In the investing world, stop-loss orders are the most used risk management device: so simple and intuitive that they confuse reason and common sense. But the hidden costs of stop-losses alter the shape of expected future return distributions, resulting in no inherent edge to be had in using neither stop-losses nor profit-taking stops, or any combination of them; and as volatility of the underlying asset’s returns is increased, the impact of stop-losses increase as well, generating higher portfolio volatility. Precisely, the opposite of what is intended: the perceived benefits of the stop-loss are largely balanced out by the hidden costs.

Note: Trading desks may profit from large quantities of sell orders from client’s stop-loss/profit-taking orders known in advance, so don’t expect them to disappear anytime soon.