This is a topic that will get everyone talking, and one that I have struggled with over the years. Many will say you are foolish to trade without a stop loss but there is research out there showing how a stop loss placed below your entry point will hurt your accounts performance. Here is a link from Author/trader Thomas Bulkowski where he has done research to show how stops will hurt your account. http://thepatternsite.com/CanStopsHurt.html
For myself I have seen far to many trades trigger a stop order ( sometimes to the exact pip or penny if trading stocks) lock in a loss and reverse back into profit ground. To avoid this I have experimented with alternatives to Stop orders, one is a mental stop, often this is a red line on my chart that I must have the discipline of manually closing the position if price falls below and reminds there at day’s end. Still another way to protect your account is with position size. On a 1K lot, price would have to move against you 1000 pips to loose $100,
One place I do like to use stop orders is protecting profits when I have a winning trade, I like to let my winners run, and having a trailing stop in place when I am away from my computer will keep that winning trade from turning into a looser
This is a ridiculous article to link to as supporting “evidence” that a stop loss will hurt your trading strategy. This guy was simply opening trades @ the first day of each month, and closing them on the last whilst using some arbitrary percentage for a stop.
No one trades like that.
Stop losses placed in tactical zones are 100% necessary to trading long-term w/ success.
If price gets to your stop loss zone, then you were wrong and need to be out of the trade.
If your stops are getting triggered “too early” and price is “eventually” moving back to your original target, then your analysis and strategy is wrong.
It dont make sense to set stop lose right before margin call or stop out. For newbie like myself, will always set stop loss in my personal accept loss zone, to secure my balance went to low
I still belief that stoplosses are essential, but when your trading strategy allows it and you are disicplined enough than it is just as valid as any other way of trading.
I know the fake-outs that we discuss here. How I deal with it is that I don’t blink my eyes when first hit but move my stoploss when the price retrieved after that first hit. It is so that bottoms and peaks are tested and retested and these are just the locations where a lot of retail traders have their stops.
As long as your position size and win-ratio of your strategy allows a lost trade with a big loss due to a not executed mental stoploss.
Surely, the use, or non-use, of stops is an integral part of the overall strategy plan and depends a lot on how one manages one’s positions. In addition, there are maybe two different kinds of stops:
Strategical stops:
In theory a “stop” is the point at which you have defined that either your original reasoning for entering the trade is no longer valid or the size of the current loss on the position is the maximum your money managment policy permits for the trade. Whether you use an actual stop order or a mental level depends a lot on how you monitor your positions. If you watch your positions continually and are scalping, then a mental level is probably fine so that you can judge whether the level is reached though a spike or an actual move. But if you trade longer term and do not sit by your PC then there is a risk of sudden big moves from e.g. Central Bank comments that occur unnoticed - in which case some kind of stop should be placed as a physical order.
Safety net stops:
Another issue is entirely different from the trading strategy itself, and I believe should always be present. One never knows when there may be a communications failure that prevents you from accessing your account. Also, there can occasionally be huge reactions to sudden events that move the markets in an extraordinary way. It is wise to avoid a wipe out or arguments with your broker from these kinds of events by always placing a “air bag” stop sufficiently far away from your strategical area of price tolerance in normal trading conditions which protects your equity from catastrophy scenarios.
Totally depends on your strategy and your mindset.
If youre happy to sit on a loss for several days in the belief that your reading of the market is right in the long term, then it can work (I do this on the vast majority of my own trades).
If youre a short term trader or dont have the cahoonahs to turn your pc off and walk away while the market corrects itself, then its not for you.
No right way, no wrong way, its a personal thing.
P.S. I dont know about other traders, but I dont enter a new trade until my existing trades are in profit and some of that profit has been secured by a stop (the only time I use one on this type of trade)
Stop loss is, I think, a double-edged sword. On one hand it can cause you trouble if you haven’t placed it on proper place and you end up making a mistake. On the other hand the market is sometimes so volatile that without a stop loss you can get into big trouble, especially during high impact events. Or, for whatever reason, you can temporary lose access to your account, due to power outages and Internet connection loss, etc which is very frustrating. It takes skill and effort to balance on that edge, but it’s a necessary hassle.
Have we all forgot some basics. Nothing to do with the debate that rages every time the topic is raised.
Money locked up in a losing trade is money you can’t trade with. Your “exit” is simply that point where you acknowledge that your analysis is no longer valid and it’s time to release those funds for something more profitable.
Probability states that regardless of what strategy you use, there will be times when the market is just a b|i|t|c|h and takes out your stop only to reverse. But, for each time it does that, it will also just bust straight through, never to return to that price level for a weeks, months, years. So too, locking up your funds. And well, some of us choose to learn that lesson only once…
You could make it a better entry when that happens… On EURUSD M1 it happens regularly that a stop is taken out only to reverse. Perhaps some strategy can be defined to use that in your advantage.
Yes, maybe you will have less trades, but the win-probability canbe higher. Allthough you have to be carefull for those burst throughs.
Agreed. SL is essential in trading. Even if you don’t have a hard SL in place, you should always have a SL zone where you will be manually closing the order if it comes to that.
I knew this topic would get some of you riled up, and don’t worry about shooting the Croc ( actually it’s an Alligator) he has tuff skin. One could look at trading as a poker game, your stop is like the money you throw into the pot. Now you would not want to enter a poker game with a pre-determine limit to how much you are willing to put in the pot, and if the other players knew this they would force you to fold every time. Well the market does just that, they seem to know where most traders will have their stops and that is where price tends to move too before reversing. If we are to use stops we most learn to identify those areas that are likely to have lots of stops and not join the pigs for slaughter. Like in poker, if you have a weak hand, you should immediately fold ( tight stop) , if a strong hand then you need the conviction to let the game play out. Worst thing is to be caught in the middle as that seems to be where the majority of traders will place there stops, and we all know the majority loose in both poker and trading
