WHy is it sooo wrong

Hey guy I am total nob to forex trading and I think this is the best place for information I have found… I have been playing with a practice account on and off for a few months now and I really like it. I have been gathering information and trying to learn as much as possible.

Up until now I have been buying positions not setting stop losses and taking short gains 15-20 pips. And it has worked well, but from EVERYTHING I understand this is very wrong. So I started setting stops and limits on all on my positions. -20/+30 on most. And every single one got stopped out.

SO my question is " Why is it so wrong to put large stops or no stops on positions?"

Keep in mind I only trade the most stable currencies I can find, and use very little of my margin at any given time. So as long as I can cover the temporary loss why not let it ride until it comes back to the positive side?

THanks so much

I’m not an expert but from what I know in Forex what is wrong for some is right for others. To solve your issue you should calculate your Expected Value to see if you’ll be a winner on long term. Gather like 1-2 year data or 1000 - 2000 trades data see which is your win rate, set a SL, TP, and see if your EV is positive or negative. For example my system has 2:1 Risk/Reward ratio but the EV is 6+ pips per trade, so theoretically in the long terms I should be a winner.

Still there are no guarantees that if your method made money in the past it could make money in future but we are playing with probabilities,

Hi Themsah,

Looks like the experts yet to reply u so hope my newbie understanding can help u out till then.

The core thing is whether you wanna be right or you wanna be profitable. It is “easy” to be right by having no stops on open positions simply by riding out when price go against your position on the assumption that price “does” come back to make your position profitable but how long will this take?? Imagine if it takes a few months to even years and meanwhile your funds will be tied up in this position in your hope that the price will come back. What about the possibility of price never coming back???

Truth is that i know of some trading companies that employ this strategy of holding on to losses in hope that eventually when price does come back to become profitable and guess what? Most went bust… Why?? Because most traders after holding on too long will eventually give up on the position and end up making much bigger losses due to the time period it sometimes takes for price to come back. Not to mention the risk/reward ratio of this tactic.

Simply put, having a stop loss on positions is to minimise your max loss per position for there is no 100% in this world. The best possible percentage is 99% and stop loss is simply safeguard against that 1%. Not to mention most forex system is around 40-60% win rate.

I know above may not be the best explaination but hope it does help abit.

It is not wrong, per se, to use large Stops, as long as there is good money management behind your choice of Stop, in terms of pips. For my longer-term trades I often use large Stops. It is not the size of Stop in terms of pips that is an issue, it is what percentage that represents of your account. I risk 1% per trade, every trade. Many on here advocate more than that, but rarely more than 5%. As long as you have a consistent plan with limited risk per trade then many options can be made to work.

However, in my opinion trading without a Stop is not a sound basis for a long-term trading plan. You say that you only intend to trade stable currencies, but that is what most of us on here aim to do, surely? By no means everyone on here is profitable all of the time, yet we don’t seek out erratic currencies or poor market conditions.

You say that you can cover the temporary loss until Price comes back in your favour, but what if it does not come back? Even stable currencies can have strong moves in one direction that often cannot be accuratly predicted. The global recession was missed by many analysts, after all. Last year, the Euro spent months in freefall. This year, the Yen has had enormous spikes (and not just following the earthquake). These are major, stable currencies. If you trade without a Stop, or even without a sensible Stop, there is a constant risk that your account will suffer a major drawdown, and that can take a long time to earn back. That is not a business model that most people would want to sign up to, so if you want to view this as a good revenue stream over a long period of time, then I think that you need a solid system in place to protect yourself, as much as possible, from losses. That includes sensible use of Stops.

You say that once you introduced Stops every single one of your trades was stopped out. Without wishing to be overly blunt, that does not stand up as a criticism of placing Stops. That just says that you had them in the wrong place, and that this is an area of trading which you should practise.

I use Stops on every one of my trades, and I make good, consistent pips. Obviously I only enter trades that I expect to play out in my favour, and I try to trade during stable market conditions. However, I still have losing trades, but sensible risk management - in terms of the amount risked and the placement of Stops - means that the losses don’t impact on my overall confidence that I will be profitable in any given month.

Some of my losing trades, had I had no Stop in place, would have proved disastrous to my account. So while we are all different, I believe that any trader who sees this as a profession over the longer term needs to take Stop placement seriously. Spotting setups, with a little practice, is not actually very difficult at all. It is the trade management where more of the skill shows itself.

I hope you find this helpful, apologies if it comes across preachy!

ST

Just to add…

If u are always getting stopped out for stop loss of 20-30 pips to make 15-20 pips then it appears that your risk reward ratio isnt that good and u may need a high win rate to make it profitable in the long run.

I mean if increasing your stop loss to say 30-40 pips to make 15-20 pips then we are looking at risking $2 to make $1 so your win rate will need to be better than 67% to be profitable on paper. Throwing in the average newbie trader’s efficiency of around 70% then u will need a even higher win rate.

Just my 2 cents worth on this though.

And I am not sure that I am the majority view here - indeed, I suspect that I am not - but I would never trade Forex at worse than 1:1.

I think you are in the majority.

To the OP- As the only things really controllable in any individual trade are overall risk and risk/reward, by not placing a stop you are making risk reward your only controllable. Why would you do this in an environment like forex which is already so volatile?

Good advice from SimonTemplar.
Just to throw in an example: if you were in a trade with the Yen just after the earthquake, tsunami your blood pressure would be off the roof! Forex is not a game, it’s a business. You are playing it as a game if you don’t cover yourself with a stop loss, a game plan and strategy. Carry on in demo, you’ll find out soon enough the dangers of playing it as a game (I did).

Ok guys thank you soo much for your response. It is clear that CORRECTLY used stop are a must in good trading… Obviously I need to learn a lot more about trading before I get into a REAL account…

What suggestion might u all have for a newbie like myself, as far as gaining knowledge would go? I have read a couple of books on Forex trading and gotten sum content from the internet, but it is all a bit confusing to me…

Thanks so much

Hi,

Well as always: SimonTemplar has given you and excellent explanation and some invaluable insights.

The only thing I could possible add to help you is this:

A Logical Method Of Stop Placement

If you find anything confusing: feel free to ask.

Regards,

Dale.

At the very least a stop can save you in the event that you lose your internet connection, have a power cut, or incidents that are sometimes referred to as “acts of god”.

Most definitely, when I first started out. I made the mistake of not putting in a stop and I lost power at home. Thank god, I had a friend at work that got on my pc there and was able to get me out of the trade. Sure, I could have drove to my office, an HOUR away and took care of it there. A lot can happen in an hour.