IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v41y1995i6p1096-1106.html
   My bibliography  Save this article

Trading Securities Using Trailing Stops

Author

Listed:
  • Peter W. Glynn

    (Stanford University, Department of Operations Research, Terman Engineering Center, Stanford, California 94305-4022)

  • Donald L. Iglehart

    (Stanford University, Department of Operations Research, Terman Engineering Center, Stanford, California 94305-4022)

Abstract

In financial markets traders often protect their position from a significant decline by using a trailing stop. Assume the trader is long the market (owns the security). A trailing stop is an order to sell the security at the market, if the price of the security drops to the stop price. The stop price is always less than the market price when the stop is entered. As the price fluctuates, the stop is raised to remain a fixed distance from the maximum price at which the security trades. In this paper we consider two models for the price process: a discrete time random walk and continuous time Brownian motion, both with positive drift. For these price processes we compute the distribution, mean, and variance of the gain to the trader as well as the duration of the trade when a trailing stop strategy is used. Also discussed is the question of optimizing the distance from the current price to the stop.

Suggested Citation

  • Peter W. Glynn & Donald L. Iglehart, 1995. "Trading Securities Using Trailing Stops," Management Science, INFORMS, vol. 41(6), pages 1096-1106, June.
    • Handle: RePEc:inm:ormnsc:v:41:y:1995:i:6:p:1096-1106
    DOI: 10.1287/mnsc.41.6.1096
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.41.6.1096
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.41.6.1096?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Neofytos Rodosthenous & Hongzhong Zhang, 2020. "When to sell an asset amid anxiety about drawdowns," Mathematical Finance, Wiley Blackwell, vol. 30(4), pages 1422-1460, October.
    2. Hongzhong Zhang, 2018. "Stochastic Drawdowns," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 10078.
    3. Bochuan Dai & Ben R. Marshall & Nhut H. Nguyen & Nuttawat Visaltanachoti, 2021. "Risk reduction using trailing stop‐loss rules," International Review of Finance, International Review of Finance Ltd., vol. 21(4), pages 1334-1352, December.
    4. V. Abramov & M. K. Khan & R. A. Khan, 2008. "A probabilistic analysis of the trading the line strategy," Quantitative Finance, Taylor & Francis Journals, vol. 8(5), pages 499-512.
    5. G. Yin & Q. Zhang & C. Zhuang, 2010. "Recursive Algorithms for Trailing Stop: Stochastic Approximation Approach," Journal of Optimization Theory and Applications, Springer, vol. 146(1), pages 209-231, July.
    6. Tim Leung & Hongzhong Zhang, 2017. "Optimal Trading with a Trailing Stop," Papers 1701.03960, arXiv.org, revised Mar 2019.
    7. Neofytos Rodosthenous & Hongzhong Zhang, 2020. "When to sell an asset amid anxiety about drawdowns," Papers 2006.00282, arXiv.org.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:41:y:1995:i:6:p:1096-1106. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.