To make these trade-offs concrete, it is useful to examine how stop-loss width affects portfolio outcomes when other variables are held constant. Specifically, consider a simple long-only trend-entry framework applied to a broad equity index. Positions are initiated when prices cross above a moving average. Position size is held constant, while stop-loss thresholds vary from very tight to relatively wide levels.
Using daily S&P 500 (SPX) open, high, low, and close prices as a data source, I simulate 500 investors entering at random dates (2000–2005) and compare outcomes under different stop-loss widths and take-profit targets (15%–30%). Each curve summarizes the average result across investors (Figure 1).
The objective is not to identify an optimal trading rule or maximize historical returns. Instead, the goal is to examine how stop-loss width structurally influences win rates, payoff ratios, and cumulative capital growth.
As stop-losses widen, win rates increase. Trades are given more room to absorb short-term noise, reducing premature exits.
Figure 1: Win Rate as a Function of Stop-Loss Width