Risk mitigation - massive stop-loss?

[pip2hunt]

Trading is war and it needs strategy
Trading isn’t Oh, I want to trade now, and I will go long USDX
Nope
trading is calculating risk
seeing opportunity
the best timing and signal doesn’t come everyday
but It comes
and we need to be patient

for those who believe a bit pofit could be collected slowly (with wide SL)
believe me
there is a time when a sudden move weeps all your pip at any instant

In case you have the funds to widen the SL it will not. Swapfee’s might eat your funds but that’s why an islamic account is the way to go on this kind of strategy. It’s also the strategy I’d like to adapt but I need an islamic account first. http://forums.babypips.com/other-top-newbie-questions-problems/70954-islamic-swapfree-account-non-muslim.html

[doncht]

Thanks but just a quick one. Swapfree literally means no fees involved right? I mean with no hidden charges?

[charly]

@Aerbe. you said you neither use SL or TP, then, how do you get to enter the market in the first place?

[Arbitrager_on_Acid]

Whatever you decide about the pip distance of a stop or a target from the entry, remember the most important thing, the golden rule of trading: “Cut your losses short and let your profits run.”

[jonathan1]

also remember that if your trade goes into a decent profit you can move your stop loss to breakeven. Trading is a bit like boxing, sooner or later you are going to get hit, but it makes sense to be hit as little as possible!!!

[Absolutely]

hi all

bare-with-me, me am just new (like in the infant baby-pip school). anyway I am appreciating risk and money management need to be treated seriously.

Random thought in head - would the following work ?
to mitigate risk, i.e.

1. set a target for a trade 10, 20,50, 100pips what ever the goal / anticipated result is…
2. follow the market / analysis etc (due diligence)
3. risk mitigation - put a a MASSIVE stop-loss on the trade ie. 900pips

idea:

• set a reasonable target (don’t be too greedy, align with goal/strategy)
• allow for volatility by putting in a massive stop-loss.
• trade might take a few days rather than hours though.

what I 've read so far common practice is stoploss= target in a ratio of 2:1 .

is there issues of putting a massive stop-loss ?
is this a workable strategy ?

ideas on a postcard, or a post to this thread

finbar

Hi,

I think that proper risk management must take into account PROBABILITIES.

(Isn’t that one of the tenets of the babypips school?)

Suppose one sets a take-profit level of 50 pips and a stop-loss of 25 pips.

Does that mean the risk:reward ratio is 1:2?

NO!!!

Because one hasn’t taken into account the PROBABILITY of the take-profit being hit versus the stop-loss being hit!

Suppose - just suppose - that the stop-loss is hit, on the average, 75 times out of 100 trades, while the take-profit is hit 25 times per 100 trades on the average.

Then the ACTUAL risk:reward ratio is [50 pips x 0.25] : [25 pips x 0.75], or 3:2 in favour of RISK!

In other words, with those PROBABILITIES, it is NOT a good risk:reward ratio. In fact you would LOSE money with such a strategy.

But most of the time probabilities aren’t easy to figure out, so many people IGNORE them.

Is that, however, a SOUND way to trade?

I DON’T THINK SO!!!

Personally I think the REASONABLE thing to do is to place a stop loss at a level that WON’T BE HIT UNDER NORMAL CIRCUMSTANCES.

And place the take-profit level at a level that WILL be hit under normal circumstances.

Under ABNORMAL circumstances - like when the recent SNBomb burst - let your stop loss be hit. It won’t matter if you take the following precaution:

When you have made x percent profit - whatever figure x may be - withdraw 1/4x and put it into some safe but liquid investment (ask your bank what that might be: mine gives me around 10% per annum).

This will be your forex trading “cushion”.

If you do that regularly, over time your cushion will grow to approach half your account. (Do the maths.)

Now if your large stop loss gets hit, EVEN IF YOUR ENTIRE ACCOUNT IS WIPED OUT, you can use the cushion in your bank to re-enter the forex market.

Since it will be close to half the amount that got wiped out, you can get back to where you were before the account got wiped out, in about the same amount of time you normally take to double your account.

For example, if on the average you make 1/2% profit per trading day, you can double your account in 144 trading days.

That’s just a little over six months.

But occurrences like the SNBomb are going to be much LESS frequent than once in six months.

So as long as you are making 1/2% profit per trading day (on the average), or more, you are safe from a devastating loss!

Indeed you will slowly but surely MAKE money.

As for myself and my son, we are making something like 3% to 4% profit per trading day, on the average. I think it would be a cinch to make at least 1% per trading day, averaged out over the long term.

So I think it is NOT risky to place a large stop-loss and a small take-profit.

I normally place my stop loss at around 300 pips, and my take profit at 20 or 30 pips.

(I trade the EURUSD pair exclusively).

A 30 pip take-profit vs a 300 pip stop-loss looks like a risk:reward ratio of 9:1 (in favour of risk, massively) according to conventional thinking, right?

BUT …

I have found that 300 pips is the upper end of the daily ATR for this pair. So I don’t think it will be hit within a day, under normal circumstances. Maybe once a year, IF even that.

And in this pair, a take-profit of 30 pips is EASILY hit within a day. Virtually without fail. And sometimes twice and even three or more times in a day.

So the ACTUAL risk:reward ratio is more like [300 x 1/365] : [30 x 1/1], or greater than 1:30 in favour of REWARD!!!

Isn’t that a very DESIRABLE risk:reward ratio?

And on some - indeed, many - days it’s even greater: 1:60 or even 1:90 in favour of REWARD.

And it gets better. Even if your 300 pip stop loss gets hit - which it won’t except maybe once a year, but even so - you get back to where you were before it got hit in almost no time!

A few days ago the rebounding EURUSD market did actually did hit all my stop losses. (I set more than one trade at a time, using a directional grid strategy - which is bearish, currently). I lost about 30% of my account.

(I also wasn’t being careful, being caught up in the euphoria of the massive wins the SNBomb and Draghi’s trillion-plus-Euro QE were handing me, as it were, on a silver platter. After Draghi’s announcement I made close to 30% on my account!)

But even after all my stop-losses got hit, 2/3rds of my account was still left for me to trade with! I didn’t even have to rely on my “cushion”.

And since then, I have been making money regularly - at the rate of 1-2% per day on the average. (It’s been slow these last few days in the EURUSD).

So I shall be back to where I lost my money in next to no time - probably in less than a month!

Any thoughts?

Cheers.

[ocheank]

Hi,

I think that proper risk management must take into account PROBABILITIES.

(Isn’t that one of the tenets of the babypips school?)

Suppose one sets a take-profit level of 50 pips and a stop-loss of 25 pips.

Does that mean the risk:reward ratio is 1:2?

NO!!!

Because one hasn’t taken into account the PROBABILITY of the take-profit being hit versus the stop-loss being hit!

Suppose - just suppose - that the stop-loss is hit, on the average, 75 times out of 100 trades, while the take-profit is hit 25 times per 100 trades on the average.

Then the ACTUAL risk:reward ratio is [50 pips x 0.25] : [25 pips x 0.75], or 3:2 in favour of RISK!

In other words, with those PROBABILITIES, it is NOT a good risk:reward ratio. In fact you would LOSE money with such a strategy.

But most of the time probabilities aren’t easy to figure out, so many people IGNORE them.

Is that, however, a SOUND way to trade?

I DON’T THINK SO!!!

Personally I think the REASONABLE thing to do is to place a stop loss at a level that WON’T BE HIT UNDER NORMAL CIRCUMSTANCES.

And place the take-profit level at a level that WILL be hit under normal circumstances.

Under ABNORMAL circumstances - like when the recent SNBomb burst - let your stop loss be hit. It won’t matter if you take the following precaution:

When you have made x percent profit - whatever figure x may be - withdraw 1/4x and put it into some safe but liquid investment (ask your bank what that might be: mine gives me around 10% per annum).

This will be your forex trading “cushion”.

If you do that regularly, over time your cushion will grow to approach half your account. (Do the maths.)

Now if your large stop loss gets hit, EVEN IF YOUR ENTIRE ACCOUNT IS WIPED OUT, you can use the cushion in your bank to re-enter the forex market.

Since it will be close to half the amount that got wiped out, you can get back to where you were before the account got wiped out, in about the same amount of time you normally take to double your account.

For example, if on the average you make 1/2% profit per trading day, you can double your account in 144 trading days.

That’s just a little over six months.

But occurrences like the SNBomb are going to be much LESS frequent than once in six months.

So as long as you are making 1/2% profit per trading day (on the average), or more, you are safe from a devastating loss!

Indeed you will slowly but surely MAKE money.

As for myself and my son, we are making something like 3% to 4% profit per trading day, on the average. I think it would be a cinch to make at least 1% per trading day, averaged out over the long term.

So I think it is NOT risky to place a large stop-loss and a small take-profit.

I normally place my stop loss at around 300 pips, and my take profit at 20 or 30 pips.

(I trade the EURUSD pair exclusively).

A 30 pip take-profit vs a 300 pip stop-loss looks like a risk:reward ratio of 9:1 (in favour of risk, massively) according to conventional thinking, right?

BUT …

I have found that 300 pips is the upper end of the daily ATR for this pair. So I don’t think it will be hit within a day, under normal circumstances. Maybe once a year, IF even that.

And in this pair, a take-profit of 30 pips is EASILY hit within a day. Virtually without fail. And sometimes twice and even three or more times in a day.

So the ACTUAL risk:reward ratio is more like [300 x 1/365] : [30 x 1/1], or greater than 1:30 in favour of REWARD!!!

Isn’t that a very DESIRABLE risk:reward ratio?

And on some - indeed, many - days it’s even greater: 1:60 or even 1:90 in favour of REWARD.

And it gets better. Even if your 300 pip stop loss gets hit - which it won’t except maybe once a year, but even so - you get back to where you were before it got hit in almost no time!

A few days ago the rebounding EURUSD market did actually did hit all my stop losses. (I set more than one trade at a time, using a directional grid strategy - which is bearish, currently). I lost about 30% of my account.

(I also wasn’t being careful, being caught up in the euphoria of the massive wins the SNBomb and Draghi’s trillion-plus-Euro QE were handing me, as it were, on a silver platter. After Draghi’s announcement I made close to 30% on my account!)

But even after all my stop-losses got hit, 2/3rds of my account was still left for me to trade with! I didn’t even have to rely on my “cushion”.

And since then, I have been making money regularly - at the rate of 1-2% per day on the average. (It’s been slow these last few days in the EURUSD).

So I shall be back to where I lost my money in next to no time - probably in less than a month!

Any thoughts?

Cheers.

Hi

Good explanation.

regards

[Royalblood]

It works only when the trader is confident of the market price action for the instrument traded and is sure enough of realizing the loss or simply close the losing position on knowing the fact that the analysis is being invalidated by the market movement which is unpredictable at times.

[wavewalk]

Even if you are a very good trader, at least 20% of your trades are in the wrong direction. Even if you can beat your ego and are willing to have stop loss orders, it’s tedious and hard to do without an automation tool.

Do yourself a favor and have less stress in trading.