Setting Stop Losses with Position Size, Volatility, and Time Horizon

Summary

The document frames stop losses as one part of a broader risk process. It describes a trailing stop that moves upward as a position reaches new highs, with the aim of limiting the amount of accumulated profit that can be given back. The examples are referenced through chart links, but the text does not provide enough detail to reconstruct their price paths or evaluate their outcomes.

For choosing a stop, it recommends first sizing a position in relation to account capital, risk appetite, and the underlying market’s risk, then setting the stop with volatility and holding horizon in mind. It leaves the position risk budget and the stop multiplier unresolved, pointing to these as separate questions about how much to risk and how quickly to trade. Thus, the document offers a useful framework, but no tested parameter values or evidence that trailing stops or a particular volatility-based distance will work across markets.

Key ideas

• A trailing stop can move with new price highs to limit how much of an unrealized gain is surrendered.
• Position size should reflect account capital, risk appetite, and the risk of the market being traded.
• Stop placement should account for volatility and the intended time horizon.
• The document leaves the account-level risk budget and stop multiplier unspecified.

Tags

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• Strategies Perp-Led Selloff Absorption Panel: buy a Binance USD-M alt perp at the next 4H open when its 24h return is <= -2 sigma AND its perp-vs-index premium is simultaneously <= -1.5 sigma (the selling came through the derivative, not spot), exit on a FIXED 12h clock; long-only, 12% per leg, max 5 concurrent, flat ~93% of the time (10 pre-2021 liquid USD-M perps, 4H)
• Hypotheses Perp-Led Selloff Absorption Panel: buy a Binance USD-M alt perp at the next 4H open when its 24h return is <= -2 sigma AND its perp-vs-index premium is simultaneously <= -1.5 sigma (the selling came through the derivative, not spot), exit on a FIXED 12h clock; long-only, 12% per leg, max 5 concurrent, flat ~93% of the time (10 pre-2021 liquid USD-M perps, 4H)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.