# Trading Myth: Always Use a Stop Loss | Robuxio Research Source: https://robuxio.com/research/trading-myth-always-use-a-stop-loss Markdown: https://robuxio.com/research/trading-myth-always-use-a-stop-loss.md Conventional wisdom says you must always trade with a stop loss. The systematic data tests that claim — and reveals where stop losses help and hurt. --- [![Robuxio - Algorithmic Crypto Trading Solutions](https://robuxio.com/images/logos/logo.svg)](https://robuxio.com/) [Home](https://robuxio.com/)[Crypto](https://robuxio.com/crypto)[Equities](https://robuxio.com/equities)[Whitelabel](https://robuxio.com/whitelabel)[Resources](https://robuxio.com/resources) [Book a Call](https://robuxio.com/call) [← Research](https://robuxio.com/research/articles) # Trading Myth: Always Use a Stop Loss Research • Pavel Kycek • July 15, 2024 It is repeated over and over again that stop loss is necessary. And those who trade without one are doomed. But is it really essential? ## The Conventional Wisdom "Always use a stop loss" is perhaps the most repeated advice in trading. The logic seems unassailable: - Limits your losses - Prevents emotional decisions - Protects your capital But like many things in trading, the truth is more nuanced. ## Maximum Adverse Excursion (MAE) Analysis To understand how stop losses affect strategy performance, we use Maximum Adverse Excursion (MAE) – the largest loss suffered by a trade while it is open. ![MAE Analysis](https://robuxio.com/_next/image?url=%2Fimages%2Fblog%2Fresearch-stop-loss%2Fmae-analysis.png&w=1920&q=75) ![Trades with 20% MAE or Worse](https://robuxio.com/_next/image?url=%2Fimages%2Fblog%2Fresearch-stop-loss%2FTrades-with-20-MAE-or-worse.png&w=1920&q=75) ## The Surprising Finding Looking at our momentum breakout strategy, we found something counterintuitive: trades experiencing severe temporary losses (exceeding -20%) frequently recovered and ended profitably or with minimal losses. ![Mean Reverting Characteristics](https://robuxio.com/_next/image?url=%2Fimages%2Fblog%2Fresearch-stop-loss%2FMean-reverting-characteristics-of-above-average-MAE.png&w=1920&q=75) This demonstrates that markets tend to revert during extreme moves, making premature exit strategies counterproductive. ## Performance Comparison We tested the same strategy with and without stops: ![Performance Comparison 1](https://robuxio.com/_next/image?url=%2Fimages%2Fblog%2Fresearch-stop-loss%2FPerformance-comparison-1.png&w=1920&q=75) ![Trades with 10% MAE or Worse](https://robuxio.com/_next/image?url=%2Fimages%2Fblog%2Fresearch-stop-loss%2FTrades-with-10-MAE-or-worse.png&w=1920&q=75) The results were striking: - 20% Stop Loss : Would have resulted in 46% more losses than no stop loss - 10% Stop Loss : Would have resulted in 27% more losses than no stop loss ![Performance Comparison 2](https://robuxio.com/_next/image?url=%2Fimages%2Fblog%2Fresearch-stop-loss%2FPerformance-comparison-2.png&w=1920&q=75) Even stopping out on trades that eventually declined to -20%, -30%, or lower, the stop loss strategy underperformed. ## Why Stops Hurt Mean Reversion Mean reversion works by buying "oversold" assets. But how do you know when oversold becomes "more oversold"? You don't. A mean reversion trade that goes against you may simply be offering a better entry. A stop loss forces you to exit when you should be holding (or adding). ## When Stop Losses Help ### Trend Following Trend following REQUIRES stops. The strategy is based on cutting losers quickly. With stops: Many small losses, occasional big wins = Profitable Without stops: Few big losses wipe out all gains = Disaster ### Breakout Trading Similar to trend following – you need to exit failed breakouts quickly. ### High Leverage If you're using significant leverage, stops prevent catastrophic losses. ### Shorting When shorting, using stop losses as protective measures against "black swans" makes sense. ## Better Risk Management Approaches If not stop losses, then what? ### 1. Portfolio-Level Risk Management Instead of individual trade stops, manage risk at the portfolio level. Diversify across uncorrelated strategies. ### 2. Position Sizing Risk less per trade. If a 20% adverse move is acceptable, size your position so that 20% move = 1-2% of account. ### 3. Proper Exit Strategies Develop exit strategies based on research, not arbitrary price levels. Time stops, trailing stops, or indicator-based exits. ### 4. Reconsider Leverage If you need tight stops to manage risk, you may be using too much leverage. ## The Middle Ground Some traders use a "catastrophe stop" – a very wide stop that only triggers if something is fundamentally wrong: - Normal trade: No stop - Catastrophe stop: 25-30% below entry This protects against true disasters while avoiding whipsaws. ## Conclusion "Always use a stop loss" is not universal truth. Stop loss functions as risk management rather than exit strategy. The right approach depends on: - Your strategy – Trend following needs stops; mean reversion may not - Your timeframe – Shorter timeframes = tighter stops make sense - Your position sizing – Smaller positions can survive without stops - Your leverage – Higher leverage requires tighter risk controls Proper research and risk management are essential for sustainable trading success. Question everything – including the most repeated advice. Pavel – [Robuxio](https://www.robuxio.com/) [All articles](https://robuxio.com/research/articles) Disclaimer: All information provided by Robuxio.com is intended solely for the purpose of studying topics related to crypto trading and is in no way intended as a specific investment or trading recommendation. We are not a registered broker or investment advisor. Trading and investing in financial instruments (and cryptocurrencies in particular) is high risk. 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