Stop loss in short selling

AI & Machine learning
1

Course Name: Short Selling in Trading, Section No: 10, Unit No: 9, Unit type: Notebook



Hi there,



I don't quite understand the below explanation on stop loss. Are you able to explain and provide some additional reading materials?

 

Stop Loss: A short-selling strategy would not be complete without a stop loss. It has a dual purpose:

  1. Stop loss: it deals with the lag in MA and false positives swing detection
  2. Position sizing: position size will be calculated from the stop loss to the close of the signal bar Stop loss must, therefore, be close enough to the current price to warrant decent position size. This excludes floor and ceiling. The logical candidate is short term rolling max or min, the main ingredient in the breakout regime.

Thanks,
Ryan
2

The first point tells whenever you get a lag signal from the moving average, the stop loss helps to protect your strategy from major loss. For example, if there are 20 points to capture in an upward direction, after that there is reversal of the trend but MA generates a lag signal when only 2 points remain. So, in this case, stop loss comes handy and minimises the loss.
 

The second points talk about the importance of stop loss in the position sizing. Can refer to position sizing and stop loss video (S13U8).