to identify optimal levels at which to set stops, and compare the performance of different rules and strategies.
Description
Keywords
barriers, trailing stop, transaction costs, stopping time, Laplace transform
Journal Title
SIAM JOURNAL ON FINANCIAL MATHEMATICS
Conference Name
Journal ISSN
1945-497X
1945-497X
1945-497X
Volume Title
5
Publisher
Society for Industrial & Applied Mathematics (SIAM)