Stop Loss for trading - when is too big?

Beginner Questions
1

Hi folks,

I started my trading journey with forex in February and up till September I was loosing big percentage due to hitting stop losses all the time or closing the trades being afraid to see big minuses. However, in September being influenced from some reading or some podcast I started to put my stop losses way further than before. For example now if I open a trade and expect some return I put stop loss with RR ratio 10:1 or 20:1 not like before 1:2. In that case I just wait long and then collect my profit without hitting stop loss anymore.

Now, I am using only 10% of my account and my leverage is only 50. This I believe prevents me from expelling the whole account at once, however some of the stop losses which I put are pretty significant and scary.

For example in month of September I made 5.21% return and in the month of October I am already 4.64% return which technically is my goal of 5-8% monthly return.

Now, I understand this is not the right strategy and would like to hear from you what can go wrong. I realize the following two cases could be really bad scenarios:

  1. Someday hit one of these huge stop losses and basically wipe half of my account?
  2. end up with no opportunities since all of them are loosing and no new ones appear, while I am waiting trend to return in my favor.

but if you add some additional concerns I will try to work on them.

2

I’m not convinced that a protocol for stop-loss settings can be pulled out in isolation and re-jigged, and this fix alone leads to profitable trading. So, can you give any more details as to your overall strategy?

3

I am not going to remove the SL at all. About the strategy it is based on MA Cross and Bollinger Bands. I place order when short and long of MA Cross are too far from each other or the price is getting out of BB or both lines of BB are above or below the long line of MA Cross. Setup for MA Cross I am using Short 21 days and Long 89 days.

I trade 1H, Daily and Weekly charts.

4

Egad, the Majors are not trending well enough to be swing trading, pull up a daily, look at it, use your common sense. You need to figure out a range Strategy or just stay out. Man ya’ll are frustrating sometimes. SOH, until you figure it out.

The Ever Firing The Whole Staff VIPER

5

So could I summarise the stronger the up move, the more readily you will get short? The TA from a reversal at say a swing high gives a natural stop level just above the high itself, but this is going to be close, as you have found. I don’t think there’s a way round this unless you take swings that also follow the longer term trend and use the trend’s TA rather than the reversal pattern’s TA to develop your stop position. But in that case, why not just be following the trend and ditch the BB’s?

I may have got this all wrong way round but f you put up a specimen chart that might make all clearer.

6

So if I understand you aright, you are trading that overextended positions will come back to the normal.

Not a bad strategy, but difficult to time correctly as you are finding out, because - like “Bitcoin”, they can just keep going almost forever and you WILL get stopped out, especially using this strategy in the smaller time frames. unfortunately, using it in the longer timeframes still means big stops. Trouble is you are going to get killed by a strong trend, and miss out completely on valid reversals, which could make you a great profit !

I don’t think there is a money management system, which will make money for you under this system, although all the indicators you speak of are valid, when trading counter trend, you have to have others too, like oscillators and volume.

You need to know support and resistance, flags, candlesticks, Pattern, Price and Time !

There are other things too, which you need to be aware of as sometimes they can be very valid. Like Vix, Gann and Fibonnacci. I’ve even heard serious professional traders, talk of things connected to planets !

Basically, what I’m thinking is that Contrarian is a good system, but certainly not all the time, and you really have to know quite a lot to trade it successfully !

1 Like
7

My concern with using such a large stoploss is, if it WERE approaching your stop and you are on the verge of being stopped out - how strong will your desire be to move it “just a little more”? Plus, it’s as you mentioned risky - in the sense that you could lose half your account on one trade.

I think if you have a trade you’re considering, you should have (before you enter) a solid idea of where if it moves against you - your trading plan will be scrapped. That would be a logical place to put your stoploss. And then calculate your position size based on the desired size of your stoploss.

8

Yep that’s right. this strategy looks like swings but just in longer period. Which I don’t mind since it is working. My concern is when I am opening too many trades.

9

Quick observations

You mentioned you closed some trades because you were afraid. Trading under the influence of emotion is bad policy, esp fear.

10% risk seems really high to me. I wouldnt be comfortable with that kind of risk but to each their own.

10:1 or 20:1 rr sounds great in theory but not realistic in my opinion. Instead of increasing your SL, maybe you should lower your RR. This is probably the main reason your SL keeps getting hit.

Your using your entry + risk/reward ratio to determime SL, and moving your SL based on “feel” to increase drawdown capacity. I think using some kind of analysis to determine your SL would be a better idea.

Good luck to you

10

For that purpose I have something which is:

I start with small amount let say 0.01 lots or 1000 units in my case. If it goes further in my direction I add additional 1000 or more. I do this three times and technically collect the profit when it reaches the level I expected or let say 10-20% of the bet in this case 3000 units with 50 leverage it will be 6-8$. Now back to your question if it goes negative I don’t put money and the loss is not that significant. If it goes negative when I am already 3000 I close one of them and the remain two are still negative. If it still negative in a week I close another one. I think this way I spread the loss equally on a weekly basis.

11

I think my explanation was not good enough. When I say RR 20:1 I mean my stop loss is way higher, let say 30$ with expectations for 6$ profit.

12

[quote=“panaka09, post:1, topic:117550, full:true”]

… if I open a trade and expect some return I put stop loss with RR ratio 10:1 or 20:1 not like before 1:2. In that case I just wait long and then collect my profit without hitting stop loss anymore.

… some of the stop losses which I put are pretty significant and scary.

… would like to hear from you what can go wrong. I realize the following two cases could be really bad scenarios:

1. Someday hit one of these huge stop losses and basically wipe half of my account?
2. end up with no opportunities …[/quote]

I think you have already identified what not only can go wrong, but will go wrong, if you keep doing this.

Reminds me of a guy I knew many years ago who came up with a nifty trading plan:

He traded intraday for very small pip profits.

When he detected a short-term up-move or down-move, he would enter in the direction of the move, with a 10-pip profit target and a 100-pip stop-loss.

He claimed that his TP would always be hit, before his SL was hit.

For a surprisingly long time, his plan seemed to work, and he got really bold, with larger and larger position sizes. Then one day, his SL was hit. The result was not pretty.

13

Do you think this could be avoided if he wasn’t using larger position sizes?

14

There’s no doubt that his catastrophic loss was due, in part, to his reckless position sizing.

But, consider this:

With a 10:1 risk/reward ratio, one loss wipes out 10 gains. And with a 20:1 R/R – which you admit to using sometimes – one loss wipes out 20 gains.

15

Thanks! Doesn’t sound positive but will work on this…

16

Probably me reading too fast.

So if im not mistaken again, you risk $30 to profit $6 ? If so, a negative r/r ratio probably isnt a good idea. When you consider that your risk is a few times greater than reward and your SL is still getting hit, that would be a major cause of concern for me.

Increasing that SL is just compounding the problem.

Just my opinion. If your strategy works, more power to you.

Best of luck to you

17

[quote=“cndlstckchic, post:7, topic:117550, full:true”]

I think if you have a trade you’re considering, you should have (before you enter) a solid idea of where if it moves against you - your trading plan will be scrapped. That would be a logical place to put your stoploss. And then calculate your position size based on the desired size of your stoploss.[/quote]

Agree completely.

Determining a logical stop-loss is one-half of the equation. Determining a logical profit target is the other half. Here are two posts from several years ago, in which I discussed my methodology for determining SL’s and TP’s –

Posted in February 2010 –

[quote=“Clint, post:2, topic:31606, full:true”]

[B]Regarding stops and limits:[/B]

Determine a rational point at which to place your stop, without considering where to place your limit. Then, determine a rational point at which to place your limit, without considering the ratio between your stop and your limit.

After you have chosen your stop and your limit, independently of one another, then compare the two to determine the implied risk/reward ratio. If that implied ratio does not comport with your trading rules, then you should reject the trade. Do not manipulate your stop, or your limit, or both, in order to make the ratio fit your rules.[/quote]

Posted in June 2011 –

[quote=“Clint, post:3, topic:38657, full:true”]

Have you ever done this?

You study your charts, and find a situation that catches your eye. You really like the way things are shaping up for this pair. You conclude that this pair is poised to move higher, and you want to get on board.

You open a LONG position, and immediately set a stop-loss to protect yourself. Your stop-loss is 30 pips, because that’s about as much pain as you can stand.

You definitely want this trade to justify the risk you are taking, and you have heard the advice of the “experts” to use a R:R ratio of at least 1½:1, so you decide to set your TP at 2R — that is, 60 pips.

Now, you sit and wait. Price moves up and down, up and down, up and down, all the while trending higher toward your TP, and you’re feeling hopeful.

At about +30 pips, price stalls and begins to retrace a bit. You start to sweat, but you hang in there, because you’ve always heard, “Cut your losses, and let your profits run.” You don’t have a loss; you have a small profit. So — determined to let it run — you hang in there. And sweat.

There are lots of scenarios that could unfold from this point forward. Obviously, the desired scenario is this one: the retracement ends, price resumes its upward move, and your TP is hit. But, you’re telling us that it almost never works out this way for you.

So, let’s analyze this trade from a different perspective.

There are two horrendous mistakes in the way this trade was structured.

• The first involved the STOP-LOSS. Placing a SL at your pain-threshold is about the weakest thing you can do. Probable support levels should have dictated where you placed your SL. Support comes in many forms: previous daily, weekly, and monthly lows (or highs); pivot levels; fibonacci levels; and even trendlines (which are potential dynamic support or resistance levels).

If your chart suggests a logical place for your SL, and it’s more than you can tolerate, then either (1) cut your position size in order to make your risk in dollar-terms acceptable, or (2) this trade is just not for you — wait for a better one.

• The second horrendous mistake in the trade described above involved the TAKE-PROFIT. Placing a TP at a point that will make you a certain desired profit is as bad as placing a SL at your pain-threshold. But, that’s exactly what you did in the trade described above: you arbitrarily decreed that price should rise 60 pips, because 60 pips is how much you wanted to earn.

Probable resistance levels should have dictated where you placed your TP. Better yet, two or more probable resistance levels should have dictated two or more TP-points; in other words, if possible, you should have scaled out of your position in a way that covered your risk as quickly as possible, while still allowing the remaining portion of your position to run further into profit.

Suppose you do all this analysis, and determine that probable support and resistance levels are offering you a trade with only R:R = 1:1? If R:R = 1:1 is unacceptable to you, then this is a no-brainer — you don’t take this trade.

When you open a chart, you are viewing a battlefield. Before you wade into that battle, let the strategic and tactical situation on the battlefield (not your pain-threshold) define the risks. And let the strategic and tactical situation on the battlefield (not your greed, or your fixation on a R:R ratio) define reasonable potential profit objectives.[/quote]

5 Likes
18

Thank you for sharing - this is great info. From seven years ago - talk about longevity! Love that you’re still here helping people.

19

Thanks. Those old article are way better than all the things I spent all my weekend looking for.