Regression to Mediocrity

Traders often believe that trading a mean reversion strategy means that the strategy should not incorporate a stop loss. After all, if the system has been backtested for mean reversion, why sell when the price drops? Shouldn't you buy more?

Mean reversion is a buy low sell high strategy, mostly done as market making/providing liquidity. A stop loss may seem counterintuitive, as it appears that you should be buying more (or selling more at the top) when using it. However, this is not always the case.

It's important to remember that your backtest may be subject to survivorship bias. Why? Because there were assets that went down to 0 and may have not been included in the original backtest. In such cases, a stop loss could have saved you from substantial losses.

So while adding stop losses reduces returns for mean reversion strategies, they would definitely protect you from blackswan events or catastrophic losses.