Stop loss and money management

I’m wondering if having a stop loss just as large as your profit target is such a bad thing? I ask because I’m working on the 5/13/62 system and it seems that having a slightly larger stop losses nets you a lot more winning trades.

I think as long as your S/L never is more than your P/T, you should be fine, if you can prove there is a high win %. So what do you guys think? Should I sacrifice wins for risk management or vice versa?

Hi m8,

I’m a scalper so I risk normally about 10-20 pips and my take profit is about the same, depending on currency pair. The real fact is that most professional traders have a 1:1 risk/reward ratio. Sometimes I do gain alot more like when I trade the EUR/JPY pair my risk/reward can be 1:3!

Psycology also comes into play. You wouldnt like to lose 50 pips @ �10.00 a pip trust me! Most newbies think the pice is gonna turn and head back in their favour so they hang on when their -40 pips down and sometimes even increase their stops!

If you have a high probability trading method then 1:1 risk/reward is good. I say if your in profit don’t let that trade turn into a losing one, take it and wait for the next opportunity!

Good Luck.

Mr. X hit upon a good point…the pair your trading is a biiiiggg factor becuase it can move 30 pips in 1 day thus defeating the purpose of a 50pip stop loss or it can move 200 pips in a day. You must take into consideration the volatility, and finally it all comes down to you really, how much can you afford to risk??? How much risk to reward are willing to offer on the pair your trading…I always tell people stick to 1-3 pairs and learn them and love them and they will in time give you love back…

Thanks to both for your replies. I’ve decided to go for the higher winning % with the larger S/L. I realized I might not be able to make all the trades that my signal gives me (due to time) until I get a little more committed to this, so having a high win% would give me the confidence to employ this system without worry of having to get lots of trades packed into the week.

In other words, if I only get the chance to trade once per week, i’d rather it be 80% likely to win rather than 50%. I’d probably change my perspective a bit if I could trade 24/7!

And just to add for raging bull, I don’t have a set number of pips for my S/L, it’s just equivalent to my P/T which is based on a previous peak, so higher volatility means larger S/L but larger P/T. Due to this, I don’t see the pair’s volatility having too much impact on my risk management strategies.

The bottom line is:

What’s your per trade expectency?

How many times can you apply your system?

Combine those two things and you can compare systems (or settings) over comparable period of times.

the ratio of the average win to the average loss should not be your only consideration. Actually it should be combined with the accuracy of your trading system to calculate its mathematical expectation:

Mathematical Exectation= (1+average win/average loss)*(system accuracy) -1

This formula requires that you take into account both the success rate (percent of winning signals) and the payoff ratio (average win/average loss) of any trading system when estimating its long-term profit potential. For example, a system with 50% accuracy and the 2 to 1 payoff ratio has the expectancy equal to +0,5. This means you can expect to earn 50% of the amount that you risk per trade on average.

Hey! That’s a really cool formula to apply. I wrote it down in my trade journal since it’s probably the most useful thing I’ve learned in math in the last 5 years.

First, can you clarify what the result of this “Mathematical Expectation” value is? Does this mean if I risk $100 on a particular trade, that (on average) I will come out of the trade with $150? So the percentage is equal to average profit? Stop me if I’m wrong here!

Second, may I propose a extended model of your equation that you could probably directly put into Excel:

Mathematical Expectation = [(1 + average win/average loss)*(# of winning trades/total # of trades)] - 1

Expectancy Theory is explained in great detail in Van Tharp’s book, “Trade Your Way to Financial Freedom”

This is definitely one of the better books in the trading industry

Thanks, I’ve been looking around for some good solid books to read. Couldn’t find anything I liked on risk managment, but this looks pretty interesting.