RW just came out with a new feature. You can scan with a stop loss and trailing stop. When you look at the effects of such stops, especially trailing stops between 1% and 2% with weekly holding periods appear to decimate the drawdowns. Just look at my favorite screen of selecting the “best” 12 Zacks’ ranked #1 stocks.

The counter side of using stops is slippage, the spread between bid and ask. That spread depends heavily on the daily trading liquidity of stocks. I usually use the 4-wks SMA of closing price times daily trading volume as a measure for liquidity. The average spread of the best 12 ZR#1 stocks as a function of daily trading liquidity is:

Daily trading Liquidity                     Spread                  ann slip               ann return

$0.25 million                                     0.79%                   41%                      17%/year                           

$0.5 million                                       0.51%                   27%                      26%/year

$2.5 million                                       0.38%                   20%                      21%/year

 

At first glance, the slippage in these trailing stops will completely destroy your expected annualized returns with these stops. However, it appears to me that RW sets the trailing relative to yesterday’s high. This enables you to change these stops into a stop loss relative to yesterday’s highs (relative to the day before yesterday’s high, etc.). You then have to make sure that your order size is smaller than the average bid size, normally one thousand to a few thousand shares for these ZR#1 stocks.

In my personal investments, I usually weekly trade much less volatile stocks having a daily spread of less than 0.1%, on average. I don’t use stops, I only trade Market On Close orders (see thread on RW Community).