While we use trailing stop losses in our Rapid Fire themes, they are by no means the brahmastra they are made out to be. We audited two of the strategies in that theme: Momo (Velocity) v1.0 and Momo (Relative) v1.1. We would have made more money by doing nothing.
Some findings (details):
- The stock that was sold usually went up after. At 20-days, you were 1.5× more likely to miss a >5% rally than to avoid a >5% slide.
- The stock that was bought instead did about the same. A drift-positive basket was replaced with another drift-positive basket. The churn bought nothing and you paid transaction costs on top.
Trailing stop losses might be psychological crutches. But with everything else in finance that is designed to ease the pain of ownership, you end up paying for it.
Analysis, charts and code are on github.