You Don't Want To Hear It, But You Shouldn't Use Stop-Losses

You may want to skip this article for a pre-established understanding of the use of stop losses, but you should read it.

Photo by Long Truong on Unsplash

One of the authors who has most influenced my way of understanding the markets has been Benoit Mandelbrot, not only has he been a great influencer for me, but for other very prominent people in this world such as Nassim N. Taleb. 

One of the main contributions that Mandelbrot made was to find a new branch of mathematics, already applied to many physical principles, to financial markets. This new branch perceives the hidden order in the seemingly disordered, the plan in the unplanned, the regular pattern in the irregularity and roughness of nature, which is called fractal geometry.

This way of understanding markets was based on the principle that markets jump and are totally impossible to predict. On the other hand, the distribution of returns did not follow a log-normal distribution as had been established up to that moment with the Black-Scholes formula. Furthermore, he added that there is no way to distinguish between a daily, weekly, monthly or decade …