Last updated: April 2026
A trailing stop loss is one of the most practical risk management tools available to private investors. Used correctly, it lets you lock in profits as a stock rises while automatically protecting you from large losses if the price turns.
Research across 54 years of US data and 11 years of Swedish market data consistently shows that a 15–20% trailing stop loss improves returns while substantially reducing worst-case losses.
But there is one calculation mistake that trips up even experienced investors: forgetting to include dividends. When a stock goes ex-dividend its price typically falls by the dividend amount, and if you do not account for this, your stop loss can trigger unnecessarily, forcing you to sell a position you should be holding.
This article shows you exactly how to calculate a trailing stop loss correctly, including the dividend adjustment, with a worked example you can apply to your own portfolio today.
Key research findings on trailing stop losses:
- A 10% stop loss strategy applied over 54 years (1950–2004) produced higher returns than the market while substantially limiting losses — Kaminski and Lo, 2008
- A 20% trailing stop loss outperformed buy-and-hold by 27.47% over 11 years on the OMX Stockholm 30 — Snorrason and Yusupov, 2009
- The optimal trailing stop loss level is 15–20% based on multiple independent studies across different markets and time periods
- Including dividend adjustments prevents unnecessary stop loss triggers for high-yield stocks
Trailing stop loss — definition:
A trailing stop loss adjusts upward as a stock price rises, maintaining a fixed percentage below the highest price reached. It triggers a sell when the price falls by the set percentage from that highest point.
Dividend-adjusted formula:
(Current stock price − highest stock price + dividend per share) ÷ highest stock price
If this result is more negative than your stop loss percentage, the stop loss has been breached.
Let the screener track your stop losses automatically — so you never have to check manually
The stop loss system described below works best when you never have to remember to check it. The Quant Investing screener handles the monitoring for you.
Add each stock in your portfolio to your watchlist, set your trailing stop loss percentage, and the screener tracks the highest price each stock reaches. When any position falls more than your set percentage from its highest price, you get an automatic email alert — the company name, the stop loss level you set, and the current value that triggered it.
Works for both trailing and traditional stop losses across 22,000+ stocks in Europe, the US and Asia. The screener monitors price movements automatically — when you receive an alert you can then apply the dividend adjustment manually using the formula described above to confirm whether the stop loss has truly been breached.
Free for 30 days — no credit card required.
Set up automatic stop loss alerts — free for 30 days
No credit card needed. Cancels automatically after 30 days.
What Made it Easy to Buy Was...
When markets get volatile or when times are uncertain I have found that what made it a lot easier to buy was the strict stop loss system I follow, it is the exact same system we use in our newsletters, Quant Value and Shareholder Yield.
All follow a strict stop loss system which sells an investment if it has fallen more than 20% from the all-time high.
Here are the steps:
- A trailing stop-loss where you calculate the loss from the highest price the company has reached since it was recommended.
- Only look to see if the stop-loss percentage has been exceeded once a month, on the newsletter’s publication date. If you look at it daily, you may sell if the share price becomes volatile. You can of course look at your stop losses weekly or every 14 days. This will also ensure that you keep your trading costs as low as possible.
- Sell your investment if at the monthly review date, the trailing stop-loss level of 20% has been exceeded.
- Measure the trailing stop-loss in the currency of the company’s primary listing. This means measure the stop-loss of a Swiss company in Swiss Francs (CHF) even if your portfolio currency is Euro (EUR).
- Adjust the trailing stop-loss for dividend payments as the share price usually falls by the amount of the dividend payment.
- Reinvest the cash from the sale in a current newsletter investment idea. This will make sure that you sell losing investments and invest the proceeds in the current best ideas.
Remember to include dividends in your stop loss calculation
This week when I looked at my portfolio two companies were close to their trailing stop loss levels. But when I looked closely this was not so. So, I want to remind you to include dividends when you look at your stop loss levels. Especially companies with a high dividend yield.
As you know when a company goes ex dividend (trades without the dividend) its stock price usually drops by the amount of the dividend. For example, you own a company trading at $1.00 and it pays a 10% or $0.10 dividend it means the stock price will drop by 10% to $0.90.
This means if the company was already sitting at a 10% trailing stop loss, and it falls another 10% it may hit your 20% trailing stop loss level.
But this is not right because the dividend usually gets paid a month or so after the ex-dividend date. This means that you must include the dividend (still to be received) when calculating the stop loss level.
Here's the formula: (Current stock price - the highest stock price + the dividend per share) / the highest stock price. In other words, you add the dividend still to be paid back to the decline of the stock price from its all-time high.
Worked Example: Dividend-Adjusted Trailing Stop Loss Calculation
Here's an example showing exactly how a trailing stop loss works:
- You buy a stock at $10 and set a 15% trailing stop loss at $8.50 ($10 - 15%).
- The stock price increases to $15. Your trailing stop loss automatically moves up to $12.75 ($15 - 15%). This locks in more of your profit.
- The price drops to $13.50. You keep holding because $13.50 is still above your trailing stop loss of $12.75 which has remained unchanged.
- A $0.50 dividend is announced and the stock goes ex-dividend. The price drops to $13. Your trailing stop loss level adjusts to $12.25 ($12.75 - $0.50) to account for the dividend. You continue holding because $13 is still above your new stop loss of $12.25 when you deducted the $0.50 dividend you will receive.
- The price increases to $20. Your trailing stop loss automatically moves up to $16.50 ($20 - 15% -$0.50), locking in more of your profit. Remember to also deduct the dividend this is important to avoid getting stopped out unnecessary.
Summary: A $10 entry with a 15% trailing stop loss, after the stock rose to $20 and paid a $0.50 dividend, results in a stop loss level of $16.50 - not $17.00. The dividend adjustment prevents an unnecessary sale worth $3.50 per share in missed upside.
As you can see the key benefit of a trailing stop loss is that it rises with the stock price, protecting more of your profits while still giving the stock room to move up. Adding back dividends ensures you don't get stopped out just because of a dividend payment.
Why 15% or 20%? The Research Behind the Numbers
The 15–20% range is not arbitrary. Three independent research studies across different markets and time periods all point to the same optimal zone.
In a 2009 study of the OMX Stockholm 30 Index covering 11 years including both the internet bubble and the financial crisis, Snorrason and Yusupov tested every stop loss level from 5% to 55%. They found:
- The 20% trailing stop loss produced the highest average quarterly return of 1.71%
- The 15% trailing stop loss produced the highest total cumulative return of 73.91%
- At the 20% level, the trailing stop loss outperformed a buy-and-hold strategy by 27.47% over 11 years
- Only the 5% stop loss performed worse than buy and hold — every level from 10% to 55% outperformed
A separate 2008 study by Kaminski and Lo applied a 10% stop loss across 54 years of US market data. It worked — but the researchers noted the stop loss level was set too low, causing re-entry into the market too quickly after the technology bubble crash. This supports using a higher level of 15–20%.
The practical reason the extremes fail is straightforward:
- Too tight (5–10%): Normal daily and weekly price volatility triggers the stop loss unnecessarily. You end up selling good investments during temporary dips and paying unnecessary transaction costs.
- Too loose (above 20%): By the time the stop loss triggers, you have already suffered a significant loss. The protection arrives too late to preserve meaningful capital.
The 15–20% range gives your investments enough room to move through normal market fluctuations while still protecting you from the kind of sustained decline that signals a genuine deterioration in the investment.
For pure momentum strategies, research by Han, Zhou and Zhu (2014) across 85 years of US data found that a 10% stop loss was more effective - momentum strategies are more sensitive to trend reversals and benefit from tighter protection. For diversified value portfolios, 15–20% remains the better choice.
Trailing stop loss versus traditional stop loss — which is better?
A traditional stop loss is fixed at a price below your purchase price. It does not move as the stock rises, which means it offers no protection for gains made after you bought. A trailing stop loss adjusts upward as the price rises, locking in more of your profit with each new high.
Research by Snorrason and Yusupov (2009) tested both across stop loss levels from 5% to 55% and found that at the most effective level of 20%, the trailing stop loss outperformed the traditional stop loss by 27.47% over 11 years. At all levels above 10%, trailing outperformed traditional.
You can read more about stop losses here:
How Trailing Stop Losses Can Maximize Your Returns
Master Trailing Stop Loss for Smarter Investing
Truths about stop-losses nobody wants to believe
Truths about stop-losses nobody wants to believe - Webinar
Stop calculating manually — automate your dividend-adjusted stop loss tracking
You now know exactly how to calculate a trailing stop loss correctly, including the dividend adjustment that most investors miss.
The screener monitors price movements automatically and sends you an email the moment any position falls your set percentage from its highest price. When you receive an alert for a dividend-paying stock, use the formula above to confirm whether the stop loss has actually been breached after accounting for the dividend — this takes less than a minute and ensures you never sell unnecessarily.
Free for 30 days. Includes the full screener, watchlist with email stop loss alerts, the historical back tester, a 74-page eBook What Works on European Markets, and our Best Ideas Newsletter.
Automate your stop loss tracking — start free today
No credit card needed. Cancels automatically after 30 days.
Frequently Asked Questions
At what percentage should I set my trailing stop loss?
Research consistently points to 15–20% as the optimal range. A 5–10% stop loss triggers too frequently during normal market fluctuations, causing unnecessary sales. Above 20% provides insufficient protection during downturns. The 2009 Snorrason and Yusupov study found 20% produced the highest average quarterly return (1.71%) and 15% produced the highest cumulative return (73.91%) over an 11-year period including two major market crises.
Do dividends affect a trailing stop loss?
Yes. When a stock goes ex-dividend, the share price typically falls by the dividend amount. If you do not adjust your stop loss calculation for the dividend, this price drop can trigger your stop loss unnecessarily. Add the dividend per share back into the calculation: (Current price − highest price + dividend per share) ÷ highest price. Only sell if this adjusted figure exceeds your stop loss percentage.
How often should I check my trailing stop loss?
Monthly review is recommended for most investors. Daily checks lead to over-trading as normal short-term volatility can appear to breach a stop loss temporarily. Weekly or monthly reviews strike the balance between discipline and avoiding unnecessary transaction costs. This is the approach used in the Quant Value and Shareholder Yield newsletters.
What is a trailing stop loss?
A trailing stop loss is a tool that adjusts your stop loss level as the stock price rises, helping you protect profits while allowing the stock to grow.
How do I calculate a trailing stop loss?
Calculate it by setting a percentage below the highest stock price since you bought it. As the price increases, the stop loss adjusts accordingly.
Why should I include dividends in my stop loss calculation?
Dividends can cause the stock price to drop temporarily, so including them ensures your stop loss isn’t triggered unnecessarily.
What happens if the stock price drops after the ex-dividend date?
The stock price usually drops by the dividend amount. Adjust your trailing stop loss to account for the dividend to avoid being stopped out.
How often should I review my trailing stop loss?
Regularly review it, especially after dividends are declared or the stock price change significantly to make sure it has not been triggered.
Can a trailing stop loss prevent losses entirely?
No, but it can minimize losses by locking in profits as the stock price rises and turns around.
Is a trailing stop loss useful in volatile markets?
Yes, it helps manage risk by adjusting to market conditions while keeping you invested during upward trends.
What percentage should I set for my trailing stop loss?
It depends on your risk tolerance. Common percentages that work best are 15% to 20%.
What if my stock is close to the trailing stop loss level?
Consider if the stock is still a good investment. If yes, adjust the stop loss; if no, sell.
Can a trailing stop loss be used with any stock?
Yes, but it’s particularly useful for stocks with a strong upward trend to make sure you lock in your profits when it turns around.
The three research studies supporting this stop loss approach are:
- Kaminski and Lo (2008) — "When Do Stop-Loss Rules Stop Losses?" — 54-year US study showing stop losses improve returns and limit drawdowns
- Snorrason and Yusupov (2009) — "Performance of Stop-Loss Rules vs. Buy and Hold Strategy" — 11-year Swedish study identifying 15–20% as the optimal level
- Han, Zhou and Zhu (2014) — "Taming Momentum Crashes: A Simple Stop-Loss Strategy" — 85-year US study showing stop losses reduce worst losses from −49.79% to −11.34%
Full analysis of all three studies: Truths about stop-losses that nobody wants to believe →
Tim du Toit has been investing using quantitative strategies for over 20 years and is the author of Quantitative Value Investing in Europe: What Works for Achieving Alpha. The stop loss system described here is the exact approach used in the Quant Value and Shareholder Yield investment newsletters.
