Comparing Time-Based, Price-Based, Trailing, and ATR Stop Methods
Summary
The document surveys several exit rules: sell after a position underperforms for a set time, combine elapsed time with a rising stop level, use fixed price thresholds for exits, trail a stop below the holding-period high, or adjust a stop in steps as the high advances. It also outlines how to derive Average True Range from daily range and prior-close gaps, then smooth that measure over a lookback period as a basis for an ATR stop.
The discussion characterizes fixed time and price thresholds as limited in reducing drawdowns, and describes trailing and stepped approaches as dynamic alternatives. It asserts that trailing or stepped rules can perform well during market crashes, but supplies no data, market sample, or comparison procedure to support those claims. The formulas are sketches rather than fully specified implementations: several parameters must be chosen by the trader, and the ATR section does not give a complete stop-distance or exit rule. The methods therefore require testing and adaptation before use.
Key ideas
- A time stop exits when a position fails to meet a return expectation within a chosen holding period.
- A time-plus-step method raises its stop level as time passes or the position reaches new highs.
- A fixed price rule uses preset profit and loss thresholds relative to entry price.
- A trailing stop exits after price falls a chosen amount from the holding-period high.
- ATR is based on true range values smoothed over a selected lookback, but the document leaves the ATR stop rule incomplete.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.