Trading to stops : the investigation of state-based stopping rules

The use of trading stops is a common practice in financial markets for a variety of reasons: it provides a simple way to control losses on a given trade, while also ensuring that profit-taking is not deferred indefinitely; and it allows opportunities to consider reallocating resources to other investments. In this thesis, it is explained why the use of stops may be desirable in certain cases. This is done by proposing a simple objective to be optimized. Some simple and commonly-used rules for the placing and use of stops are investigated; consisting of fixed or moving barriers, with fixed transaction costs. It is shown how to identify optimal levels at which to set stops, and the performances of different rules and strategies are compared. Thereby, uncertainty and altering of the drift parameter of the investment are incorporated.